Private banking revenues for most major American lenders saw growth in the second quarter while AuM fell. The lag could portend an industry inflection point.
The private banking and wealth management businesses of major US-based banks are beginning to show contradictory trends as a result of the correction in financial markets this year. For example, a closer read of JP Morgan's figures for the second quarter released last Thursday shows a potential lag impact building in the private banking industry worldwide given this year's events, and it is one that could have a long and deeper impact on future results than it does now.
In JP Morgan's earnings supplement, the bank reported that global private bank revenue, part of the asset & wealth management division, totaled $2.17 billion in the second quarter. That was up a hefty 16 percent from the same period a year earlier and 8 percent from the first quarter. Those gains were also reflected in an 18 percent year-on-year increase in client advisors employed in the business.
In contrast, the level of assets under management (AuM) fell to $712 billion, down 5 percent from the same period a year earlier and 8 percent lower than in March.
Lag Effect
The numbers seem to indicate that the business is likely experiencing some form of a lag impact in that current revenues are generated from the higher levels of assets in earlier periods. If that is the case, it means that the current drop in reported AuM levels is likely to prompt revenues to decline more sharply in upcoming quarters, a trend that could potentially be seen at the major Swiss banks when they disclose results next week. JP Morgan, for its part, characterized the full division's performance as being driven by growth in deposits and loans, although that was somewhat offset by investment valuation losses and declining performance fees.
Citigroup, which also reported results in the week ending 15 July, saw similar trends, although they were not quite as accentuated as they were for JP Morgan. Its Private Bank and wealth at work revenues were largely unchanged from a year earlier although Citigold revenues were up 3 percent from the first quarter (all three businesses make up global wealth management).
However, those numbers should be contrasted with the 8 percent decline in wealth management client assets year-on-year and the 7 percent decline from the first quarter.
Other US Banks
It was a similar story for Goldman Sachs, which recorded private banking and lending fees up 23 percent from a year earlier although they were down 6 percent from the first three months of the year. Assets under supervision in its consumer and wealth division, the closest AuM equivalent that it reports, fell 9 percent year on year.
Bank of America saw total revenue in global wealth management rise 7 percent year-on-year and private bank revenues up a very significant 11 percent. Assets under management, and the number of client advisors, however, were both down significantly, with most of the fall attributable to market valuations.
Wells Fargo reported year-on-year wealth and investment management revenue up 5 percent while total client assets were down 14 percent.
A Bellwether
All this, taken together, is a good bellwether for results of UBS, Credit Suisse, and others starting next week. When looking at results or performance, it might be best to question any strong continued increases in revenues, particularly if it seems to come at a time when AuM or invested asset levels are falling.
