Private banks and wealth managers are continuing to lend to high net worth clients despite the worsening credit crisis, according to a straw poll of firms carried out by WealthBriefing this week

Private banks and wealth managers are continuing to lend to high net worth clients despite the worsening credit crisis, according to a straw poll of firms carried out by WealthBriefing this week.

The informal survey showed that firms are determined to continue to lend, viewing the scarcity of credit as an opportunity to differentiate themselves from some of their peers.

RBC Wealth Management told WealthBriefing that it is “unequivocally” still lending and Barclays Wealth said that it is “very definitely still lending to clients”. Barclays Wealth said it has not changed its budgets or targets as a result of the credit crisis.

"Our strategy is to work with clients over the long-term so we're very focused on taking a relationship approach to deliver a range of services and solutions, and financing remains a core part of that offering," said Steven Victorin, managing director and head of investment finance for Europe, Middle East and Africa and International in Citi's global wealth management business.

In its 2008 Benchmark study published in July, Scorpio Partnership, the research and consultancy, said that in general wealth managers are continuing to miss an opportunity in providing credit facilities to clients.

The study said the turmoil in the credit markets is providing a strong opportunity for private banks to distinguish themselves from competitors by extending their credit and enhanced cash management facilities. Scorpio’s research found that in volatile markets, investors often shift their weightings to cash but also seek to take advantage of market opportunity. However, the average proportion of deposits and loans to assets under management remained virtually static for Scorpio’s Benchmark banks in 2007.

“Private banks should consider more active measures to increase the proportion of assets that they currently lend out in order to improve revenues and margins. We believe that wealth managers with strong banking capabilities stand to be major beneficiaries of cash inflows as clients adjust their allocations in 2008. Moreover, clients are also seeking their banks to work more actively for them in these opportunistic markets,” said Scorpio.

The wealthy rely on credit for many reasons. Barclays Wealth said its clients’ credit requirements can be broadly divided into four main areas: credit to finance lifestyle assets such as properties or yachts; investment leverage; simple matching of in and outflows; and passing on wealth in an efficient manner. Activity is well balanced across all four areas, but in recent times the firm has witnessed an additional focus on property as clients take advantage of re-pricing and less activity around investment leverage.

According to RBC Wealth Management, extremely wealthy individuals tend to be concerned with asset management and tax efficiency and asset monetisation is a key reason why private clients approach them.

“Clients approach the firm to help them diversify their holdings in a single line of stock, or to unlock the value of their assets in the most tax efficient way possible. We provide them with advice and solutions to help them achieve their goals, and this is not expected to change as a result of the current market disruptions. Clients might also wish to refinance an existing debt on better terms,” said Michael Kay, head of credit products, British Isles, at RBC Wealth Management.

Both Barclays Wealth and RBC Wealth Management said it was important to continue lending to keep close to clients and not cut off the supply of capital in times of crisis because that is when clients need it most. It also makes sound business sense as from a shareholder perspective, as prudent lending can smooth income volatility.

Torben Nielsen, head of balance sheet at Barclays Wealth said: “Cash is king and most of our clients are cash rich. However, some of them will have illiquid investments that they do not wish to exit right now. Asset classes have been impacted indiscriminately and there are opportunities to pick up and we can provide leverage to clients to acquire those.”

Lending to HNW clients is also seen as a relatively safe bet. “Our private clients are top tier in terms of financial stability and generally carry above average credit protection metrics.  To date, their assets and income have shown far less elasticity to the economic shocks affecting so many companies and individuals right now,” said RBC’s Mr Kay. “Generally our clients’ credit requirements have been less driven by cash flow bridging and more aligned to asset acquisition, diversification and efficient tax planning.”

Rather than tighten its lending criteria, Mr Nielsen said Barclays Wealth takes a holistic rather than a ‘”tick the box” view as to what is accepted and rejected and is helping clients understand their position from a risk perspective. “In assets where volatility has gone up, we discuss with clients that they should not gear up to get caught out, but to maintain a level which provides an ability to stay in the market over the long term and to avoid forced selling,” Mr Nielsen said.

Barclays Wealth’s primary objective is to enable clients to realise the long term value of their investments as it believes that many assets are fundamentally under priced, “but at the moment it is necessary to take into account the possibility of further drops and not get closed out,” said Mr Nielsen.

Capital liquidity and access to balance sheet liquidity is a scarce resource at the moment and Barclays Wealth believes that there are opportunities for those clients with a high degree of what it calls “market composure”. “We provide clients with reassurance if they are risk averse, help some to restructure better and others to take advantages of the opportunities the current situation presents,” Mr Nielsen said.

RBC’s Mr Kay said he spends a lot of time listening to experts and colleagues in real estate and financial markets to build a view as to where the market is going in order to guide his firm’s lending criteria to ensure that RBC Wealth Management meets needs but not take on excessive risk.

“If there is a consensus of experts telling me that a certain segment of the market is illiquid and overvalued, then this will obviously be taken into account when a credit application is put before the bank. But it will not be the sole influencer - we actively listen to our clients as well. They have accumulated significant wealth not by luck, but by understanding their markets. They are a source of tremendous information.  And, if a client appears to be doing something different to the consensus view, it pays to understand both the business case and the views of the market place,” says Mr Kay.

The potential benefits to firms of prudent extending of credit throughout the current crisis are both financial and reputational. Barclays Wealth believes that offering credit is a differentiating factor and to rein it in at this time is a mistake.

RBC Wealth Management points to its careful balance sheet management both in the UK and at group level. It says appropriate lending to clients can be both a benefit for clients and accretive for the firm.

RBC Wealth Management also likes to stress its strong risk management culture and conservative book of business. It says it is extremely selective about both the types of clients and transactions in which it chooses to compete in order to maintain its split AA-/Aaa credit rating which it says has served it well during this period of market disruption. “There has been no need to change our lending criteria at this point as we continue to be well positioned with a strong balance sheet and are weathering the storm,” said Mr Kay.

While undoubtedly tough for many, the credit crisis is providing advantages in some unlikely areas. There are ways of HNW individuals profiting from banks' wariness of lending to one another, making what Mr Nielsen calls “the liquidity premium” extremely high at the moment.

“There is a reluctance for financial institutions to do long-term lending among themselves but more and more overnight money is changing hands between banks. This creates an opportunity for cash rich wealthy investors who can take a three months or even a year’s view to take advantage of the difference between the overnight money and Libor rates and gain a substantial credit and term premium,” he said.

Mr Kay calls the current market disruption “the worst point in the cycle – perhaps the worst in our lifetime”, but believes it is character building for bankers. As it is easy to make a bad decision at the moment, it increases the necessity to be cognisant of a client’s reason for borrowing and a focus on their liquidity and cash flow. This in turn creates bankers who truly understand their clients’ needs and financial position. “Sometimes a friendly workout process helps the client as well as the bank,” he said.

Mr Kay makes the point that if a great client asks their banker to be creative and the banker is reluctant to help because the request is outside of the firm’s policy, clients have long memories and the relationship will be damaged. 

“It is about finding the balance between the obvious desire to react as opposed to listening, assessing and then making a decision. A good banker knows how to build business; a great banker knows the difference between fighting for the exception and helping a client retain value in their assets,” he adds.