How Asia’s Rich Are Hurting the Big Banks of Switzerland and Beyond

Asian investors are cutting back on leverage across the market and moving out of risky assets

By Paul J. Davies

     Swiss private bank Julius Baer says a drop in activity among wealthy Asian clients has hit commissions, fees and trading income. Photo: Reuters

Rich Asians can make the best banking clients anywhere, but when markets get tough they can disappear.

Private and investment banks with big wealth management arms are finding this to their detriment this year. Goldman Sachs GS -0.29 % and Morgan Stanley MS -0.03 % last week both pointed to the collapse in Asian activity to help explain worse first-half revenues, particularly in equities.

Julius Baer JBAXY -0.49 % of Switzerland added to that chorus on Monday, saying a drop in activity among wealthy Asian clients had hit commissions, fees and trading income, which were all down in the first half compared with the first half of last year.

This all adds up to a bad sign for the company’s bigger Swiss rivals reporting later this week, particularly Credit Suisse CS 1.47 % which has made a pivot to Asia the central plank of its stuttering turnaround strategy.

Wealthy Asians are such lucrative clients because they often have a greater risk appetite than western counterparts and are eager to use borrowed money to fund financial market bets.

But when this leverage goes away—either because brokers won’t lend or because clients become suddenly cautious—the outsize revenues that rich Asians generate can vanish.

At Julius Baer, first-half trading revenue was down 46% year on year, while commission and fee income was down 7%.

The bank said that not only were Asian investors cutting back on leverage across the market, they were also moving out of risky assets and into more liquid, safe investments. They are also switching out of local currencies, particularly the Chinese Renminbi and into international currencies like the dollar.

This is helping Julius Baer and its rivals to attract more assets in Asia, but the new money is generating poor revenues because clients are doing little with it.

However, Julius Baer is combating this by doing something that its bigger rivals likely can’t: it is leveraging up its own balance sheet to grow its loan book and collect more interest. It is also charging more for its lending both on mortgages in Switzerland and on loans for trading stocks and bonds.

This helped it grow net interest income by 26% year-over-year as its total lending grew by 12%. To do this, however, it has run down its capital ratios below its own targets: its common equity tier one ratio dropped to 10.2% at the end of first half versus 12.2% a year ago. Its medium term target is 11%.

As a smaller bank, Julius Baer has lower capital hurdles to worry about. Its systemically important rivals would struggle to pursue a similar strategy, especially Credit Suisse, which has yet to convince investors it won’t need to raise more capital.

For Julius Baer’s bigger local rivals, compensation for the Asia slowdown will be harder to find.

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