Banks Flock to the “One Percent” for 10% Growth

As the rich keep getting richer around the world, banking behemoths like Credit Suisse, Morgan Stanley, Wells Fargo, and several others have been busy transforming their businesses to share in some of the wealth.

As the Swiss put it, they’ve been “doing a UBS,” following the large Swiss bank’s model of catering to the (read: lucrative) banking and investment needs of the much talked about “one percent.”

That’s because high-margin “private banking” — which offers personalized advisory, banking, asset management, and trust custodial services for affluent individuals with a net worth of $500,000 or more — is quickly becoming a must for large banks that want to grow.

The transition into private banking hasn’t been a difficult choice for most. Low interest rates continue to eat into the razor-thin profit margins for retail banks, while egregious account fees have been known to be deal killers for retail bank customers in the competitive market.

And while the investment banking industry has been prosperous in the recovering economy as more companies have needed access to capital, it is highly sensitive to economic downturns.

By contrast, private banking services for affluent individuals typically enjoy more stable demand during recessions and carry higher profit margins. In fact, the wealthy often ask for more advisory services or invest more heavily when they see a falling stock market or depressed housing prices in pursuit of great bargains.

Just look at Wells Fargo’s private banking performance last year. While its traditional banking revenues grew by a paltry 1%, its trust and investment fee income swelled by 6% during the year.

Meanwhile, JPMorgan Chase’s private bank performed even better. The US’s largest bank grew its private banking assets by 19% in 2014, making it the fastest-growing of the top 10 largest private banks last year.

With growth like that, it’s no surprise why the total assets for wealthy investors managed by the global private banking industry have grown to an amount larger than the US’s entire gross domestic product — more than $20 trillion, according to an industry study by Scorpio Partnership.

Top 10 Largest Private Banks Worldwide (2014)

Bank Assets under Management
UBS Group AG $2.03 Trillion
Morgan Stanley $2.02 Trillion
Bank of America Merrill Lynch $1.98 Trillion
Credit Suisse $883 Billion
Royal Bank of Canada $704 Billion
Citigroup $550 Billion
JPMorgan Chase $428 Billion
BNP Paribas $370 Billion
HSBC Holdings $365 Billion
Goldman Sachs $363 Billion

Source: Scorpio Partnership

Banks like Morgan Stanley and UBS have known about the lucrative private-banking market for some time. UBS began moving aggressively toward the relatively untapped market back in 2008 while others were busy salivating over the growth prospects for investment banks.

Now managing more than $2 trillion in assets for high-net-worth individuals (HNWIs), UBS is officially the world’s largest private bank and generates more than 50% of its revenue from its Wealth Management business. But based on its future growth plans, the Swiss bank believes it is far from reaching its peak.

While its Wealth Management business courts the wealthy directly, UBS’s small retail banking division plays an alternative strategic role toward its long-term growth. The division offers traditional banking services to individual customers much like any other retail bank, but management says the key difference is it works as “the central building block of UBS’s universal bank delivery model in Switzerland.”

By assisting many of its retail clients with services aimed at building wealth, the bank’s retail division can eventually bring clients up to a level at which it can transfer them to its higher-margin Wealth Management services.

Using this strategy and others, the Swiss bank expects its Wealth Management business will eventually deliver pretax profit growth of 10%-15% per year — a healthy clip when compared to the near-zero profit growth that some of the US’s largest banks generated last year.

With plans to mimic UBS’s success, rivals like Credit Suisse have already begun scaling back their investment banking operations to plow more resources into their private banking businesses in hopes of knocking UBS off its throne.

And entrepreneurs, marketers, and sales professionals who do business with larger banks can expect other banks to quickly follow suit if they haven’t already. They can also expect top private banks such as Morgan Stanley, Bank of AmericaMerrill Lynch, Royal Bank of Canada, Citi, JP Morgan Chase, and others to continue building upon their wealth management empires to boost growth in the years ahead.

As the trend toward private banking continues, it may not be long before the phrase “do a UBS” becomes the new banking lingo for growth strategy.