Goldman and Morgan Stanley gain from targeting ultra-rich

Banks can reap more revenue from ultra-wealthy clients prepared to pay for personalised services

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For Goldman Sachs Group’s millionaire clients, it can take the firm 5 minutes to underwrite a loan to start a new business or pay down taxes. At Morgan Stanley, bankers are keen to give you bridge financing so you can bid for your mansion in cash.

Beyond the billions in trading gains and deal fees, the Wall Street firms’ profit reports this week showed they’re increasingly rushing into the booming market for lending to high-net-worth individuals. So far, it’s paying off: Morgan Stanley has tripled those loans in the past five years, while Goldman Sachs is expanding overseas.

Forced into becoming bank holding companies by the financial crisis, the firms have embraced the lending business in recent years. Morgan Stanley set a goal to double the percentage of clients that got loans from the bank after its acquisition of Smith Barney. Goldman Sachs has pegged a key chunk of its revenue growth plan to increasing lending to wealth management customers.

"Relative to things like the securities trading markets that generally haven’t grown post crisis, the wealth market continues to grow and the ultra-high-net worth market is even more attractive, it grows fast and has high margins," said Christian Bolu, a bank analyst at Sanford C Bernstein. "It tends to be very bespoke; you can’t get go to your regular, mainstream bank to get loans on your artwork.”

The two banks have conceded that they’re playing catch-up to rivals like JP Morgan, which for decades have provided loans to clients who don’t need the money. And competition is rising. Deutsche Bank has been hiring in the US with a commitment to lending to individuals, particularly those with more than $100 million in assets. Credit Suisse had a more than $3 billion loan book in the US at the end of June, even after it wound down its private wealth division in the region.

Goldman Sachs sees "significant opportunities" for private bank lending, especially outside the US, where it had almost no business five years ago, chief financial officer Marty Chavez said this week. The bank plans to hire, he said.

Mr Bolu wrote in a September note to clients that private wealth may help Goldman turn around its stock performance, and a plan to add $11bn of loans in the business could generate an additional $850m in revenue.

When dealing with a client who on average has more than $50m, “spending a little bit of time isn’t a lot of cost relative to how much you can make on the loan,” Mr Bolu said.

So far, the businesses aren’t big enough to move the needle. But the growth has been rapid. Goldman Sachs has boosted its portfolio of wealth management loans to more than $17bn through the second quarter, from $4 billion in 2012. Morgan Stanley said this week that loans in the wealth unit climbed 7 per cent in the past year to $82bn, and interest income jumped 22 pe rcent. The bank said in a January strategic update that extending credit was a key priority for its wealth management unit, which has $2.5 trillion in assets.


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Chief executive James Gorman has said he’s seeing an aggressive bifurcation between very wealthy clients and other retail investors, who are more likely to demand digital, cheaper services.

The ultra-rich with "foundations, with family offices, with accountants and lawyers involved, are highly unlikely to do all this stuff remotely, but people with much less complicated lives aren’t going to feel that way", he said in a June conference.

Banks can reap more revenue from ultra-wealthy clients prepared to pay for personalised services, while also being able to sell them a wider array of products, said Devin Ryan, an analyst with JMP Securities. In addition to standard mortgages and margin loans, wealth managers can branch into more illiquid assets. The market for loans backed by art is growing and private banks have begun offering to lend a larger portion of the artwork’s value, according to a report by Deloitte Luxembourg and ArtTactic.

"High-net-worth accounts tend to have a higher percentage of the income and the assets, there’s typically more financial products and more financial advice in those relationships," Mr Ryan said.

The business is relatively safe. The Federal Reserve’s stress test earlier this year estimated the loss rate for Morgan Stanley’s book of mortgage loans at about 2 per cent, below the average for the 35 banks in the exam. Mr Chavez said this week that 98 per cent of the loan book in the firm’s GS Select business is secured.

However, should loans go sour, they can leave an adviser in the awkward position of having to collect on a debt. For example, Goldman had to seize a customer’s yacht last year after he failed to pay.

“‘Lending always has risks because depending on whether the loan is collateralised or not, you have the risk of not being paid back," said Mr Ryan.

"But having an existing relationship with the customer and information around their financial life allows the firms to make better underwriting decisions."