Wealth management and investment banking are supposed to be a settled couple these days. That’s the explicit strategy of the two big Swiss banks, and an increasingly regular refrain on the earnings calls of Barclays, Société Générale, Intesa and others. The causes are partly economic, partly regulatory and partly fashion.
The wealthy are getting richer faster than everyone else. Helping them with this — in exchange for some of the proceeds — is a caper that ought to grow faster than broad-based banking. Highly structured balance sheet-bloating fixed income trades have been out of favour since the crisis, and many firms have been steadily lowering their capital allocated to investment banking.
Perceptions matter, too. Wealth management produces steady fee streams most of the time, but importantly, the term conjures images of discreet and cautious Swiss bankers in suits, not barrow boys rigging Libor or rocket scientists building machines that trade in dark pools at the speed of light.
For most bank chief executives over most of the past decade, positioning their firms as retail and wealth management operations with just a dash of investment banking on the side has helped boost valuation multiples. UBS has played this card with particular success.
At the margins
But wealth management also includes a large slice of lending money to risky clients, particularly in places where collaboration with investment banking is supposed to bear fruit.
Investment bankers are meant to steer newly flush company founders, fresh from IPOs, into the hands of their wealth management colleagues.
Wealth managers are supposed to proffer exotic investment opportunities sourced from their investment bank's trading desks and help their clients liquefy their assets with well-timed margin lending — cash loans to a customer using their shares or somesuch as security — or block trades of equity.
In theory, all of this has to be done at arm's length. Wealth managers who stuff their clients with the detritus created by investment bank structurers ought to feel the consequences. So should syndicate desks that give bountiful allocations in hot IPOs to their own wealth management desks.
But there are ways to collaborate without violating these duties of trust. Investment bankers are skilled at bringing people together — simply brokering a meeting or making an introduction can add a lot of value.
The tale of Steinhoff, though, acts as a reminder that even the seemingly good businesses are prone to occasional large money-losing events.
Hairy today, gone tomorrow
All the investment banks that have recorded losses on Steinhoff margin loans so far have placed them on their investment banks' books. The big US firms mostly recorded them in equities sales and trading.
It is not clear, at this point, which loss matches up to which bit of lending.
Christo Wiese, Steinhoff's former chairman, and the driving force behind the group, raised a margin loan against €3.17bn worth of collateral in 2016, led by Citi, HSBC and Nomura. This is likely to be worthless and is probably the main source of the losses disclosed so far.
JP Morgan not only took a $130m credit cost, but booked a $143m loss on a Steinhoff-related margin loan, while Citi recorded a $130m "episodic loss in derivatives". Goldman Sachs took a $130m impairment in “investing and lending”, from a "single structured loan", which chief financial officer Marty Chavez disclosed was, indeed, Steinhoff
Bank of America took a $132m provision, but split this between its banking and markets businesses, meaning it may not all be margin lending. Meanwhile, UBS recorded a generalised credit loss of Sfr74m ($79m).
Placing any margin lending losses in the investment bank makes sense — equities trading businesses ought to be the best places to manage margin loans. But that may simply reflect the size and scale of the Steinhoff exposures.
Margin lending, particularly where it helps founders raise cash, is a core wealth management product, and while Steinhoff’s problems were idiosyncratic — investors couldn’t trust the accounts — issues of that kind may arise more easily in firms with charismatic and powerful founders who are still deeply involved.
The founders in question, particularly if they have a penchant for financial engineering, may be among the best clients of investment banks, and their respective wealth management divisions.
But the woes of Steinhoff, and the losses now being nursed across the Street, ought to act as a reminder to bank investors that wealth management is not always squeaky clean.