Private banks outperform in the UK wealth management revenue stakes - 29.07.2009
Wealthnet
UK private banks have the most diverse revenue streams of any of the wealth management groups covered by ComPeer in their annual survey of the UK wealth management survey (see thewealthnet 28/07/09). According to ComPeer private banks source their revenues from a much wider range of activities than their peers.
This may have enabled them to outperform their peers during 2008, a very traumatic year for the UK wealth management sector. During a year in which overall revenue fell by 1.94 percent, from £4.12 billion to £4.04 billion they managed to increase their revenues from £1.91 billion in 2007 to £1.93 billion.
The ComPeer report provides an interesting breakdown of private banks’ revenue sources during 2008. These vary significantly from investment managers, full service stockbrokers and execution only stockbrokers, the other constituents in ComPeer’s classification of the UK wealth management sector.
Commission and brokerage fees accounted for 10.6 percent of private banks total revenues in 2008 compared to 53.2 percent and 47.3 percent respectively for execution and full service stockbrokers respectively and 17.9 percent for private client investment managers.
Investment management fees accounted for 35.4 percent of private banks’ revenue, compared to r 66.1 percent for investment managers and 32.9 percent for full service stockbrokers, and next to nothing for execution only stockbrokers.
Private banks also appear to have generated significant earnings out of product sales, which accounted for 7.3 percent of revenue during 2008. None of the other constituents appear to have sourced revenue from this activity to any degree.
At 34.3 percent treasury income was the next biggest source of revenue after investment management fees for private banks, as well as the fastest growing. This increased by 14.3 percent during 2008, a feat that probably enabled private banks to increase overall revenues during the course of the year, as all other revenue sources fell.
Treasury income was also important for execution only stockbrokers, the only other segment that managed to increase revenues during 2008. Here treasury income accounted for 32.9 percent of total revenues. Full service stockbrokers and investment firms generated 12.3 percent and 11.6 percent of total revenues respectively from this source.
Wealth structuring also made a significant contribution to total revenue at private banks. At 11.1 percent this was significantly more than the 4.4 percent it contributed to full service stockbrokers revenues.
Custody and administration fees was the only revenue source of negligible importance for private banks. This was of some significance to execution only stockbrokers where it accounted for 12.2 percent of revenues. But even at full service stockbrokers custody and administration only contributed 2.9 percent of revenues.
One problem that private banks will have to face during 2009, however, is that treasury income will not help revenues significantly as a consequence of a big fall in interest rates. And with other sources of revenue, especially investment management fees and product sales likely to come under increasing pressure they could suffer disproportionately in both relative and absolute terms (unless asset values recover significantly during the second half of 2009).
Private banks still dominate the UK wealth management sector, as defined by ComPeer, in terms of revenue. During 2008 they generated £1.93 billion of revenue. This is much more than investment managers (£964 million), full service stockbrokers (£873 million) and execution only stockbrokers (£271 million).
One other interesting development gleaned from the ComPeer data is that there is evidence that the private banking sector experienced increased consolidation in terms of revenue generation during 2008.
The top five private banks increased revenues by 7.8 percent to raise their share of total private banking revenues from 61 percent in 2007 to 65 percent in 2008.
Indeed, in terms of revenue, there is statistical evidence to suggest that the UK wealth management sector is not as fragmented as is commonly supposed.
“Overall, revenue for each of the four firm types is concentrated within a small number of firms and smaller firms have struggled to make up ground in 2008, with the larger firms capitalising on stronger client growth and being less impacted by the drop in investment assets,” says ComPeer.