For Goldman Sachs Group Inc.’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 catchup to rivals like JPMorgan Chase & Co., which for decades have provided loans to clients who don’t need the money. And competition is rising. Deutsche Bank AG has been hiring in the U.S. with a commitment to lending to individuals, particularly those with more than $100 million in assets. Credit Suisse Group AG had a more than $3 billion loan book in the U.S. 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 U.S., where it had almost no business five years ago, Chief Financial Officer Marty Chavez said on a call with analysts this week. The bank plans to hire, he said.
Bolu wrote in a September note to clients that private wealth may help Goldman turn around its stock performance, and a plan to add $11 billion of loans in the business could generate an additional $850 million in revenue.
When dealing with a client who on average has more than $50 million, “spending a little bit of time isn’t a lot of cost relative to how much you can make on the loan,” 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 $17 billion through the second quarter, from $4 billion in 2012. Morgan Stanley said this week that loans in the wealth unit climbed 7 percent in the past year to $82 billion, and interest income jumped 22 percent. 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.
Chief Executive Officer 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.