The USA has gotten tough with Russia and even the EU has said they’re really, really serious this time. They mean really serious. They've even drafted a letter.
What does serious mean? It means sanctions. So what will be the consequences of these sanctions?
There'll be plenty of consequences, but let me give you a European private banker's view. It involves new shoes for the missus, negligee for the mistress and Ferrari or Porsche for the banker in question. This is because some bankers in Europe will be making some nice bonuses this year. Da baby, da! because bonuses are back, or perhaps we should call them Bфицskis.
There are three ways a private bank can grow their business:
- Acquisitions
- Appreciation in assets under management (AUM)
- Inflow of new money
The first is plain enough: Buy another bank, pretty self-explanatory.
The second, asset appreciation, is what we have been seeing in recent years. Stock prices have gone up, bond yields have declined so the value of bonds in client portfolios have gone up. Even private bankers who have sat on their hands for the past few years have seen AUM increase, giving the illusion of good business. In reality this has absolutely nothing to do with generating new business.
Then we come to the third bit, inflow. Make no mistake, this is what private banks crave like vampires crave blood. The banker that brings the inflow is the Big Cahuna and the Grand Poo-bah all rolled into one.
This brings us to Russia, capital flight and European private banks.
Provided that markets don’t tumble, 2014 will prove to be a bumper year for several European private banks as wealthy Russians continue to transfer their assets out of Russia and into the secure vaults of European private banks.
The amount of capital flight from Russia, according to the ECB, is estimated at around $220 billion (yes billion with a "B"). That’s a lot of money. To get some perspective let’s compare that to some hard data on private bank inflows. Recently Scorpio Partnership published their Global Private Banking Benchmark for 2014, the report includes net new money data for 25 major private banks. The inflows for 2013 came in at about $45 billion (a decent number by the way).
Now compare those two figures: Capital flight from Russia an estimated $220 billion and inflows in 2013 of $45 billion to the major private banks.
Obviously a large proportion of the capital flight from Russian is made up of corporate flows and the Scorpio data includes only 25 banks, some outside of Europe, but you can bet your bottom Ruble that there’s enough there to go around and make some Swiss bankers and their local Porsche dealer very happy indeed.
In 2015 when banks start reporting their 2014 results look for some really good results.
So who are the banks to look out for? You want names don’t you? Well I’ll give them to you.
The big winners will be those banks that already have an existing large Russian clientele. Those that don’t won’t be as lucky. Opening new accounts for Russian clients is nigh on impossible so it’s the banks who already have the client accounts open who will gain from the sanctions.
When (some) Russians started becoming rich after the fall of the Soviet Union they wanted prestige and respectability (they still do) so they flocked to the traditional prestige names. You want to be looking at banks like UBS, Julius Baer and Credit Suisse.
So bring on the Bфицskis!
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