Banking giants report loans to wealth management clients grew by double digits
Despite rising rates and a stock market crash that crushed the value of their portfolios, wealthy people increased their borrowing in the first half of the year.
The wealth management divisions of Bank of America and Morgan Stanley reported double-digit loan growth in the second quarter. According to executives, the surge was caused by wealthy clients taking out mortgages and loans secured by assets like stock and bond portfolios.
Mortgages increased by 30% to US$50 billion at Morgan Stanley's wealth segment from a year earlier, while securities-backed and other loans increased by 23% to US$93 billion.
Wealth-management loans at Bank of America increased by 12% from a year earlier to US$222 billion, beating a 4% growth in the bank's consumer segment.
Although among a richer portion, the growth is just another indication that Americans aren't being defensive in anticipation of a crisis.
The CEOs of the top U.S. banks stated in earnings calls earlier this month that their clients are spending at a healthy rate and making their loan payments on time without depleting their bank accounts.
According to Mike Kosnitzky, co-head of the private-wealth practice at law firm Pillsbury Winthrop Shaw Pittman LLP, the wealthy are using their securities-backed credit lines to buy assets that appear inexpensive in the current volatile markets.
Rich families piled on cheap debt during the more than ten years of historically low interest rates. They received a stream of money from loans that prevented them from selling assets and incurring hefty tax liabilities.
Banks are currently providing less lenient terms because of rising interest rates and a weakening stock market.
Since lenders often only allow borrowers to access a certain portion of their holdings, borrowers whose stock portfolios have lost value are likely to qualify for lesser credit lines.
Additionally, the variable-rate loans are often based on indexes that have seen significant increases since the beginning of 2022 because of the Federal Reserve's periodic increases in interest rates to fight inflation.
The loans are still considerably less expensive than what a bank may charge for a credit card, for example.
Although the wealthiest clients who can put up more assets as collateral can receive even lower rates, according to Tom Anderson, who works with banks on wealth-management lending, securities-backed loan rates currently range from 3.75% to 5.75%.
The pandemic resulted in twin stock market and real estate booms that increased the value of the wealthiest Americans' holdings, allowing them to become even wealthier. According to Moody's Analytics, Americans saved an additional $2.7 trillion from January 2020 to December 2021. Over half of that money was held by the top 10% of earners.
One reason wealthy clients were borrowing against their portfolios, according to Andy Sieg, chairman of Bank of America's Merrill Lynch Wealth Management division, was to meet their tax obligations. The fiscal year that ends on September 30 is expected to see record-high individual income tax receipts.
