A strong wealth management business can represent a positive, stabilizing force to financial firms with substantial capital markets exposure, says a new report from DBRS.
Capital markets revenues are particularly prone to volatility, given their association with global economic activity, client demand and client risk appetites, the report notes. Moreover, these revenues are largely marked-to-market, it says, which drives real-time revenue swings, rather than revenue shifts evolving over time.
To some extent, this can be mitigated by operating a diverse range of capital markets businesses, the report says. But a strong wealth management franchise can also represent a consistent, stable revenue base, it adds.
Overall, DBRS views a strong wealth management business as a credit positive for banks, as it enhances the business mix, diversifies the revenue base, and contributes to a more stable funding and liquidity profile, the report says. “This has the potential to provide the bank with a stronger ability to adjust to the changing operating environment given its increased diversification,” it adds.
In addition, wealth management can complement capital market business by providing opportunities for synergies that support both businesses, the report says. “Synergies require close co-operation across businesses, which could intuitively go against the best interests of the individual employee despite being in the best interest of the firm,” it says.
“A strong risk management function is also necessary, as a result of the complexity which inter-business joint ventures and revenue sharing agreements can create,” the report adds.