UBS Group AG and Credit Suisse Group AG are navigating a rocky wealth management environment in Asia-Pacific that market observers said will not improve until at least the latter part of 2022.

Both Swiss institutions recorded a drop in AUM and year-over-year profits for the region in first quarter as COVID-19 lockdowns and uncertainty surrounding the impact of Russia's invasion of Ukraine weighed on wealth management activity. Heightened caution among clients, shown through deleveraging, was a key theme in the quarter, analysts and executives said.

This scenario will likely remain until the third quarter, when Asian markets are expected to reopen and cross-border trades and supply chains are re-engaged, according to Justin Ong, Asia-Pacific asset and wealth management leader at PwC Singapore.

Risk-off

The tendency of Asia-Pacific high net worth clients to borrow against their wealth makes leverage a key determining factor of fee income for wealth managers operating in the region.

Credit Suisse said June 8 that it is headed toward a loss in the second quarter, marking its third consecutive quarterly loss. Client deleveraging, especially in Asia-Pacific, was among the factors cited by the bank in its trading update.

Asia-Pacific is where UBS has the highest leverage penetration, and the bank has suffered three consecutive quarters of deleveraging, CFO Kirt Gardner said on the bank's latest earnings call. The bank believes this trend could reverse quickly.

"Our Asian clients do tend to like to use leverage as part of their investment strategy. You see ... sharper deleveraging when they turn negative, but you also see sharper pickup when they turn positive," the CFO said.

S&P Global Ratings analysts Benjamin Heinrich and Anna Lozmann said they expected a swift reversal of the deleveraging trend once market conditions improved, though the operating environment is unlikely to be significantly better in the second quarter than the first.

Talent competition

The longer term prospects for wealth management in APAC remain strong, the analysts said. The region "is one of the fastest-growing wealth markets with a high proportion of young clients and entrepreneurs looking for advice and ways to invest their money globally," according to Heinrich and Lozmann.

PwC projects Asia-Pacific AUM to reach $29.6 trillion by 2025, nearly double the 2017 level. Yet, as investable assets grow, so does the need for wealth management staff. As such, the biggest risk facing wealth managers in the region is the availability of enough client managers, said Ong.

UBS has more than 15,000 staff in the region, equating to 21% of its workforce, according to its latest annual report.

Credit Suisse's headcount in Asia Pacific rose 9.3% between 2020 and 2021, but an accelerated cost-cutting push looks set to hinder its hiring ambitions. The bank will have to "slow down a little bit" on its plan to annually increase its number of relationship managers in China by a third by 2024, CEO Thomas Gottstein said June 9 at the Goldman Sachs European Financials Conference in Rome.

Global banks have been in increased competition for talent in recent months and have been hiking salaries and bonuses for bankers to attract top staff. "Wealth managers need to continue to ensure that they keep close to their clients — understand their needs, be transparent and keep their talent motivated," Ong said.

A spokesperson for Credit Suisse did not elaborate on hiring plans, while UBS declined to comment.

Assets, profits suffer

The fee-generating assets of UBS in Asia-Pacific amounted to $110 billion as of March 31, slipping year over year from $112 billion. Net new fee-generating assets totaled $400 million in the first quarter, compared to $8.8 billion in the year-ago period.

Within the bank's Asia-Pacific wealth management unit, operating income slumped to $288 million in the first quarter from the year-ago $468 million. Transaction-based revenues in the region dropped roughly 40%, said Gardner, adding that clients there are expected to remain cautious in terms of activity in the second quarter.

At Credit Suisse the impact was more severe. Asia-Pacific AUM stood at CHF266.2 billion at March-end, versus CHF293.6 billion a year before. Its net new assets in the region also declined in the first quarter to CHF2.5 billion from CHF7.9 billion a year prior. The bank does not disclose specific Asia-Pacific wealth management results.

First-quarter adjusted operating loss was about CHF100 million, compared with a year-ago operating profit of about CHF700 million. Credit Suisse booked market-to-market losses of CHF32 million in Asia-Pacific financing, said CEO Gottstein at an earnings presentation.

Spokespeople for UBS and Credit Suisse declined to comment on the asset decline and instead pointed to the banks' respective first-quarter financial reports.