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Profits at the world's private banks, whose fortunes soared this decade, are expected to tumble this year as the global financial crisis slashes revenues from fees and sales.
The tanking of financial markets has prompted wealthy clients to sell equity holdings and shun higher-fee products for the comfort and safety of cash, private bankers and industry experts have told the Reuters Wealth Management Summit.
Assets held by the world's richest people rose by 9.4 per cent to $40.7 trillion in 2007, according to the Merrill Lynch and Capgemini Annual World Wealth Report.
But trillions in wealth has been wiped out globally since the credit crisis began over a year ago, and it's not clear when the carnage will end.
The private banking industry, whose largest players include UBS, Citigroup and Merrill Lynch & Co, typically earns fees of one per cent or more per year on assets under management.
Analysts note that a disproportionate amount of that fee income is generated from riskier asset classes like equities.
Structured products, which often use complicated financial instruments such as derivatives, are seen as particularly big fee generators for the banks.
But private bankers serving US, European and Asian investors say many of their clients had been dumping assets with the slightest hint of risk and hoarding cash to avoid further losses as the global credit crisis continues to bite.
This means even if overall assets hold steady or shrink only slightly, profits for the private banks could quickly evaporate.
Against this backdrop, banks in the UAE could be forced to consider mergers.
Shareholders in listed banks currently lack the ability to inject capital into banks through capital increases, thus necessitating mergers to create bigger banks.
Dubai-based Emirates NBD, the Gulf region's biggest bank by assets, resulted from the government-sanctioned merger of Emirates Bank International Ltd and National Bank of Dubai last year.
The lender, which has been better able to face global circumstances due to its size, posted a 45-per cent jump in second-quarter profit and is likely to record 'good performance' in the third quarter.
The UAE central bank last month opened a Dh50 billion ($13.61 billion) emergency lending facility to help banks cope with the credit crisis.
This month it will inject Dh70 billion of new cash into the banking system.
Saudi Arabia's government could step in to buy collapsing stock on the local bourse and the central bank will keep banks liquid if necessary.
Barring surprises such as the sudden bank collapses that hit other major economies, analysts predict Saudi Arabia's status as the world's largest oil exporter offers it at least short-term protection even though falling oil prices will cut its earnings.
Bahrain's banking system is sound, and no bank has needed to use a central bank interbank facility, Bahrain Central Bank Governor Rasheed Al Maraj says.
"No banks felt the need to make use of the (central bank's) repo facility which indicated the continuing strength of confidence and funds in the Bahraini dinar market," Mr Maraj says.
"Bahraini banks remained well capitalised and were showing good profitability in 2008, even surpassing the record performances for 2007 in most cases," he says.
Bahrain's Finance Minister Shaikh Ahmed Al Khalifa, says most banks in the island kingdom had invested in the booming Gulf region rather than in complex financial products, limiting exposure to the global crisis.
Meanwhile, consumer credits extended by GCC banks increased in the first half of this year compared with the same period of last year. This surge could be the main factor in the rising inflation rates in the six member states.
Analysts say if credit growth continues at the same pace, it will increase inflation pressures and at the same time give rise to bad and doubtful loans when the current economic boom eases.
This could result in Gulf oil producers being hit by a US-style credit crisis in the absence of government curbs on excessive loans.
Then, what should the Gulf governments do to drain off excess liquidity?
Experts say they need to issue more certificates of deposits and bonds to mop up liquidity in local markets even though they do not need to borrow given their massive fiscal surpluses.
They could also increase the ratio of reserves for mortgage and personal loans to more than 100 per cent and at the same time establish credit bureaus as is the case in other countries.
