Banks cash in on “spend and lend” strategy
Private firms already own major works and sponsor heavyweight fairs. Now they are defying the crisis by lending against art
By Melanie Gerlis. From Art Basel daily edition
Published online: 13 June 2012
Despite the continuing sovereign debt crisis, the European banks Deutsche Bank and UBS are not holding back on their sponsorship of art fairs. The latest news is that Deutsche Bank will sponsor Art Basel Hong Kong from 2013, rather than UBS, the bank that has been associated with the Art Basel brand since it began sponsoring the Swiss fair in 1994 (it has supported the Miami Beach edition since its inception in 2002). Deutsche Bank has also been associated with Frieze Art Fair; the bank has sponsored the fair’s London edition since 2004 and has now added the Frieze New York and Frieze Masters editions to its remit. Deutsche Bank sponsored ArtHK before it was bought by Art Basel (for three editions, from 2010 to 2012).
The bankers are out in force at Art Basel this year; UBS, the fair’s main sponsor, is due to host a dinner for around 100 clients in the Art Unlimited exhibition. During Frieze New York, Deutsche Bank hosted a dinner at the Whitney Museum of American Art, where the city’s mayor, Michael Bloomberg, gave a speech. The bank is not entertaining as extravagantly in Basel, but Alistair Hicks, the senior curator of its collection, is in town. “Fairs have become a useful way to entertain clients and try to promote what we do,” he says. “[Art Basel] enables us to give something back to clients who are interested in art,” says Irene Zortea, the head of the UBS Art Collection.
At the end of 2011, one joke going around the banking world was that UBS’s art collection had made more than its banking business that year. The exact figures were never confirmed (UBS does not disclose the value of its art), but as the bank’s net profit was down 45% in 2011, it is safe to assume that its collection of around 35,000 contemporary works performed better.
The banks’ art collections are significant; Hicks says they are “small but integral” to the bigger business. Deutsche Bank has around 60,000 works on paper (including photography) dating from 1960 to the present day, making it one of the biggest contemporary collections in the world. UBS has around half that number and buys pieces in all media, providing they can be displayed. Although both firms focus on emerging and developing artists (who are cheaper), their collections, which incorporate those they have acquired from other banks, include some important pieces. The UBS collection is more than 30 years old and has around 8,000 works by what its curators refer to as “premium artists”, including Roy Lichtenstein (Crying Girl, 1963), Willem de Kooning, Chuck Close, Julian Schnabel and Damien Hirst. Deutsche Bank, which has been collecting post-1945 art since the 1970s, owns Gerhard Richter’s Betty, 1991, as well as works by artists including Neo Rauch, Hirst, Anish Kapoor and Andy Warhol. Both banks distribute works to around 900 offices worldwide, and pieces owned by UBS are on loan to museums around the world, including Lesley Vance’s Untitled, 2011, Richard Diebenkorn’s Untitled (Ocean Park #13), 1983, and Claes Oldenburg’s Study for Store Objects—a Sock & 15 Cents, 1961-62.
Mixing aircraft with art
For the banks, art plays an important role in winning and retaining their private wealth clients (high-net-worth clients are typically those with more than $5m of investible assets; ultra-high-net-worth individuals have more than $50m). “There is a crossover [between clients’ investments],” says Michael Darriba, the head of lending and credit solutions at Deutsche Bank Private Wealth Management. Clients who use the banks for more traditional assets (such as property, stocks and funds), or estate planning and even aircraft financing, are often players in the art market, too—or they become the owners of works when a relative dies. The banks position themselves as expert sounding-boards in an otherwise under-regulated world:?offering, for example, shipping, export, conservation and due-diligence advice. Patricia Amberg, the head of UBS’s Art Competence Center, which was set up last year, talks of the “many pitfalls” that the centre can help clients avoid. Darriba describes Deutsche Bank’s offering as “bespoke”.
Business from privately wealthy clients has become increasingly important to banks as their other revenue-generators, such as mergers and acquisitions in the corporate arena, have run dry (or at least drier) since the economic downturn of 2008. Meanwhile, wealth creation has continued, particularly in Asia and South America. Deutsche Bank showed its commitment to the private client business when it bought Sal Oppenheim, a Luxembourg-based wealth manager, for €1bn in cash, a transaction that was completed in 2010. At UBS, wealth management has increasingly been on the strategic agenda: in the first quarter of 2012, pre-tax profit in this area was up 70% on the previous quarter to SFr803m ($883m). The bank closed the period with invested assets of SFr772bn ($850bn), up 3% on the fourth quarter of 2011.
All aboard the gravy train
Although entertainment and VIP lounges at fairs are valued by clients, they are not tangible income-generators—and it would be an unusual bank that said it didn’t care about its bottom line. The signs are that several of the financial institutions are looking more closely at how to capitalise on bringing their core skills to art. One potential area is in lending against art: a more direct way for banks to make money.
“Art can often represent a large portion of wealth that doesn’t generate any income [for its owners]. Unlocking this money can allow it to be used for other opportunities [outside the art market],” Michael Darriba says. “More and more people are using their collateral to get liquidity,” says Suzanne Gyorgy, an art finance manager at Citi Private Bank. Citi’s art advisory business has lent against art for more than 20 years.
The banks say that every transaction is different, but in general, they lend up to around 50% of a work’s value (which reduces their risk considerably when compared with, say, loans against property). The lending rates also vary, but these are typically between 2% and 5% above the interbank lending rate, representing a healthy margin. However, UBS does not offer art lending and never has, because the market’s illiquidity is too risky. “If you have to sell a specific work of art, you can never guarantee that it will fetch the price you expected,” Patricia Amberg says. Instead, UBS charges clients an hourly rate for independent advice on either buying or selling art.
It also seems that the economic downturn is helping banks regardless of whether clients are buying or liquidating their assets. Gyorgy says: “Both things are happening; people are freeing up and parking liquidity.” For clients who need the cash, an art loan or advice on a work’s disposal is a helpful solution. And for those who have run out of investment opportunities in more traditional fields, buying art has already proved popular. Since the downturn, high-net-worth individuals’ investment in art has increased at the expense of property and cash—a trend that is expected to continue, according to the 2011 Merrill Lynch/Capgemini World Wealth Report.
It isn’t just the banks that sponsor art fairs or have big art collections that want to take advantage of this dynamic. Daniel Ross, an associate vice-president in Barclays’s wealth and investment management team, says the bank recognises the “crossroads between the art market and private banking”. The investment management part of his bank boasts a few works by modern British artists, and Barclays is exploring ways to extend its expertise in tax and estate planning to art, and lending against art. “Banks are now clambering over art,” Ross says. Other banks on the art gravy train include Société Générale Private Banking, which in 2009 announced a partnership with the art advisory firm 1858, and Germany’s Berenberg Bank, which launched an art advisory subsidiary last year.
Banks aren’t the only firms growing their art services business while the sun shines on the art market; art advisers to the wealthy are also becoming more prominent. But Lisa Schiff, a New York-based independent art adviser who is at Art Basel this week, says she doesn’t see them as competition. “I am on the ground all the time and I never run into anyone from a bank. My guess is that what they are doing is very investment-driven and that they are occupied with blue-chip, recession-proof works.” She acknowledges that this is the way the art market seems to be leaning, as some galleries become mega-businesses on a par with auction houses. It is, Schiff says, “a strange time in the art world”.
There is even talk of banks launching art funds again, although this is “not a topic” of discussion for UBS, while Deutsche Bank’s Hicks says that he is “not consciously aware of one”. The bankers will be mindful of ABN Amro, which launched an art investment advisory service in 2004, only to pull out of the art market completely the following year. But Daniel Ross says that “the banks wouldn’t be investing so much in [art] if they didn’t think it was going to drive future revenue”. Schiff agrees: “It will be interesting to see the art world in ten to 20 years’ time, when I suspect the banks’ art advisory teams will be thriving.”
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