UBS and Credit Suisse are better positioned and have better valuations when compared with smaller wealth managers, according to a new resear...
UBS and Credit Suisse are better positioned and have better valuations when compared with smaller wealth managers, according to a new research report.
The report from Bank Sarasin said that both UBS and Credit Suisse have distinctly better fundamental outlooks.
“When measured by P/B ratios, both banks obtain a higher valuation, which is justified due to their higher return on equity. Specialised wealth managers on the other hand, suffer from pronounced low new money inflows,” said the report.
The report went on to say that the current consolidation process provides a short-term option, but does not solve the fundamental problems of slow net new money flows and pressure on revenues.
The most likely M&A transactions may occur between listed wealth managers and their unlisted counterparts, said the report. Foreign transactions are also feasible, as are takeovers of external asset managers.
“Although consolidation eliminates a lot of duplication between merging partners, it does nothing to improve the sector’s poor revenue momentum,” said the report.
In contrast, both UBS and Credit Suisse are showing an outstanding momentum in their core business, private banking, said the report.
UBS increased its gross profit margin in private banking from 37 basis points in 2002 to 48 basis points in 2004 and Credit Suisse Private Banking from 33 to 57 basis points. In the same period, Julius Baer’s gross profit margin shrank from 24 to 21 basis points.
Only Vontobel’s private banking business managed a slight improvement from 28 basis points to 29 basis points.
Smaller wealth managers suffer from a cost disadvantage, especially in their core business, private banking, argues the report. The costs for new compliance rules, major projects (renewal of IT systems) or for the expansion of the product portfolio (new departments for alternative investments) are not so favourable when compared to revenue generating assets.
But the main reason for the unfavourable cost income ratios is the lack of new money, said the Bank Sarasin report.
The report went on to say that Europe’s share of global assets could sink from 31.5 per cent in 2002 to 25.4 per cent by the end of 2009.
In the future, large banks are likely to continue to benefit from the excellent new money growth trends in Asia, onshore Europe, Eastern Europe and Latin America and register significant new money.
Wealth managers are forced to launch growth initiatives to attract new client money, said Sarasin. This mid-term solution will be very expensive in the initial phase. Of the listed wealth managers, Julius Baer is currently making serious investments in the European onshore business.
Vontobel and VP Bank also announced growth initiatives in Germany a few years ago, but so far these have not had any significant impact on new money rates, said the report.