Swiss private banks having enjoyed spectacular growth in the 1990s are feeling the squeeze from weak markets, high technology costs, inflexi...
Swiss private banks having enjoyed spectacular growth in the 1990s are feeling the squeeze from weak markets, high technology costs, inflexible remuneration systems and desperately seeking ways to slash costs, stem outflows and curb losses. Few, if any, are in peak health. Boston Consulting Group estimates sector profits were down between 40 per cent and 50 per cent in 2001. Private bankers play down the losses, saying 2000 was a record year, making 2001 result appear worse than they actual were. But analysts say most institutions must tighten their belts and boost margins to survive.
Some banks are changing fee structures to become less reliant on highly volatile transaction commissions and more on performance or advisory fees, such as Banca del Gottardo, while others are considering such measures. Lombard Odier and Valiant Privatbank in Berne are sharing back office facilities, a model others are considering.
Many are shedding staff, such as Union Bancaire Privée by ten per cent in 2001 to 900, while Bank Julius Baer has been the most aggressive in terms of cutting bonuses. Hard times are forcing banks to realise the value of flexible remuneration systems and the danger of fixed bonuses.
Claudia von Tuerk, a banking analyst at Pictet & Cie, predicted that Swiss private banks 2002 Q1 figures were unlikely to show much improvement and more cost containment measures were in the offing."They have been rather late in realising things are not going as well as previously. It won't be as dramatic as weve seen in investment banks, but there are definitely thoughts about reducing headcount," she said, adding that the private banking sector was still better off than the brokerage business or investment banking.
Market leaders Credit Suisse and UBS emerged from post-merger restructuring fighting fit. Boutique banks, such as Hottinger & Cie, which has no IT department and outsources when possible, say they too are lean and mean due to a strict low overheads policy.
It is the mid-tier private banking institutions that are suffering most—under pressure to cut costs, improve profit margins or merge. They are too big to enjoy boutique status and big banks are squeezing them on the competition front.
"You are either a boutique bank with less than SFr15bn or you need to be SFr80bn or SFr 100bn to be big enough to survive and looking for distribution or merging partners because costs will become too big for single banks to handle," said a spokesman for UBP. Smaller private banks, such as Bordier & Cie and Mirabaud & Cie, are less affected by the downturn because they did not hire as much as the larger partnerships. Lombard Odier and Darier Hentsch are rumoured to be in the process of cutting ten per cent of staff.
UBP has learnt this from experience. The Geneva bank, one of two Swiss institutions in merger talks, is taking over Discount Bank & Trust with client assets of SFr20bn. The deal to be finalised by month-end would bring assets to SFr78.5bn. Rabobank, the Dutch bank, is swallowing Sarasin. Initially, the deal will mean selling a 28 per cent stake with the option to buy a majority stake in the 161-year-old Basel bank in the next seven years.
"Clearly an independent future was not an option for Sarasin, but one of the good things with Rabobank is that it gets to keep its brand name," said Christoph Ritschard, banking analyst at Zuercher Kantonalbank. UBP and Sarasin are not the only ones struggling.
Baer, whose client assets fell to SFr126.5bn from SFr142bn in 2001 and Bank Vontobel are also under pressure. Vontobel, which is mainly controlled by the eponymous family, is unlikely to be a target because of its unusual shareholding structure. Baer is looking to buy a small private bank outside of Switzerland but there is not much around, noted Ritschard.
Von Turk said Vontobel was not only in trouble because of huge losses after it shelved plans for an online bank last year, but due to a drop in its investment banking business and value adjustments it had to make. Zurich rival Julius Baer has forayed beyond the bounds of traditional private banking with its European brokerage -- a new business which is also doing worse than its core private banking business.
"Small under SFr 10-billion banks might be all right, the concern is with bigger banks which are expanding into other fields that are proving problemmatic and who do not necessarily have scale," she said, adding that the results of UBS, for example, as well as big foreign banks with private banking and other divisions showed however that although private banking was suffering, it was not doing as badly as investment banking.
"For years a private bank was great to have, but what seemed like having a jewel in the crown looks more like a rhinestone in your buckle," said Andy Maguire, vice president at Boston Consulting Group. A case in point is Swiss Life’s dilemma with Banca del Gottardo, its private bank. The insurer has dismissed any suggestion that it is for sale.
"The problem for many mid-size private banks is that they don’t have big onshore operations like the big banks and they face the challenge to get a certain amount of the market, such as in Germany, Spain, France and Italy," Ritschard said.
Not only mid-tier institutions but even boutique private banks are scrambling for a piece of Europe’s onshore wealth, such as Banque Syz, the Geneva private bank, which has bought Albertini & C., the Italian brokers.
Credit Suisse and UBS have spent undisclosed millions building up their onshore business across parts of the continent, as well Pictet, the largest of Switzerland’s partnership banks. Whether the strategy pays off for the big banks, let alone the others, has yet to be seen; competition is stiff. Gottardo recently opened offices in Italy, Austria and France. Sarasin too has been trying to establish links with Italian banks that have no expertise in private banking to capture a slice of their wealth too. Baer, which already had strategic cooperation with Gruppo Bancario Credito Valtellinese, now plans to distribute funds via the group, giving it a low cost entrée into Italy to recapture wealth Italians are repatriating under a tax amnesty.