Swiss pain contrasts with German private banking zeal

A staff reporter 14 October 2002


The increasingly clear distinction between onshore and offshore private banking has come into sharp focus in recent weeks. At one end of the...

The increasingly clear distinction between onshore and offshore private banking has come into sharp focus in recent weeks. At one end of the scale, Switzerland's private banks are facing cuts and management changes as the industry faces slowing growth and client losses. Meanwhile, at the other end of the scale, the largest of Germany's commercial banks are positioning themselves for growth in the domestic private banking market.

The private banking shake-ups in these two neighbouring states are, of course, strategically unconnected; but the comparison between Swiss gloom and Teutonic zeal only highlights what we have all known for some time. The future of wholesale private banking probably lies at home.

It was a diplomatic certainty that the days and weeks surrounding Switzerland's entry to the United Nations would be characterised by sniping on tax 'avoi-sion' by EU neighbours. But the very fact that the mountain nation has taken the step onto the international stage at all signals clearly that times are a-changing for the country's premier financial industry.

At a more local level, recent weeks have seen at least 680 of Geneva's private bankers facing redundancy, just among those that have revealed their 'cost-cutting' targets. Lombard Odier Darier Hentsch and Banque Edouard Constant announced combined job losses of around 330, adding to Union Bancaire Privée's losses of 350 staff, announced just weeks previously.

While the Geneva banks cut back, the Zurich banks started to play executive musical chairs, seeking new leadership to stem losses. Credit Suisse was not the only firm to get new top brass. Bank Julius Baer, Bank Leu, Banque Cantonale Vaudoise and Bank Vontobel all appointed new senior managers and began retrenching at home and in the international markets to savage costs.

Meanwhile in Lugano, Swiss Life's SFr537m write-down on Banca del Gottardo would indicate at least mild anxiety on the part of the Swiss insurer to find a buyer for the private banking business. Swiss Life has confirmed that private banking is 'non-core' and the write-down would put a price on Gottardo of around SFr1.86bn, down significantly on the SFr2.4bn paid by Swiss Life in 1999 when it bought the Lugano-based bank.

The fate of Gottardo contrasts with activity in Germany where ABN AMRO and Royal Bank of Scotland last month snapped up Delbrück & Co and Allbank Privatkunden respectively, despite bad debts at both German firms.

Not only are international firms seeking entry to the German private banking market, but all four of Germany's Big Four commercial banks are also actively repositioning to tap domestic high net-worth wealth.

Germany has long been recognised as Europe's most significant wealth market, with well over €1trn in domestic high-net-worth private capital. However, a number of factors have coincided to make the market look particularly appealing right now.

For local players, the attractions of private client fee income are irresistible given current credit problems and investment banking losses. But that is not all. The commercial banks, and other international banks, are looking to take advantage of a raft of regulatory changes that could dramatically alter the face of German banking.

The abolition of state guarantees for savings banks is a particular case in point. The commercial banks have historically played second fiddle to the savings banks sector — the Spaarkassen and Landesbanken. The savings banks have done so well largely due to state guarantees that have given these players a significant funding advantage over their commercial rivals. In particular, they have developed strong relationships based on credit with small and medium-sized companies, or Mittelstand, where they control an estimated three-quarters of the domestic market. Remove the guarantees, as the European Commission has ruled must be done, and a whole swathe of companies and their wealthy owners are more likely to shop around for their financial services.

The new Basel II guidelines are also having an impact, making credit to small companies still less palatable for the savings banks. The implementation of Basel II will therefore likely have the effect of unpicking more of those historical ties between savings banks and their Mittelstand clients.

Deregulation of corporate ownership and tax breaks on the sale of corporate holdings, which were introduced at the start of this year, have also been discussed as a likely cause of restructuring in the banking sector. Although, in reality, not much of the restructuring looks to have been the direct result of these changes.

Change is, of course, generally bad for the private banking business, except when the changes are happening on such a grand scale that the priority is to be in the right place at the right time when the cards start to land. This would seem to be the logic behind the current restructuring among Germany's commercial banking players.

HVB Group nudged up the market average in September, when it revealed that the minimum investment for a segregated stock and bond portfolio was €1.5m — 50 per cent above the norm. The bank will also target clients with €500,000, offering a fund-based solution. Effective product segmentation is critical to making money in the private banking business and HVB seems to be taking a step in the right direction with this strong lead.

What will emerge from the other commercial banks is not yet clear, but if HVB is anything to go by, we could well see some defined segmentation between the retail and private banking business that has been lacking in the German market for some time.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes