In debate on whether the best way to deliver private banking is to be “standalone” or part of a bigger organisation, the private banking head of Union Bancaire Privée has few doubts.
In the constant debate on whether the best way to deliver private banking is to be “standalone” or part of a bigger organisation, there’s not much doubt which side the private banking head of Union Bancaire Privée is on.
As concerns about conflicts of interest and industry short-termism remain, Michel Longhini, managing director, private banking and member of UBP’s executive committee, is adamant that “standalone” beats opposing models hands down.
A former head of international private banking at BNP Paribas – with several years working in Asia before joining UBP in 2010 – Longhini argues that many integrated banks have reached the economic limits of what they can do with private banking. The raft of merger and acquisition deals in Europe and Asia in recent times – in some cases driven by regulatory issues - underscores this, he says. “Pure-play” firms are well placed to advance. UBP itself, with around $105 billion of assets under management (bulked up by M&A deals as well as client growth), has, Longhini says, one of the best (ie, lowest) cost/income ratios in the wealth space, at 68.5 per cent (end-2013). That compares with an industry average, depending on various sources, of just under 80 per cent.
In a wide-ranging interview with this publication at his bank’s smart offices in the Rue du Rhône, Geneva, he was also blunt about the how the bank, with its renowned involvement in the hedge fund space, has battled back from a damaging episode when investors were hit by exposure to Ponzi fraudster Bernard Madoff. The bank’s determination to help affected clients as much as possible has, he says, been a proof of how doing the right thing pays off in the long run, he said. UBP was one of the first firms to settle with clients – paying around $500 million to repair the damage. He reckons UBP’s “pure-play” status helped in getting this sorted out without having to wait months or years for shareholder approval.
“The way we have been dealing with the Madoff case on behalf of our clients has been recognised. That is the sort of difference that a pure player can make,” Longhini said.
His comments strike home because, notwithstanding the surge in regulatory action since the Ponzi fraudster was caught and locked up, it is probably an inevitable feature of life that there will always be clever crooks. The issue, Longhini would argue, is doing the right thing when trouble strikes.
A lot of financial groups that have private banking arms are considering what to do with these assets, in some cases because they are not as profitable as they once had hoped or because certain market segments lack critical mass. UBP has benefited from some of this re-appraisal: In 2011, it bought the Swiss arm of ABN AMRO; in May last year, it bought the international private banking segment of UK-listed Lloyds Banking Group (it has, as a result, since set up UBP-branded operations in Monaco and Gibralta). It has added hedge fund assets via M&A also and bought a book of business from Santander. Those acquisitions, and other moves, have bulked up the bank’s AuM to the point where it is one of the most prominent of players in the industry, behind the big hitters of UBS and Credit Suisse. AuM has risen around 50 per cent in four years. The bank, which is not one of the oldest Swiss firms in a market where some are centuries-old - was founded in the late 1960s. Its footprint is expanding: it now operates in Singapore, for example, among other locations.
The regulatory assault on financial services and attack on Swiss bank secrecy and undeclared assets means banks face headwinds in Switzerland for some time, Longhini said. (UBP has signed up as a “category 2” bank for the purpose of the US-Swiss accord that was signed last August, which means it says there might be some risk of having broken US rules on tax.)
“We will have international private banking but “offshore” will, I think, disappear as a definition. When they face the reality of this [wealth] business, a lot of banks, see it is a lower-margin one than retail banking and there is a higher level of regulation and risk. Suddenly, banks are reconsidering what they are doing. Cost/income ratios are usually in the high 70s or into the 80s; with retail it can be down to 50 per cent,” Longhini said. “You have margins which are relatively small and reputation risk which is far higher than in the retail business,” he continued.
“Other firms will keep private banks because for them it serves their image,” he said. With the very largest firms, such as the biggest Swiss banks, reducing their investment banking activities, they can be seen as “huge pure players”, he said.
His comments come at a time when, for example, recent data from the Swiss National Bank (see here) shows huge variation in average profitability between banking models in the country. From the sample of almost 300 entities measured by the central bank for 2013, it is clear that while a handful of firms are making sharp profits, quite a long “tail” of firms is keeping its head above water.
As one of those banks involved in M&A, UBP is a firm that knows how much close scrutiny there is on how happy its corporate nuptials prove to be. For example, there are bound to be some staff departures and client exits when deals are done. Longhini argues, however, that his kind of bank makes a more attractive type of suitor than an “integrated” house would do. “When you do an acquisition as a pure player, your capacity to make it work is higher because it is a good home to offer clients and staff,” he said.
He says in all M&A deals there is some amount of client attrition. “When you can keep the main staff and clients, it means your strategy is good.” He said the firm had had long conversations with Lloyds’ relationship managers and key clients at the time of buying Lloyds to ensure people were happy.
Time, clearly, will tell. The industry has seen, for example, the Julius Baer-Merrill Lynch deal, and in that case, Julius Baer was keen to spell out its detailed approach to how client attrition could be minimised. (A key metric is to watch the relevant AuMs at the time a deal was announced and when completed.) Credit Suisse has bought a chunk of Morgan Stanley’s EMEA business, while selling its own German unit to ABN AMRO. Further away, Societe Generale in Asia sold its Asia private bank to DBS. A lot of reshuffling of assets is going on and this can unsettle clients. (For an article on this specific issue, see here.)
Longhini said UBP remains interested in acquisitions.
Given the pressure on Swiss banks to clean up their act and add value, Longhini liked to draw attention to the relatively high profile that alternative investments continue to have in the UBP stable. About 10 to 12 per cent of AuM is in hedge funds.
“This [percentage] is more than the average for banks,” he said.
“It is a sector that suffered in the crisis….if you look at the figures and volumes, though, it is growing again. There is an amount of value-added and performance that makes it attractive. We see more interest from private clients and family offices…it is an area we are continuing to develop,” he said.
So what of the future? Longhini reckons Swiss banks face some challenging times for the next three to five years, hence the need to have a broad, international offering. He referred to the bank’s acquisition of a banking licence in Singapore last year as an important step in developing its global presence.
Longhini finished by musing on an important issue that bank regulators and politicians have not yet been able to resolve: a clear distinction between privacy in financial matters as opposed to secrecy. “A lot still needs to be done,” he said.