Strategy

Wealth report: Switzerland, healthier than at first sight

A staff reporter, 12 September 2002

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For so long protected by its anonymity, power and exclusivity, the world of Swiss private banking is undergoing its biggest upheaval in a ge...

For so long protected by its anonymity, power and exclusivity, the world of Swiss private banking is undergoing its biggest upheaval in a generation — at least this is what many analysts are saying. Yet there is plenty of evidence to suggest that Swiss private banks are very much alive and kicking, and making the necessary changes to guarantee their success in the years to come.

To the novice, Swiss private banking looks as exclusive and as secretive as ever. Geneva shows little outward sign of its pre-eminence in the world of finance. The city manages so much private money but there are few signs of this success in terms of big architectural statements to the influence of the banks that manage the money of the world's rich. No modern day cathedrals to mammon here.

No, the discreet brass plaque is still very much in evidence around the exclusive area of Rue de Rhone and the Boulevard George Favon. For the most part, Geneva's exclusive private banks still protect their anonymity by hiding behind discreet, low-rise buildings with little or no evidence of their brand to the outside world.

But subtly, the anonymity of private banks in Geneva is beginning to change. Private banks are advertising their services. Walk around the concourses and walkways of Geneva airport and, between the advertising for Rolex and Patek Philippe, there are an increasing number of ads for private banking services from many of the most exclusive names. A number of foreign private banks in Geneva are also making their buildings glow with their brands, most notably Dresdner and HSBC Republic.

Brand statements are symptomatic of the changes affecting private banks in Switzerland. For most of their existence, local private banks gained much of their business through client referrals — there was no need to advertise one's services, especially as there was enough money to go around for all private banks. But greater competition, against the background of global weak equity markets, is changing all this.

Local banks now have to compete harder than ever to acquire new assets and to retain their existing clients' assets. "Competition has no doubt increased, and this is leading some banks to change their strategies, and become more aggressive in their sales drive," a local banking analyst said.

Consolidation — but only minor

The most extreme of these competitive pressures are forcing some private banks to consider mergers in order to guarantee their long-term survival. The most high profile of these so far has been the merger, (although some see it as an acquisition by Lombard Odier) between Lombard and Darier Hentsch — two of Geneva's oldest and most exclusive private banks, which came together in June. Bank Sarasin, yet another exclusive name in local banking circles, sold part of its business to Rabobank, the Dutch cooperative bank.

Others are still looking for a buyer such as the Banca del Gottardo. It has, or at least its owner, Swiss Life, has, firmly put a 'For Sale' sign out front for the Lugano bank. No one appears to want to buy Gottardo, at least not at the price its parent company wants to sell it for — but there is a steady stream of mostly big foreign banks going over its books. There are at least ten or more private banks discreetly looking for buyers, according to many observers.

Management consultants who analyse the industry say this is just the beginning of the consolidation. "The Swiss private banking market is the most fragmented of probably any part of the financial services industry worldwide — it is crying out for consolidation," one consultant told Private Client Management.

One just has to look at the number of entries into "The Wernlin Directory", the annual Swiss-based private banking directory of banks in Switzerland and Liechtenstein, to get an idea of just how many private banks there are in the country. There are at least 100 entries for Geneva alone.

The so-called middle ranking Swiss banks such as Julius Baer, Pictet and Union Banque Privée, and Bank Vontobel are meant to be either too small to develop an onshore business in the rest of Europe, or too big to take advantage of 'boutique' client relationship specialists. They face the biggest pressures to consolidate, analysts said.

Pictet has been extraordinarily successful at asset gathering over the last six months. In a recent survey by the Financial Times, the bank came in at number five in the top 20 cross-border fund managers in Europe, which ranked asset managers by estimated monthly sales (mutual funds) between January and May of this year. Pictet beat the likes of Morgan Stanley, Global Asset Management, Schroders, Goldman Sachs and HSBC.

UBP, one of the most successful private banks of all time, might be cutting staff, but its successful diversification into alternative investments at an early stage is ensuring its profitability in tough market conditions. Even Bank Vontobel — which, since its disastrous foray into online wealth management, has been the subject of intense speculation over its future — appears to be turning the corner with better interim results for 2002.

Julius Baer might be the exception. With many of its portfolios being exposed to tech stocks, its assets under management have suffered hard but it probably has enough financial muscle to see it through a tough period, without falling victim to an acquisition.

The surprising thing is with all these consolidation pressures — weak markets, falling profitability, high IT costs, over capacity — is that there has not been more mergers and acquisitions during the last year. There are practical reasons behind this, such as unrealistic pricing, stubborn partnership structures and lack of buyers. But consolidation is not likely to happen as fast — indeed if at all — as some consultants would have us believe.

"I've heard this said about private banks in Switzerland for years. It has yet to take place on any major scale and the factors influencing consolidation today are, yes strong, but are not going to really make much difference. Even when acquisition does take place the old names don't disappear — they are too valuable as a brand and the smart acquirers realise this," Gunter Woernle, editor of the "Werlin Directory".

Woernle is also a senior client relationship manager for Banque Baring Brothers, which itself was partly taken over by ING Bank in 1995, but remains very much its own brand.

Woernle's view is uppermost in the minds of many Swiss bankers who believe foreigners mostly fail to break into Swiss banking to any significant degree. "Names mean a lot and most of the bank's clients like to be associated with one private bank and stay with them," a senior Swiss private banker told Private Client Management.

Local relationship managers say foreigners attempting to grow market share do not often appreciate their overall attentiveness to clients and their needs. "We are often criticised for our willingness to take the client's poodle for a walk, but it is often these relationships that distinguish us from the competition and ensure high levels of client satisfaction," the banker said.

Foreign banks have been criticised for pushing their products and neglecting servicing clients' needs. Many of the big names in international wealth management have largely failed to make any major inroads into Swiss private banking, including Coutts, Barclays, Lloyds TSB, Citibank, Dresdner and Goldman Sachs. All are suffering from falling profitability and in some cases are cutting back on staff.

The titans: Credit Suisse and UBS

Together UBS and Credit Suisse are the titans of Swiss private banking. Between them they control around $3.8trn of private client money, most of it onshore. They have been very successful in gathering assets from the world's rich and continue to do so. Despite Credit Suisse's demise as a global financial powerhouse over the last year, largely to do with ongoing problems at its investment banking and insurance divisions, the bank's private banking business continues to be highly successful. In the first six months of 2002, net new assets — one of the best indications of the health of a private bank — within the private banking division grew by a massive SFr14.8bn.

UBS saw net assets grow by a slightly less spectacular, but nevertheless respectable SFr6.1bn. The Zurich-based bank appears to have turned the corner in private banking after a difficult few years. It has changed top management, consolidated its existing business and is in the process of successfully integrating its PaineWebber acquisition in the US. UBS also does not have to deal with fallout from its other divisions as its great rival Credit Suisse has to suffer. Consequently, its share performance has remained strong — at least compared with the industry average — giving it space to breathe and confidence to expand.

The biggest challenge for both of these banks it to develop their onshore strategies in the rest of Europe and the US. There is still a considerable amount of confusion over how committed both banks are in developing an onshore business. UBS looks to be the one most committed and appears to be having most success. The PaineWebber acquisition might be still eating up resources, but bank analysts say it should deliver the required results in the longer term and do not doubt the acquisition's success.

UBS is beefing up its onshore presence in most of the major financial centres in Western Europe, most notably in Italy during the recent tax amnesty. Credit Suisse is doing the same, but its personal financial (onshore wealth management) initiative is faltering and its presence in the US wealth management sector is minimal.

Regulatory pressures

Possibly the biggest threat to private banking in the Alpine republic is international regulatory pressures, which have grown considerably since 11 September. These are considerable and involve various organisations, countries and issues.

Here are just a few:

the Group of Seven industrialised countries wants Switzerland to do more to end banking secrecy

the European Union is placing pressure on the country to improve transparency for reasons to do with the taxation of its own citizens

the US wants stricter guidelines on anti-money laundering and know-your-customer regulations

the Organisation of Economic Cooperation and Development, the World Bank and the IMF want Switzerland to make greater efforts in all these areas.

Ironically, the more regulatory pressures from international organisations on different issues, the more likely Switzerland is to remain unscathed by them — at least this is the view locally.

"The EU and the US are not talking with one voice when it comes to putting regulatory pressures on Switzerland — they each have their own agenda and this is working in our favour," said one private banker in Geneva.

More importantly, Switzerland has made efforts to improve its regulatory environment and local regulators believe that anti-money laundering and KYC standards are just as good, if not better than anywhere else in the world. Regulators have not been scared to name and shame banks associated with dirty money, for instance, during the Abacha scandal in 2000. And they argue that most of this money went through London and New York, where regulators there have been slower to censure financial institutions involved in the scandal.

One area that appears to be non-negotiable is Swiss banking secrecy. It would appear that the removal of this would bring into question the country's sovereignty, say bankers and regulators. Any resolution of this issue is likely to be years away — not least for many of the reasons stated above.

Tax amnesties

This year's Italian tax amnesty was meant to give some indication of the likely outflow of offshore money from Switzerland back to Italy. Sources say around SFr50bn was repatriated. Much of this ended up in Swiss banks in Italy, which specifically set up onshore branches to re-gain much of the outflow. The tax amnesty appears to have done little to undermine the success of Swiss private banking.

The Swiss appear to be nonchalant about the possibility of further tax amnesties, such as the one which has been mooted in Germany. "The reality is that fiscal regimes in much of Western Europe will remain strict regardless of these tax amnesties," a Geneva-based private banker said.

Swiss private banking is going through changes, and many of the forces behind these changes are to be found in other financial centres. Yet, little would indicate that these changes are creating systemic threats to the future of private banking in the country. Indeed, Swiss private banks are probably more malleable and adaptive to changing circumstances than many outside observers might believe.

"Five years from now, some banks will have merged, others will have been acquired, but new names will also emerge. I don't think I will be adding fewer entries to my directory. This is a dynamic market place," Woernle said. And with more than 40 years as a private banker in the country, who would bet on him being wrong?

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