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EFG International "Reset" Highlights Cold Climate For Wealth Industry

Tom Burroughes

20 October 2011

Wealth managers may not have felt the chill economic winds as keenly as some other parts of the financial world but as EFG International demonstrated yesterday, the battle to protect margins is tough.

The Swiss private bank, which has expanded at a scorching pace in its 16-year-history to hold SFr80 billion (around $88.7 billion) of client money, realises that it has acquired too much cost along the way, as well as, it says, hiring "average" managers and buying some firms that have proven a disappointment. (To see that news report, click here.)

And this is by no means an isolated case. In July, Bank of America said it would consolidate its wealth management business outside the US as part of an efficiency drive that will see it cease to manage client money outside 20 “core” regions that cover 77 countries. As a result, BofA will see a 3 per cent fall in non-US assets under management but efficiencies will increase profits and margins, the firm hopes. UBS, meanwhile, reorganised its US wealth management arm earlier this year in a move which will see its divisions consolidated and senior staff reshuffled.

Over at the wealth arm of UK-listed Royal Bank of Scotland, the firm books clients from 170 countries but RBS aims to shrink this number and rationalise the geographic coverage of the bank to focus on what it sees as core markets.

On other hand, banks continue to manage and in some cases, increase, their footprint in other ways. For instance, UBS and other large banks have been expanding their regional offices in the UK.

Recovering from mistakes

In what is, by the standards of this business, a blunt statement, EFG International said it had “made a number of mistakes”. As a result, it is to shed total headcount by between 10 to 15 per cent out of a total payroll of 2,500 (the exact geographic breakdown of any cuts is not yet disclosed). The aim is to get its cost-income ratio down below 75 per cent, which is a few percentage points below an average, and record figure, of almost 80 per cent for wealth managers around the world (source: Scorpio Partnership).

One man who is not at all surprised by such a development is Sebastian Dovey, managing partner at Scorpio, which is a research and consulting firm.

“The declining cost-income ratios and low net new asset ratios for most institutions in wealth have been alarm bells to us for several years now,” Dovey told this publication in an email. “The challenge remains that most firms have overextended in front line relationships which have been expensive to bring on board and have taken longer than projected to deliver new business. For some, time is running out and in this environment we may begin to see a swing back to acquisitions as a way to capture client business.”

At stake is continued profitability. In its statement, EFG International referred to previous guidance (core net profit for 2011 in range between SFr140 million (around $155.9 million) to SFr160 million/IFRS net profit: SFr110-130 million). This guidance has been superseded by the business review, although, based on performance to end-September, the underlying business performed “broadly as anticipated at the time of EFG International’s half-year results”, it said. The firm said it has the potential to deliver an annual IFRS net profit of SFr200 million within the next three years.

A number of businesses are being shed or have already been disposed. EFG Bank in Sweden, along with its Helsinki operation, will go. (Asset management and non-banking business will be transferred to Quesada, EFG International’s profitable Stockholm-based wealth management boutique). Offices in Dubai and Abu Dhabi are set to close, subject to regulatory approval, although EFG International will continue to target offshore/Non-Resident Indian business in the region. Also, a number of offices in Canada have been closed. EFG International has earmarked EFG Financial Products for an IPO. A number of other loss-making/marginal offices will be exited, subject to negotiation and market timing.

Reset and move on

“That growth potential of the firm has been partly obscured, as we said, by a series of mistakes…such as opening in places and buying businesses where our presence is too small, not sufficiently profitable or growing fast enough. Once that resetting has been done, we believe strongly the capacity to deliver growth is intact and that is a reflection of our geographical mix of private banking business and the quality bankers that we have," Keith Gapp, head of strategic marketing and communications at the firm, told this publication.

“We have hired too many average bankers over the last few years but the core is very strong,” he said. “We have strength in Asia and the Americas and in the UK….these underlying businesses are very well placed in relation to regional high net worth growth trends.”

"To a quite significant degree we hired bankers, in 2006, 2007 and into 2008 where we hired a record number at what in fact was the wrong moment and we possibly relaxed quality and hired people not up to the quality of the past," Gapp continued.

The cost/income ratio issue is different for standalone wealth managers than for a private bank which is part of a larger organisation, since some of the costs of the latter can be borne by a parent, so direct comparisons are not easy to draw, he said.

"It is also important not to become obsessed with a specific ratio target since a bank, as this is a multi-faceted business, which is based on relationships, and with potential to grow, but this needs to be in a disciplined way with a strong focus on delivering shareholder value," Gapp continued.

“There are some private banks that map try to play the cost/income ratio game. They may do this by acquiring synergies at a faster rate than, say, losing clients because of the changes to offshore banking,” he said. (Such banks were not identified by name.) “We don’t see the issue like that; private banking at EFG has been consistently profitable, the market remains attractive, our business is well placed regarding high net worth growth trends and we believe we can remain in the front rank of the industry as an independent private bank."


There have been some senior moves at EFG International. In June, John Williamson, previously the chief executive of the firm’s UK and Channel Islands subsidiary, became chief executive of EFG International. Lonnie Howell, co-founder of the firm in 1995 along with Jean Pierre Cuoni, decided to step down, although he will keep his substantial share stake.

Early in September, EFG Asset Management, the asset management arm of EFG International, formally launched its UK business, establishing it in its own right after it having operated in the UK as a division of EFG Private Bank for more than 17 years.

EFG International made a net core profit of SFr72.6 million for the first six months of 2011, down from SFr88.4 million a year before.