Bob Reynolds is consultant editor of Offshore Red.
The shape of Swiss private banking has dramatically emerged from a period of eclipse. Bob Reynolds discovers that the two biggest players intend to use aggressive strategies to attract new money
Swiss private client banking has emerged from the dark side of the moon. Commercial, regulatory, political and competitive pressures had conspired to put the giants of Swiss private banking into the shadows.
Although Switzerland remained the number one destination for European expatriate funds, investor confidence became deflated. Old money became disenchanted with the disruption in the markets and unusually poor returns on investments. New money is characteristically sceptical of the value of such venerable institutions without hard proof that they can deliver.
Profitability had tumbled in private banking and the future looked distinctly edgy. For Swiss private banks there is the added pressure of tax amnesties and concerns about banking secrecy, which are driving assets back onshore. Despite the apparent warmth of the new found closeness of the European Commission and the leaders of the Swiss Federation, an all-Europe tax amnesty – targeted at the Swiss – is an instructive weapon handily available if matters do not progress according to the wishes of Brussels.
Anti-Swiss amnesties in Italy and Germany, although not vastly rewarding in revenue, have annoyed the Swiss and inflicted a great deal of public relations damage. As they were intended to do, they have convinced nationals in the countries operating the amnesties that Switzerland was not a long term harbour for their money if they wanted to remain anonymous.
But early in 2005 the two leaders in Swiss private banking announced spectacularly good results. The extent of the recovery – in many cases driven by revenue from private client and asset management – showed that the Swiss had learned extensive lessons from a period of downturn. It also demonstrated that in a fragmented private client market, the Swiss could retain the upper hand.
In early February, UBS turned in the best figures in its history. UBS, formed from the Union Bank of Switzerland and the Swiss Banking Corporation in 1998, is the federation's largest financial institution and the world's biggest private bank with more than 100,000 separate accounts.
The group announced a record net profit of SFr8.09bn ($6.62bn) for 2004, boosted by buoyant financial markets and increased fees. Its prime rival is Credit Suisse (CS), the second largest financial institution in Switzerland. It astonished analysts by reporting profits of SFr5.63bn ($4.77bn) for 2004 – more than seven times what it earned in 2003.
The CS business unit, which includes the highly profitable private banking sector, accounted for about 60% of 2004 net profit (SFr3.37bn), while investment bank CSFB and insurer Winterthur brought in SFr1.84bn and SFr728m respectively.
Some analysts say that Credit Suisse could overtake UBS. But it would have some way to go because the market leader has a market capitalisation of about SFr115bn, compared with SFr62bn for the CS Group.
The resurrection came after four years of bear markets, global economic stagnation and low levels of market confidence. Deal activity in mergers and acquisitions and asset management started to pick up in mid-2004 and in equities in the final quarter of last year.
UBS's aggressive expansion of its private banking business coupled with a general recovery in financial markets since mid-2003 paid off with a 32% rise in pre-tax profits for the private banking business to Swfr3.435bn.
Despite the setbacks of the last four years, the UBS private banking business is a case study in success. From a single onshore office in 1996, it now has 43 throughout Europe, plus 14 in Switzerland. Many are in relative backwaters such as Eastbourne and Bury St Edmunds in the UK, Offenbach and Bielefeld in Germany, and Padua in Italy. Considering UBS has always focused on ultra-wealthy clients this is no small change.
The northern Europe leader of UBS private banking is Jeremy Palmer. He has a spotted pedigree – he was in Hong Kong for Barings while colleague Nick Leeson was making headlines. Palmer insists that he had nothing to do with trading's most notorious anti-hero. After Leeson brought Barings to its knees, Palmer was given the task of rebuilding Barings' Asian operations by ING who acquired the bank after the crash for £1.
Operating from the calm grandeur of an office in Mayfair off London's Berkeley Square, Palmer has restructured the UBS attitude towards private banking. The new profile of the truly rich is no longer old family money. Businesses created by baby boomers in the capitalist 1980s and 1990s have been sold off to create new personal wealth.
Palmer recognised the fragmented nature of the private banking sector. UBS has only 2% of the market, so growth is hard to achieve organically. To sponsor growth it has made several key, though not especially large, acquisitions in Europe.
In 2003, it bought Lloyds TSB's French fund management and private client business and Merrill Lynch's German private client business. A year ago it bought Laing & Cruickshank, the UK private client wealth manager, for £160m ($299m) from Crédit Agricole. UBS then added Scott Goodman Harris, a UK specialist financial adviser. Clive Standish, the bank's chief financial officer, says UBS will continue looking for small acquisitions to expand its private and investment banking divisions, but doesn't plan any major deals. Palmer's European wealth management business brought in SFr13.7bn ($11.3bn) in 2004, up 27% from 2003. So the strategy appears to be paying off.
The downside of Palmer's buying strategy is the changing faces at UBS. Private banking clients, by and large, like stability, tradition and permanence. Being greeted by different client managers could be a disincentive. Clients may also not take too kindly to the losses on equities when the markets collapsed and some have become sceptical about some of the investment advice given.
The upside is that some of the new professionals that have joined the bank are more in tune with the new wealthy. 'Historically, the wealth management business has tended to attract a narrower type of person,' Palmer says. 'While many clients have inherited wealth, many others have become successful at a relatively early age. They may want to deal with like-minded people.'
The change in approach extends to practical matters in individual client affairs. UBS no longer recommends pushing investors into equity and bond tracking funds. It now favours previously unfashionable money market funds. For more cautious investors, it proposes structured products that protect capital when markets go down but a healthy margin when rates rebound.
Meeting the challenge
Down the road at Credit Suisse, the target is to overtake UBS by 2007. Credit Suisse's private banking operation reported a net income of SFr616m for the fourth quarter of 2004. This quarter alone was up 21% on the previous quarter. In the main, this was due to higher transaction-driven income. Private banking's 28% increase over the year was mainly attributable to the strong asset-driven revenue generation and efficiency improvements.
Speaking in Zurich, chief executive Oswald Grubel said he was confident the group could reach its target of SFr8bn annual profit by 2007. This would put CS on an equal footing with UBS which reported SFR8.09bn only a week earlier. But analysts point out that Credit Suisse still has some way to go before it can meet its goal, and point to some fundamental outstanding differences between the two. CS group management revealed the ambitious 2007 profit target at a presentation to investors last December, along with details of a major internal restructuring programme.
Peter Thorne, an analyst at Helvea, said the 2004 result was better than expected, and showed that CS was now a serious global contender. But he agreed with other analysts that he was sceptical that investment banking arm Credit Suisse First Boston would be able to meet its goal of generating SFr3bn in net profit by 2007.
"Credit Suisse has two problems," Thorne said. "First, they have to get rid of insurer Winterthur, and that brings in about SFr1bn profit, so we might be looking at a 2007 total profit of nearer SFr7bn.
"Second, my forecast for CSFB in 2007 is nearer SFr2bn. What they need to do is get CSFB earning return on equity of about 20%, like the UBS investment bank division. At the moment there is little sign of that happening."
The group's management team said in December that the projected CSFB profit would complement a forecast SFr4bn from the Credit Suisse business unit, which includes the lucrative private baking division, and a further SFr1bn from insurance arm Winterthur.
Under a proposed restructuring programme, which is due to be implemented by the end of 2006, the group will create three distinct lines of business: private client services; corporate and investment banking; and asset management.
CSFB will thus be integrated into the private banking business, while Winterthur will be floated on the stock market. Asset management will be positioned as a core strength across all business units.
Grubel said the restructuring would "enable us to remain competitive in the face of a mixed market environment that is expected to continue in 2005".
In mid-February, CS also announced that the board would request shareholder approval for the launch of a two-year share repurchase programme, worth up to SFr6bn. The move follows the launch of similar programmes by UBS and main German rival Deutsche Bank. Analysts at Merrill Lynch described the announcement as the biggest surprise and commented: "It strikes us that CS is acting more and more like UBS even as we worry that UBS might start acting less like UBS."
Helvea's Thorne said: "The buyback is a good sign that they are serious about shareholder value and won't just fritter it away on some further acquisition."
Share buy-back strategies notwithstanding, he pointed out that parallels with UBS should not be taken too far.
"UBS today is really two banks, whereas Credit Suisse is more like one and a few bits, so it's rather like comparing chalk and cheese," said Thorne.
A key region for growth for UBS is Asia Pacific. Although brand recognition remains a difficult hurdle, it is the area where the bank forecasts its greater increase in business in 2005. CFO Standish said revenue from the Asia-Pacific region had increased by 35% in 2004, compared with a global revenue increase of 11%. He said all UBS businesses in the region had outperformed, adding that 40% of new UBS staff in 2004 had been taken on in Asia.
"One advantage we do have is that, as Europeans, we have a differentiated brand. We are seen as a very strong alternative to the Americans, and that does give us a certain competitive advantage," he says. UBS said it believed its private banking and asset management divisions are its key areas for growth. Private banking clients had put Sfr88.9bn of new money into the bank, up 29% over last year.
Economists at a recent Asia Pacific conference held in Sydney said the number of high net worth individuals in the region is set to double in the next decade. As a result every major financial institution which has a measurable market share is opening across Asia and the Pacific. JP Morgan and ABN Amro announced in February that they were seeking to tap the new found wealth in India. But the Swiss are already present in China and are increasing the numbers.
A mixture or reputation and innovative ideas is winning the main players new friends.