Swiss private banking, crushed
by the strength of the Swiss franc, is being confronted
increasingly by the need to consolidate and merge, to offset
steadily rising currency-related costs. Swiss National Bank efforts
to lower interest rates may be too little, too late, writes John
Evans.
Go deeper with GlobalData
The latest financial
results from the Swiss banking industry showed a sobering, and
familiar, story across all players, big and small – a swingeing
rise in costs linked to the soaring Swiss franc.
The franc’s rise has been so steep
that it will inevitably trigger mergers among banks seeking to put
a lid on costs, analysts forecast.
Ray Soudah, founder of M&A
specialist Millenium Associates in Zurich, says bluntly: “Those
which wish to stay in business will look to acquire and save costs
as (the) alternatives are rather depressing.”
Soudah’s forecast has proved
correct. ABN AMRO has become the latest global bank to sell its
Swiss private bank in the face of rising costs (see facing
page). It has sold to Union Bancaire Privée (UBP) for an
undisclosed sum on 16 August.
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By GlobalData
Swiss revenues take
hammering
Boris Collardi, chief executive of
Bank Julius Baer, observes that at his bank, 80% of revenues are in
non-Swiss francs, but 80% of its costs are in Swiss francs.
“When you aggregate it back, even
though economically nothing has really changed… you are still
putting the same resources at work to produce the same revenue –
but that revenue is worth 15% to 20% less,” he says.
Most foreign investors still tend
to have accounts denominated in US dollars, for example. But a 1%
management fee on a dollar-denominated portfolio works out at much
less than this, once converted into Swiss francs, Zurich bankers
point out.
The Swiss franc, a target for
client money seeking a safe haven amid continuing turbulence in the
eurozone, has soared in recent months.
It has appreciated against the US
dollar, pound sterling and the euro by nearly 38%, 34% and 30%
respectively in the past 12 months.
As a result, the Swiss National
Bank has acted to curb the franc’s strength by slashing interest
rates to almost zero, seeking to give relief to the country’s
hard-pressed export, banking and tourism industries. Many banks,
however, see cost pressures continuing despite the interest rate
ease.
Both UBS and Credit Suisse Group
cited the strength of the franc as one factor in their decision to
make large job cuts. UBS is expected to slash as many as 5,000 jobs
to save up to $1.5bn annually, while Credit Suisse wants to
eliminate up to 2,000 posts.
At UBS wealth management, total operating income fell 3% to
CHF1.87bn ($2.38bn) in the second quarter, due to lower invested
assets and reduced client activity.
Credit Suisse private banking reported a fall in pre-tax income
of 4% to CHF843m in the second quarter. Excluding the franc’s
foreign exchange impact, income before taxes actually rose by 20%
in the second quarter and net revenues increased by CHF100m or 3%
over the same period a year ago, the bank said.
Credit Suisse is also lagging when
compared to its recovering rival UBS. Chris Wheeler, analyst at
Mediobanca Securities, notes that its pre-tax margin has been
lacklustre and is not only well below the stated 40% target but
below the 36% pre-tax margin UBS achieved in its wealth management
business in the second quarter.
Dealing with this looks to be
behind the decision to move current wealth management chief
executive Walter Berchtold ‘upstairs’ to the role of chairman of
private banking, replacing him with Hans-Ulrich Meister. Meister
moved across from UBS three years ago, and has been running
corporate and institutional clients.
“He [Meister] has a reputation of being very tight on costs, and
this looks like an important part of wealth management’s strategy,”
Wheeler contends. “Clearly his job is to maintain the strong
inflows while creating a cost base that delivers better returns in
both difficult markets and more buoyant ones.”
Sarasin bucks the trend,
others struggle
At Julius Baer, operating income
and client assets fell 2% to CHF898m in the second quarter of 2011,
down 2% year-on-year. Assets were flat, translating into a gross
margin of 105 basis points, some 2 bps lower than in the first half
of 2010.
EFG International, which has already changed chief executives to
help reverse a decline, recorded a net core profit of CHF72.6m for
the first six months of 2011, down from CHF88.4m a year ago,
reflecting the strength of the franc.
Core operating income fell to
CHF396m compared with 407.1m a year ago. Revenue-generating assets
under management fell to CHF80bn compared with 84.8bn at the end of
2010.
Union Bancaire Privée reported that
assets under management fell sharply in the first half of 2011 due
to the rising franc.
Assets fell to CHF60.7bn from
CHF65bn at the end of the year, although the bank said it had net
new money inflows, without disclosing any actual figure.
In its results UBP said it would
consider acquisitions, a reference to the ABN AMRO purchase which
was finalised after UBP’s half-year results.
Bucking the trend was Bank Sarasin,
whose first-half net profit rose 13% to CHF67.8m compared with a
year earlier as higher commissions and service fees outweighed the
negative effects of the franc.
Sarasin repeated its aim of exiting
doubtful tax-related client business over the next 18 months.
Elsewhere, HSBC, which operates
Switzerland’s fourth biggest private bank by assets, reported that
first-half profits fell as costs ballooned with the country’s
currency.
Pretax earnings dropped 24% to $122m at its Swiss banking arm at
the end of June from $161m a year earlier.
