Do the biggest banks in Switzerland have a fight on their hands in their own backyard? Jamie Crawley looks at how JPMorgan and Goldman Sachs have been expanding their wealth management offering and could challenge UBS and Credit Suisse.
Investment banking is an industry dominated by Wall Street, with JPMorgan and Goldman Sachs the first and second largest by almost any metric. Citi, Morgan Stanley and Bank of America complete the top five.
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However, the huge stature of UBS and, to a slightly lesser extent, Credit Suisse means that Switzerland still holds the ascendancy in wealth management.
Both JPMorgan and Goldman Sachs have upped their headcount in their Swiss offices this year, while also nabbing executives from UBS and Lombard Odier to lead their operations there.
“Given the significant rise of millionaires in the United States it is logical for the banks to invest in Switzerland just like the Swiss banks are investing more in the US,” Sankar Krishnan, executive vice president of banking and capital markets at Capgemini, tells PBI.
“The New York Post reported that there has been a growth in American ultra-high net worth individuals to 1.3 Million with a net worth of $5-25 million, and some 173,000 with more than $25 Million. This increase in prosperity globally creates new opportunities for wealth management banks around the world.”
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By GlobalData
Waning investment banking
In a post-2008 world, investment banking has become an increasingly difficult environment, owing to the more stringent regulations and capital requirements eating into profits.
Wealth management appears to have become more appealing to many of the world’s financial behemoths in recent years.
UBS announced thousands of job cuts in its investment bank in late 2012, as CEO Sergio Ermotti embarked on his plan to make wealth management front and centre of the bank’s business, with investment banking relegated to a supporting role.
Christ Renardson, managing director of financial services consultancy, TORI Global, says: “The realisation dawned on UBS some time ago that it was destroying a great wealth management franchise (and its balance sheet) through its pursuit of investment banking and has subsequently re-orientated the business with a high degree of success.”
Credit Suisse has done something similar, become something of a success story in bank restructuring.
A further example is Deutsche Bank, where the corporate restructuring and recently announced job cuts appear to be largely affecting trading operations. The German bank’s wealth management unit meanwhile is set to receive around 300 reinforcements in the next couple of years.
What does this have to do with JPMorgan and Goldman Sachs? The two American banks emerged from the financial crisis in better shape than most. JPMorgan in fact has gone from strength to strength, its share price increasing by 75.7% between the start of 2016 and the end of July this year.
Goldman Sachs however were concerned enough by a decline in fixed-income trading to launch an ambitious plan aimed at increasing revenue by $5 billion in the next three years. An increased focus on private wealth management was to play an important part in this.
So, given the recent efforts of the two banks to expand their wealth management operations in Switzerland, does this point towards a scaling back of their traditional specialism of investment banking?
Krishnan thinks not: “Investment banking continues to be a key area of focus for both Goldman and JPMC and they have strengthened their number 1 and 2 position versus the rest of the industry.
“That said they are diversifying into new areas through their ‘digital banking initiatives’ across retail and commercial banking.”
Alpine expansion
JPM and Goldman clearly see a substantial presence in Switzerland as integral to tapping into any growth in the European market. Research by GlobalData has found that 71% of the Swiss population is affluent, with a 12% increase in the emerging affluent segment projected up to 2022.
Krishnan adds: “Switzerland continues to be the largest market for wealth management although there has been a slight decline in market volumes as Singapore and Hong Kong pick up volumes as a response to the growth in millionaires in Asia.”
JPM and Goldman currently manage a $522bn and $391.8bn, according to GlobalData and PBI’s latest Global Private Wealth Managers AuM ranking.
These sums trail Credit Suisse’s $770bn figure and are dwarfed by UBS’ jovian $2.26trn. Added to this, the latter claims to bank at least some of the wealth of 80% of Asian billionaires, and roughly half of Europe’s.
A key client base for UBS and Credit Suisse is in Germany, where high-net-worths often look to Swiss banks to manage part of their wealth for obvious reasons of proximity and language.
Hakan Straengh, JPMorgan’s head of private banking in German, recently told Bloomberg that German HNWs generally maintain relationships with one local bank and one Swiss. However, he notes that those who are keen to gain some international exposure increasingly look to a third provider, usually British or American.
Therefore, while the Swiss giants dominate wealth management in their home country, it seems the pie is big enough to be shared around.
“JPMorgan and Goldman bring a lot of versatility to wealth management banking in Switzerland,” Krishnan says.
“Given that the Swiss economy is doing well and there is a significant rise in millionaires around the World especially in Asian and African regions.
“As such, the demand for Swiss banking has never been so strong and Goldman and JPMC are investing in Switzerland, looking to increase their client coverage.”
Going mass market?
Where Goldman and JPM may look to steal a march over the likes of UBS and Credit Suisse is by targeting the mass affluent who they may perceive are being overlooked by the Swiss giants.
Both banks have demonstrated their desire to broaden their client base through partnerships with the world’s biggest tech companies.
Goldman Sachs hit the headlines in April when Apple unveiled its new credit card in collaboration with the bank. This invited comparisons with rumours from March of last year that JPMorgan and Amazon were in talks to start offering banking services.
“The banks are obviously building products to engage with more users,” Freddy Kelly, CEO of API-powered credit bureau, Credit Kudos, said at London Fintech Week in July.
“The question you often hear is, ‘Is it easier for an Amazon to become a bank, or a Barclays to become an online marketplace?’
“You can see that it’s easier for Amazon to become a bank (not that it isn’t hard). I think perhaps the banks have more to lose in that trade-off, so they would do anything to get on board with companies who have such a huge user base.”
Goldman Sachs has already been successful in building a stake in the mass market through its Marcus brand. JPMorgan meanwhile closed down its own digital bank, Finn, only a year after rolling it out in the US.
JPMorgan have however recently launched a robo-advisory platform christened You Invest which offers investment in the bank’s ETFs. There has also been much talk of Goldman Sachs doing the same, possibly integrating it into its existing digital brand.
“Goldman launched Marcus as an entrée into the retail and mass affluent market and so likewise is wanting a piece of the vanilla de-risked action,” Renardson says.
“JPM remains firmly in the investment banking camp and is doing just fine, but you can be sure there will be an aggressive strategy in wealth management to buy market share.”
