Research and interviews conducted by
Private Banker International showed some private banking
heads are factoring in 0 percent industry-wide organic growth over
the course of the year, and are accepting they will have to resort
to stealing market share from each other in order to grow their
businesses.

The situation is becoming more intense
because, as well as declining wealth generation, there is also the
expectation the easy money flowing from UBS is likely to slow.

“There will be less money coming in this year
because wealth is not being created as quickly as it has in the
past, although we can still take client money from our
competitors,” said a senior figure at one private bank.

“Business owners are not making as much money
and there are fewer IPOs, so it will be a difficult year. If we
achieve 5 percent, then we are really doing a good job.”

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It is a situation which has prompted Julius
Baer to conduct a review of its strategy, according to Toni
Scheiwiller, head of business development at the private bank.

“There are several areas we are working on,”
he said. “One is revising and reviewing the business model – that’s
what most banks do in the current environment – to see where we
have to adjust. ‘Where are we on our offshore business model?’,
‘Where are we on our onshore model?’ and ‘Where will we be in 5 to
10 years?’ – those are the questions we are asking, and reviewing
the strategy we have had in the past.”

“We are also looking at the short-term stuff,
like the impacts of the markets on revenue, and also what we can do
on the cost side.”

Baer, along with other mid-tier private banks
like Bank Sarasin and Vontobel, have all benefited from the
problems at UBS. But there remains a fierce debate about which
business models will emerge as the winners in private banking, not
just in Switzerland, but across the whole industry.

While the ‘One-Bank’ investment banking model
has been derided following a disastrous year for UBS, Credit
Suisse, one of the strongest advocates of that strategy, which aims
to provide ultra high net worth clients with institutional-style
services, has been quietly successful. It took in CHF42.2 billion
($36.8 billion) in new client money in 2008 – or 5 percent of its
end-2007 assets – making it one of the world’s top-performing
wealth managers by that benchmark.

It fact, reputation, rather than business
model, has done more than anything to scare off clients. Scandal
and government intervention – of which Citigroup, Merrill Lynch and
UBS suffered plenty of in 2008 – drove client money away far more
spectacularly than the presence of an investment banking
division.

“The thing which really matters is reputation
and we have to protect that,” said Scheiwiller.

He added steering clear of major controversy
was a big plus for Julius Baer and some others.

Potential win-back
strategies

Yet with UBS’s outflows totalling
CHF123 billion in 2008, representing 5.4 percent of its end-2007
assets under management, it is hard to imagine how its reputation
could get worse.

And that poses a new problem for the banks
which benefited from UBS’s problems in 2008 – how will they perform
if UBS finally stabilises, or even starts to improve its market
share? Scheiwiller at Baer and Eric Sarasin, head of private
banking at Bank Sarasin, another which claims to have taken clients
from both, say they do not have specific strategies to deal with
such an outcome.

“We are pretty confident our clients will stay
with us because of the quality of our products and advice,” said
Scheiwiller.

“I think the people that work with our clients
can retain them – it is difficult to get the clients in, but an
easier task to retain them when they know and trust us and they see
the performance we deliver.”

Sarasin added that his bank continued to see
inflows from UBS and Credit Suisse. Hew van Steenis, a banking
analyst at Morgan Stanley, believes larger mid-tier banks are
likely to continue to fare well, but there could be bigger problems
for the smaller, unlisted banks.

“I think clients are more worried about
reputation, whether their bank is a good custodian of their money,
well run and likely to be around in the future,” Van Steenis
said.

“The problem with the investment banks were
their losses and the volatility going into the investment bank. If
you think back two years, the smaller banks were winning the money,
but my sense now is they are winning nothing and the money is going
to Credit Suisse or HSBC because they are seen as too big too
fail.

“So it is the larger end of the middle: Julius
Baer, Pictet and Vontobel – anything below that, they are
struggling. The issue is more about stability and quality.”

Andreas Feller, head of wealth solutions at
Vontobel, added: “A lot of the small players will struggle in the
long run. There will probably be more margin pressure as we get
everything onshore. Building client reporting, multi-banking
set-ups and other things require huge technology investments which
could put the smaller players into trouble, because you have to
spend big on systems to do that.”

Yet the Swiss Private Bankers Association,
which represents some of the smallest private bankers in
Switzerland maintains there will always be a demand for the
unlimited liability business model its members offer. Michele
Dérobert, the organisation’s secretary-general, said larger wealth
managers were challenged by diseconomies of scale.

“They are so big, their left hand doesn’t know
what their right hand is doing,” he said. “Then there are the
governance issues, and managers taking too much risk because the
compensation system is badly thought out. These are issues even the
mid-sized banks aren’t faced with, and so they and the smaller
banks are taking over from the larger players.”

Banking secrecy

Another big factor affecting private
banking business models is the Swiss government’s decision to relax
banking secrecy regulations. The move has been seen as a big
negative for the industry. Citigroup estimates asset outflows would
reach between 2 percent and 7 percent for Swiss banks and, said
Julius Baer, Vontobel and EFG were among the most vulnerable.
Analysts at the US bank said offshore services account for around
43 percent of assets under management at Baer, 30 percent at
Vontobel and 36 percent at EFG.

But Scheiwiller at Baer was more optimistic
about the ruling because it reduces uncertainty for the bank.

“I like where we are heading, because we were
always unnecessarily on the defensive about bank secrecy,” said
Scheiwiller.

“It looks like all offshore centres are going
to be subject to the same rules and that helps us a lot, because we
can’t build our business model on banking secrecy, something we
can’t control.

“We have to work on what we can influence,
which is the quality of our people and the products and services we
have.”

Another area some Swiss banks are looking to
focus is their onshore business. By opening branches in different
countries, Swiss private banks can maintain client relationships
even if they start to repatriate their assets by having offices in
individual countries.

Scheiwiller said Baer, which had an onshore
drive at the start of the decade only to scale back in the last few
years, would have to do that “in a smart way” because money was not
available to build up a big network of onshore locations.

Sarasin also said the bank’s onshore business
was becoming more important, with offices located in Germany,
Spain, London Poland, Dubai, Oman, Qatar, Singapore and Hong Kong,
in addition to its Swiss outlets.

Most private bankers interviewed, along with
other private bankers interviewed by PBI, supported the
idea of a tax amnesty to help persuade clients to disclose
assets.

“I don’t think that undeclared assets are the
future for Swiss banking, and many private banks have to rethink
their business model,” said Sarasin.

“Most of it [undeclared assets] came a couple
of generations ago and the current generation say they want a clean
sheet of paper rather than running from the law. There’s a change
of mind taking place and a need to try to find tax amnesties to
clear that.”

Yves Mirabaud, managing partner at Mirabaud
& Cie, added: “They can be very efficient, depending on how you
are treated when you report your assets. The recent German one was
not successful because it wasn’t attractive enough, whereas the
Italian amnesty in 2001 was better. If it’s attractive, it would be
helpful for the clients.”

Another point made in support of Swiss private
banks weathering the banking secrecy changes is that much of the
new money being invested with them are now coming from either Asia
or the Middle East, both regions which are famous for having low
taxation levels.

The bankers say these clients are not
funnelling cash to Switzerland to try avoid tax, but to buy into
the expertise of the country’s institutions.

“Switzerland is like the Silicon valley of
private banking,” said Scheiwiller.

“When people want to do something in private
banking, Switzerland is the natural place because of the
infrastructure it has: the universities, the skills, the technology
companies – everything is concentrated in the area. Then there is
the tradition, the huge network of professionals here from
accountants to consultants, product specialists: it helps to
support Switzerland as a financial centre.”

New Clients

While this demonstrates Switzerland
has more strings to its bow than banking secrecy, the trend towards
increasing client demand from Asia and the Middle East is subtly
altering the type of service expected of private banks.

“We are now dealing with different types of
clients, and we know their sophistication is different, their
requests in terms of our service is different and their mentality
is different,” said Mirabaud.

“But that is part of the beauty of private
banking, getting used to people’s requirements and tailoring
solutions to that.”

“Some of the clients are more conservative,
others request us to finance their activities, which we are not
able to do because we’re not a commercial bank. Some of them expect
us to be a 24/7 service which is not the same as the old-fashioned
sort of client that has undeclared assets and thinks about them
once every couple of years.”

Guillaume Lejoindre, managing director of SG
Private Banking (Suisse), said Swiss-based private banks would
increasingly be able to attract custom from Asian clients as they
become more interested in international portfolios.

“It is a matter of how mature the market
you’re dealing with is, and as they become more mature they are
converging,” Lejoindre said.

“The main difference is the Asian markets are
more interested in the Asian region than diversification. But this
will come with time and what we say to them is that Switzerland
there to provide more than a purely domestic view.”

Another area becoming increasingly popular
among clients is wealth planning, according to Lejoindre.

“Whenever there’s a change in rules, people
have to adapt to the new situation and secrecy is a part of that,”
he said.

“There are always new laws, rules and
regulations in various areas, like trusts, which can have an impact
on people’s wealth planning priorities. People need to be advised
on these new structures and regulations, and that’s where we think
we can help.”

Consolidation

Consolidation
in the Swiss private banking market has been relatively quiet
recently, something which is expected to change as wealth managers,
particularly those from overseas, reassess their priorities.

In addition, as banks are forced
away from undeclared money, which generates higher profit margins,
because of changes to bank secrecy regulations, they will have to
grow their business either by organic expansion, or from
acquisitions

Lejoindre at SocGen believes fundamental
changes at the top of some of the world’s largest banks will create
a “complete sea change in many organisations”.

“Right now, for large organisations, private
banking in Switzerland is not a key issue because it is making
money, does not give too much risk and brings liquidity to the
group,” he said.

“Those large institutions here have bigger
things to face, but when they get their heads above water, there
will be a lot of changing faces and consolidation.”

“The only recent deal we have seen has been
AIG, but I am sure some foreign institutions are asking, ‘Do we
keep a wealth management activity or not?’ – not only in
Switzerland, but across the world. When they come to that point, we
will see a lot of activity.”

Lejoindre said he expected SocGen to be a part
of that consolidation process as a buyer when “the market is
ready”.

The most high-profile deals of last year
involved Banca della Svizzera and AIG Private Bank. AIG Private
Bank was bought by Aabar Investments, an Abu Dhabi-based investment
company, for CHF307 million. The business had around CHF10 billion
in AuM in December.

Early in 2008, Banca del Gottardo was bought
by Assicurazioni Generali, the Italian insurance business, for
CHF1.7 billion. It was merged into Generali’s existing private
bank, Banca della Svizzera, at the start of this year, creating a
business with CHF78.2 billion in AuM, now Swizterland’s
ninth-largest player.

Recruitment and technology

There have been big changes at the
top of UBS and Credit Suisse in recent months, a trend which is
expected to continue over the remainder of the year.

One private banker said the changes
had led to destabilisation within those organisations, particularly
with mid-level staff fearing for their jobs.

Again, other Swiss players say this is an
opportunity. While few said they were actively recruiting staff,
several private banks, including Baer, said there were
opportunities to upgrade staff as rivals made layoffs.

Technology projects, too, are being placed on
hold, though some investment is still being justified, mainly in
the area of risk management.