Private banks pick up the pace of M&A

Of the 35%, almost all did end up divesting. In continental Europe in particular, several international private banks pulled the plug on local operations, selling to rivals that had a greater commitment to building scale. Last year Merrill Lynch sold its German private-client business to UBS. Although the arm managed $1.4 billion in German private clients' assets, the business was not competitive. "Merrill was sub-scale in size and capacity compared with the large German and Swiss institutions," explains one banker involved in that deal.

Insufficient scale was also the reason for the divestment of Lloyds TSB's French wealth management operation in May last year to UBS.

The business has a net asset value of £20 million ($36.5 million), and had around e1 billion of assets under management. Lack of profitability also caused HVB to sell its private-banking subsidiary, Bank von Ernst, to Royal Bank of Scotland-owned private bank Coutts in October. Swiss-based Bank von Ernst's profits had fallen 56% in 2001 and 12% in 2002.

Ray Soudah, founder of independent financial services M&A adviser MilleniumAssociates, warns private banks on the acquisition trail not to be blinded by low prices. He fears that with relatively few banking players in continental Europe, companies are over-eager to buy – even targeting businesses that do not fit culturally with their existing operations.

Private-banking intentions Have you considered or undertaken the following over the past 12 months? Percentage of respondents

Source: IBM Business Consulting

A cultural fit means finding a seller whose client base complements your own in terms of net worth and geography, and this is essential when buying a company in financial difficulty. Gerrard Management Services, Old Mutual's UK private-client wealth manager, for example, had suffered recent falls in assets under management when it was bought by Barclays last year for £210 million. Culturally, though, the deal made sense. Barclays had been looking to expand its UK wealth management capabilities, and Gerrard had £12.5 billion in high-net-worth assets. "The deal doubles Barclays' private-client assets under management and may well permit the operation to become a truly balanced full-service provider to the attractive middle market of high-net-worth business," says wealth management consultancy Scorpio Partnership. "It is possible that a management overhaul by a committed private-client operator could turn [Gerrard] around."

Similarly, in spite of Bank von Ernst's falling profits, RBS, via its Coutts (Switzerland) operation, was prepared to pay £228 million for BvE because of a cultural fit. "Bank von Ernst has 16,000 clients and around $20 billion in client assets under management, making the average client account approximately $1.25 million. Hence the client base is likely to be much more in line with the Coutts objective of servicing higher-end high-net-worth customers offshore," explains Scorpio.

The lack of choice in the onshore European private-banking market is, however, forcing some banks to find other ways to realize their growth strategies. Schroders Private Bank, for example, has focused on acquiring teams rather than buying whole businesses. Last August it hired a structured product and banking team of four from Kleinwort Benson Private Bank in order to offer more sophisticated financing and investment strategies to its high-net-worth clients. "We don't rule out acquisitions, but you have to check the cultural fit, product fit and people fit, and ask whether it is in the best interests of the client," says Sally Tennant, chief executive of Schroders Private Bank. "This is a people business, and if it's not a cultural fit, then you will lose clients."

Although lack of players might keep a lid on consolidation in most of continental Europe, in Switzerland M&A opportunity is easier to find. MilleniumAssociates estimates that around 40% of last year's M&A deals took place in that country.

Switzerland is the private-banking capital of the world. Close to 30% of all cross-border private assets invested worldwide are managed there, and clients' assets managed by Swiss banks are estimated at SFr3.4 trillion ($2.7 trillion). As such, the country has some 340 institutions active in private banking.

For these 340, however, pressure is mounting. The introduction of withholding taxes, know your customer principles and other anti-money laundering regulations, and Basle II/IAS compliance are resulting in higher costs for Swiss banks. Meanwhile, tax amnesties and other efforts by European countries to keep money onshore are taking a toll on the customer base.

Although the level of increased costs that Swiss banks face is hard to quantify, it is certain to exceed the 3% increase in costs experienced by the average European private bank. According to a report by Boston Global Consulting, costs for private banks and wealth managers in Europe rose on average by 3% from 2002 to 2003, and revenues fell by 4%, reducing gross margins from 27% to 19%.

Foreign banks score highly in certain client segments and product categories of Euromoney's survey of the best private banks and wealth managers in Switzerland, increasing competitive pressures.

In the light of such challenges, Soudah believes that the number of independently owned private banks and private-banking subsidiaries will decrease by one-third over the next five years. Soudah says: "There are the companies that, facing regulatory hurdles, issues of profitability, and the inability to grow further, are making the decision to merge or sell. And on the other side, there are those that have taken the hits but want to remain committed to the industry. They look around them and see hundreds of other players, and the opportunities to grow through buying them."