By almost doubling assets under management and market capitalization after acquiring three private banks and GAM from UBS, Julius Baer throws down the gauntlet to the private-banking industry in Switzerland. The pace of consolidation is stepping up.
It's the inevitable response to the challenges facing an industry in which 70% of the total $1.8 trillion assets under management – according to estimates from Boston Consulting Group – belong to European citizens whose national governments are making it less attractive to keep assets offshore. At the same time as the costs of new regulations to prevent money-laundering are weighing heavily on the smaller private banks, those banks' clients are demanding better service and increased access to top-quality investments products that the banks don't have. The result: costs are up, client assets are stagnant or declining, margins are shrinking.
The old business model for Swiss private banking is basically finished.
Bank owners face two choices. They must bulk up to spread various costs: in particular compliance; investment in world-class IT to support better advice and open architecture access to products; and acquisition of wealthy customers from outside western Europe who might be persuaded to lodge their wealth offshore in Switzerland. The alternative is to hunker down as boutique players offering a pampering service to old Europe clientele and trying to charge a premium for it. Even that is tough, as family offices and hedge funds disintermediate the private banks and show up their limited in-house investment products.
Swiss private bankers should be grateful, then, that many large international banks seem so attracted by the idea of breaking into the business of managing the money of wealthy individuals. Although Singapore might one day overtake it, Switzerland still has plenty of cachet in private banking. Julius Baer was inundated with queries from foreign banks. Investment bankers say any Swiss bank putting itself on the block can expect several potential foreign bidders.
A few already have toeholds in Switzerland. Rabobank has 28% of Bank Sarasin and the option to build its stake further. Raiffeisen holds 12.5% in Bank Vontobel, though this is dwarfed by the family-led voting pool that controls 40% of the shares.
Many Swiss private banks, including big ones such as Pictet and Lombard Odier Darier Hentsch, still persist in partnership form. Will they soon sell out?
If they do consolidate, many of the Swiss private bankers will seek domestic partners. There is a strong belief, probably a mistaken one, among the wealthy families that run many of these private banks that opening up to foreign shareholders will destroy the last vestiges of their reputation for offering independent advice to their customers.
There is still a cosy, clubby feel to Swiss banking. The deal between Julius Baer and UBS reeks of it. UBS hands over some prize assets and top management to a medium-size domestic competitor, enters a commercial agreement to continue directing UBS clients into GAM products, undertakes not to poach staff and applauds the emergence of a domestic consolidator. It takes a 20% stake in the new bank, and vows not to vote its shares, take board seats or nominate directors. It lends Julius Baer some of the purchase price and leads on the rights issue to fund the rest. Sure, UBS gets a fair price, but no wonder both sides describe relations between the two banks as so good.
Foreign banks should, in any case, tread cautiously in Switzerland. Swiss bank secrecy laws make it extremely difficult to conduct proper due diligence on client assets. Post-closing price adjustments might be possible but the directors of foreign banks might be wary of taking too big a leap of faith on a sizeable acquisition. Unsolicited deals are out of the question.