|Full results index|
A strategy of integration is paying rich dividends for Credit Suisse, sending the Swiss private bank storming past local rival UBS to take the top spot in the global rankings. Now it needs to maintain that momentum.
It’s warm and fuzzy, and it’s the way the Swiss feel about Credit Suisse. The big bank that didn’t have to go to the Swiss taxpayers for money. The big bank that hasn’t been naughtily advising foreign clients to evade their taxes. The reputational beating that Switzerland has taken was not caused by this bank.
But beyond the schmaltzy windows of Paradeplatz lies a global story of success. And it’s not just about wealth management, as the firm embarks on the final stretch of its integrated strategy whereby the private and investment banks work together to serve clients.
Such news would probably shock smaller customers of the private bank. After all, 2008 and early 2009 showed investment banking to be inherently risky and, well, a little bit evil. But higher up the wealth spectrum, private clients know that they need investment banking expertise. They also know, however, that they don’t want it shoved down their throats. Product pushing might have been tolerated in 2007, but it will not be tolerated now.
Credit Suisse gets this – and it was the first and is still the only private bank to truly get it. It was a gamble the firm took back in 2006 when it embarked on the strategy and one that has paid off. From ranking fourth globally in Euromoney’s 2009 private banking poll, Credit Suisse Private Bank now holds the top spot. Its regional positions have also accelerated, and revenues driven by the integrated approach are rocketing. It’s a blow to Credit Suisse’s biggest rival, UBS, which has been ranked top globally since the poll’s inception in 2003. But plagued by outflows driven by losses in investment banking, and accusations of helping US clients evade taxes, UBS has been too distracted to keep up with Credit Suisse.
Naturally, UBS is not taking its displacement as the premier brand in global wealth management lying down. The firm has returned money borrowed from the Swiss government at interest and has hired former Merrill Lynch wealth management head Bob McCann to turn around the tarnished US brokerage arm. Chief executive Oswald Grübel says that as soon as the firm is back in profitability, clients will return."What we need is time," he adds. (See Grübel claims the tide is turning for UBS, Euromoney, February 2010).
Timing is indeed everything – and thanks to Credit Suisse’s integrated bet, the smaller of the Swiss private banks has a good head start. It’s the key to success, as even Grübel admits, and one that UBS has not yet managed.
At the same time, other leading global financial institutions are looking to make more out of wealth management. At HSBC, which again ranks second in our overall poll, private banking has been placed within the empire of Stuart Gulliver, global head of banking and markets. The new chief executives of Morgan Stanley and Bank of America, James Gorman and Brian Moynihan, have put their US wealth platforms at the heart of future growth and the restoration of their firms’ overall businesses. Universal banks that have ridden out the financial crisis into a position of new strength, such as BNP Paribas and Royal Bank of Canada, see private banking as a key driver of future growth.
It seems as if wealth management as a core discipline of global banking’s time has come. And for now, no bank is as successful at getting the business mix right as Credit Suisse.
Together we stand
Fortune has smiled on Credit Suisse. The investment bank did not suffer the enormous writedowns during the financial crisis that its competitors globally did. Nor has the private bank been involved in a highly embarrassing tussle with the US regarding banking secrecy. But to claim that Credit Suisse is simply winning clients because its reputation is solid would be unfair.
Three years ago the firm looked into the future and saw what high-net-worth clients would want, and what shareholders would want, and decided to implement a strategy that is now bearing fruit – one of complete integration.
Not everyone approves. One banker at an independent Swiss private bank says clients prefer not to deal with a private bank that may be conflicted. "Clients want open architecture and to be able to choose their investment bank separately," he says. It is not a convincing argument. The importance of being fully integrated is clear. First, clients of the investment bank that have a liquidity event are prime private banking client material. Secondly, high-net-worth private clients will require an investment bank at some point, and they will be better off using the one attached to their private bank, if it is as high calibre as Credit Suisse. For a start, their private banker will get them through the door of the investment bank.
"Many large financial institutions claim to be integrated, but we’re unique in that we actually are"
Walter Berchtold, Credit Suisse Private Banking
If proof is needed that it works, the combined approach made Credit Suisse SFr3.6 billion ($3.4 billion) in revenues in the first three quarters of 2009. But it does require long-term investment and commitment to achieve such a fundamental cultural change – not an easy undertaking, says Berchtold. Indeed, one former Credit Suisse banker describes the separated units of retail and commercial banking, investment banking and private banking back in the late 1990s as being "at war. Private bankers even had their own separate entrance to the building," he says.
In 2004, it was decided to build a "one bank" model, where private banking, investment banking and asset management would work together. Having come from a trading background at Credit Suisse, Berchtold clearly knew where the benefits were. "The private bankers lacked capital and the balance sheet capacity for large risk deals," he says. "And they also lacked the knowledge of risk transfer structures, trading ideas, and investment banking opportunities for clients, so we opened up the investment bank for more business."
The hindrance, says Berchtold, was the structure of the group. "The businesses were still very standalone, and there was little understanding between the investment bank and private bank on how they could benefit from one another."
The solution was threefold. First, every board – from the local boards such as Bern to the country boards, the regional boards and the highest echelons of the Credit Suisse Group – would have an investment banker, a private banker and an asset manager present. Secondly, compensation would change. Referrals from one side to the other would create a ‘global currency’ – the revenues generated would be considered as belonging to the entire firm, not one division, and would be split accordingly. Private bankers that refer clients to the investment bank receive a chunk of the deal fees; investment bankers referring clients to the private bank get a cut of the revenue stream generated over three years.
The final part of the jigsaw was the introduction of ‘solution partners’ – a group sitting between the investment bank and the private bank that generates ideas for the private bankers and screens potential investment banking opportunities from private client requests.
Heading the group is John Zafiriou, previously head of Credit Suisse’s European fixed-income coverage group and one of the former Bankers Trust squad that now dominates Credit Suisse’s senior management. (Both Brady Dougan, chief executive of Credit Suisse, and Paul Calello, head of Credit Suisse investment bank, are Bankers Trust alumni.)
The right solution
Yes, the name ‘solution partners’ may cause eyeballs to roll. This is a group that, one would think, is just there to flog investment banking products to private clients – it is, after all, made up almost entirely of investment bankers, and investment bankers are known for being mostly money-driven.
But in reality, Credit Suisse has got this right. For a start, the Solution Partners group sits within the private bank. And having been one himself, Zafiriou knows how investment bankers tick and is there to make sure the balance is upheld. Ultra-high-net-worth clients are entrepreneurs who have their own companies. The chances are they know more than their private banker about investment banking, so they want to deal with investment bankers. Investment bankers on the other hand are used to working with institutions to which they can say yes or no on deals, with a focus on selling products rather than nurturing relationships. "The emotion of private clients is entirely different to institutions. You can’t just say no to them. You have to try to meet their needs or let them down gently," says Zafiriou.
Indeed, a great many clients are let down gently. Solution Partners receives hundreds of requests from private clients but some simply "are not doable," says Zafiriou. "In some ways it is easier now to get across to clients that their deals cannot be done. They understand that you cannot syndicate as much risk now as you once could."
But a surprising number do get done. In 2009, 500-odd deals were completed. And these were not all plain-vanilla transactions: the acquisition of an airport, a hedge on a £50 million interest rate loan, a property total return swap, a collar on fuel oil, the sale of a $350 million steel mill, the provision of leverage certificates to enable a client to hedge his $450 million hedge fund portfolio. Zafiriou admits to having underestimated the extent to which private clients need investment banking solutions.
It is not just investment banking that the Solutions Partners group is managing to leverage off. Zafiriou says that the alternative asset management arm of Credit Suisse is also a provider of business. "The private equity group might come to us with opportunities for private clients that we would screen, and similarly if we have a client selling a business that the private equity group might want to buy, we will put that to them." If this sort of two-way flow is maintained in equal measure, it is hard to see why clients would complain of having the odd product suggested to them now and again.
Zafiriou admits, however, that this middle-man strategy is not easy to manage. "It’s complex. We cannot be replicating investment banking. To survive as a group, you have to be adding value within the whole chain." That is why, he says, the group needs to be compact. Solutions Partners employs only 100 people worldwide and, while there are obviously plans to expand the business, growth will be strictly monitored. The US is perhaps the most challenging region to grow because of the engrained product-selling culture there. This helps explain why obvious contenders for such a strategy, such as Goldman Sachs, do not have an equivalent business group.
The culture of sharing revenues and encouraging all parts of the bank to share business is hard to establish, admits Berchtold – even with every department represented at board levels it is a case of constantly reiterating the "one bank" philosophy. That kind of cultural shift cannot be built overnight, he says. Fortunately, he adds: "The fact that the investment banking and private banking businesses are about the same size has made it easier. It’s hard to implement this kind of integration when one side is significantly bigger than the other."
While that is true in terms of number of employees at Credit Suisse – the private bank employs some 24,200 people, investment banking around 19,300 – it is not true of revenues. In the first three quarters of 2009 the private bank produced revenues of roughly SFr8.6 billion – half those of the investment bank. When looked at in this light, it becomes clear why Credit Suisse Private Bank is being made to contribute more – while the investment bank does pass on potential private clients to the private bank, most of the traffic is in the opposite direction. It also saves the private bank from any potential talk of splitting investment banking and private banking. Having this combined revenue clearly laid out reassures analysts and shareholders that the private bank is a necessary part of the group. They certainly should be convinced by now – the SFr3.6 billion of combination revenues accounts for more than 10% of Credit Suisse’s total revenue.
Aside from the global integrated approach that now provides the core for Credit Suisse Private Bank, Berchtold says that adapting to the changing shape of local markets was crucial in 2009.
This is especially true in Switzerland itself. For the second year running, Credit Suisse ranks as best for private banking in its home country and the accolade is well deserved. As warmly as the Swiss now view Credit Suisse, the initial stages of the financial crisis caused many to turn their backs on the large banks with investment banking risk, and flock to the safer cantonal and Raiffeisen banks. While Credit Suisse suffered much less than UBS, the fourth quarter of 2008 brought outflows in Switzerland of SFr6.1 billion, and the first quarter of 2009 drew only SFr1.5 billion in net new assets – a disappointing result for a bank that has 40% of its employees based in the country. Most of the money returned as the crisis abated, but a change in strategy also helped boost new assets. In the second quarter of 2009, the Swiss private bank registered SFr2 billion in net new assets, and in the third quarter SFr3.7 billion.
"The growth is going to come, and already does, from within. It’s all about how we can leverage the client base"
Hans-Ulrich Meister, Credit Suisse Switzerland
Credit Suisse set about putting staff back in the branch network to serve customers with between SFr250,000 and SFr1 million – the sweet spot of the cantonal banks. "We had to compete with them," says Meister.
Not only was the segmentation important in retaining and attracting clients, Meister says it was more appropriate for managing risk. "There were some relationship managers who had clients with SFr250,000, clients with SFr1.5 million and clients of SFr20 million – all at the same time. The regulatory advice, and product and risk advice that each of those clients requires differ. Not only is that difficult for the relationship manager to keep on top of, but for the company it is a big risk. With the new model we can ensure that the relationship manager can give the best advice suited to the clients’ specific needs. And I expect our peers will be making similar adjustments."
Now private banking relationship managers cover only clients with more than SFr1 million. It was a sensible move, and one that outsiders say is typical of Credit Suisse. "They are much smarter than UBS, and when a good idea happens there is a team-like mentality that gets things done," says one Swiss banker. "UBS has always suffered from having one perceived leader through whom everything has to be passed. It’s not conducive to reacting quickly in local areas, and it’s not conducive to managing risk."
It is not unreasonable, however, to question just how much more Credit Suisse can do on its home turf. The bank already has 220 branches in Switzerland and doesn’t expect to add more than 10 to that figure. The segmentation move has, however, opened up the ability to attract the mass-affluent to the bank – a sector that may well move up into the private bank over time. To encourage the retail branch networks to move clients up to the private bank, employees are given targets. Meister says: "A target could be to identify 5% of retail assets that could be moved up to the private bank, for example. It takes time, but we have actually moved hundreds of millions of Swiss francs up to the private bank from the branch networks in the last few years."
And Meister insists that there is still more to be done in Switzerland. The country has the highest density of millionaires in the world. Every sixth household is a millionaire household, and millionaires have a variety of needs and demands – which is where the ‘one-bank’ philosophy comes in. Although there is still potential to gain market share in Switzerland, Credit Suisse is no longer entirely dependent on adding new assets. "The growth is going to come, and already does, from within," says Meister. "It’s all about how we can leverage the client base. In Switzerland we have really tried to communicate that Credit Suisse has a large investment bank that can be of service to Swiss companies and ultra-high-net-worth individuals. Up to two years ago we were perceived primarily as a retail bank and offshore private bank domestically. Clients thought we perhaps did investment banking in New York and London. We had to explain that investment and corporate banking is core to our offering. And that given 50% of Switzerland’s GDP is from exports, Switzerland needs investment banking capabilities. Clients will clearly benefit from the unique focus we have as a globally integrated bank."
A world of difference
Away from its domestic success, Credit Suisse Private Bank has earned increased respect in regions across the globe. Its onshore strategy in Western Europe has meant it has lost fewer clients to tax amnesties, and it ranks first this year in that region. In North America, the bank is the top-ranking non-domestic player and sixth overall, up from 10th for 2008. Through the economic crisis since 2007, the US business has grown revenues at a compounded rate of 19% and attracted more than 150 senior relationship managers.
The business is much smaller than that of the Swiss-based private bank. In the US, for example, there are around 400 relationship managers compared with almost 2,000 in Switzerland. And the level playing field that Berchtold mentions in terms of investment banking and private banking headcounts does not apply in the Americas, where there are five times as many investment bankers as private bankers. Anthony DeChellis, head of private banking Americas, says culturally it works. "Our clients, being largely entrepreneurs and executives, are a natural fit for the investment bank, and therefore private bankers and investment bankers have a strong interest in working well together. Our size is also an advantage as we can foster close relationships."
DeChellis says that by remaining smaller, the private bank has avoided the pitfalls of other European entrants which have tried to be "all things to all people". While the brokerage model may work for Bank of America Merrill Lynch and Citi, it has been harder for European banks – UBS among them – to control. As one private banker at a small Swiss boutique says: "How can you have any control over 20,000-odd brokers? How can you make those follow the same rules as the rest of the private bank globally?"
Credit Suisse Private Bank does have a brokerage model in the US but it has been slowly metamorphosing into a full-service wealth manager. "Our focus needs to be on solutions that look at our clients’ broad financial picture and that deliver the whole bank for their benefit," says Berchtold. He admits the US is a tough market to crack. "We’re one of many there. The acquisition route could boost us, but there is no point buying assets unless you can make them profitable. At the moment we do not see anything that makes sense for us."
Instead, DeChellis says Credit Suisse is gaining clients by differentiating itself from the traditional US retail brokerage model. "We’re carving out a niche at the high end," he says. "It’s confusing for clients to think that you are running $200,000 and $2 billion accounts, so we try to focus solely on clients that will eventually have at least $10 million with us."
Half of Credit Suisse Private Bank’s US assets under management lie with clients with more than $25 million at the bank, and it has developed banking and lending capabilities to enhance its client offering. By targeting the ultra-high-net-worth space, Credit Suisse in the US also has a better chance of increasing revenues for the group by enabling access to other parts of the bank, for instance through Solution Partners, which is adding staff in New York. And the more ultra-high-net-worth clients the private bank can attract, the more will follow also, says DeChellis. "Clients do not like being your first big account, so they look for firms with deep expertise in catering to the needs of families like theirs."
Until recently, Credit Suisse has struggled to attract this segment. As one private banker in Zurich points out: "If you are a very wealthy client, you want to be with the biggest private bank in the world. By virtue of that, if a client is picking just one Swiss bank, UBS would nearly always have been the choice." Unsurprisingly, however, that is changing in the wake of the reputational damage UBS has suffered in the US, and UBS’s loss is Credit Suisse’s gain.
That is also the case in Latin America. UBS pulled out of Brazil entirely when it sold Pactual last year. Credit Suisse on the other hand is going strong with its Hedging-Griffo business. The private bank is also looking at going onshore in Canada.
In Asia, Credit Suisse Private Bank retains its position as fourth-best in private banking services. Net new assets have been growing strongly at more than 20%, reflective of the confidence clients have placed in the bank as well as the successful newly established operations in Australia and Japan.
The Australian private banking business saw particularly strong growth in 2009. "There isn’t much in the way of classic private banking in Australia, so our offering has been very well received," says Marcel Kreis, head of Asia private banking. "We also remunerate our relationship managers differently whereas typically the advisory industry in Australia is commission-based. That structure encourages a more short-term sales-focused trading mentality, and we wanted to stand apart." By the end of the third quarter, the Australian business was ahead of budget – as was Japan, which opened in May.
Kreis says the integrated bank approach goes over well in Asia. "It’s an entrepreneurial region with a lot of business owners who are very much engaged in running their wealth." They may not all be large enough to warrant using the investment bank, but Solutions Partners takes care of things like structured lending or smaller corporate activity. "An increasing number of relationship managers are actively involved in helping clients with their businesses at some point here," says Kreis.
It’s never easy being top of your game, and Credit Suisse knows this better than most. "There has always been a cycle of Credit Suisse up, UBS down – then three years on, it’s UBS up, Credit Suisse down," says one Swiss banker. "Credit Suisse is a better brand, and has smarter people, but it’s prone to making silly mistakes that knock it from its perch." Mistakes such as having to cough up a $536 million penalty to the US government for helping Iranian clients get access to US dollars.
Fortunately for Credit Suisse Private Bank, such mistakes don’t hit the radar when billions of dollars are being lost by financial institutions, but when Wall Street calms such errors will be noticed. DeChellis sees the future as bright. "As time goes on, the gap between those who suffered during the crisis and those who didn’t will actually widen," he says. "Lack of client focus and investment, distracted management and brand erosion will be seen more clearly as time goes on. Not that business will be handed out on a plate to those who fared better, but there is a higher probability of growing that gap."
Key to maintaining Credit Suisse’s lead will be keeping its talent and leadership in place. Berchtold, Calello, and Dougan have been working together for years, and are seen in the industry as a ‘dream team’. But the private bank has a reputation for losing its talent. Former Credit Suisse employees make up the cream of the Swiss private banking industry: the chief executives of Sarasin, Julius Baer, HSBC and, of course, UBS are all from the Credit Suisse stable. Berchtold’s talk of future plans, however, indicates he is there for the long term. "The integrated model is only halfway there, and 2010 will be about building on that and growing organically," he says. "We have a lot to do still, but we have a head start."