Swiss franc unpegging hits private banks
Julius Baer fares worse than UBS and CS; small private banks’ M&A escape hampered.
Julius Baer will be the Swiss bank that takes the biggest hit on profits from the Swiss National Bank’s decision to unpeg the Swiss franc from the euro, say analysts. Nomura analysts estimate the impact will cut Julius Baer’s pre-tax profit by 19%, while for UBS and Credit Suisse the decrease will be 8%. JPMorgan expects a 9% decrease in FY14 profits for Credit Suisse and a 10% decrease for UBS.
Jürg Zeltner, chief executive of UBS Wealth Management, has been quick to call the unpegging an “opportunity” for his business. “The sharp fall in the Swiss equity markets and the currency turmoil highlight the importance of portfolio diversification,” he says. “Anyone who follows this principle and holds securities in all the world’s major markets, hedging their currency risks, is financially better equipped to cope with this decision. The continuing high volatility on the financial markets also gives us the opportunity to demonstrate to clients why they need us. Advice has never been more important than it is today.”
While Boris Collardi, chief executive of Julius Baer could well say the same thing, Nomura analysts say that it was not as well hedged as its biggest peers.
“UBS discloses that a 10% rise in the CHF would lower book value and risk weighted assets by 5% but CET1 capital by only 3%, raising the CET1 ratio,” Jon Peace, Nomura’s European bank analyst, notes. “Credit Suisse states that it is more fully hedged. In both cases, RWAs are better hedged than gross exposure, meaning the leverage ratio should benefit more. We do not believe Baer significantly hedges its capital position.”
In addition, Julius Baer has a higher cost base in Swiss francs than its peers, which are more globally spread.
Matt Spick, research analyst at Deutsche Bank, estimates a cost base of 60% in Swiss francs at Julius Baer, leaving a 47% gap between Swiss franc revenues and costs.
“From least to greatest sensitivity, we have downgraded our 2016E forecasts by 12% for UBS, 16% for Credit Suisse, 17% for EFG International and 20% for Julius Baer, with Baer having the greatest mismatch between CHF costs and revenues,” says Spick. “This is better than prior to the [Merrill Lynch] IWM acquisition where Baer’s cost base was 80% CHF.”
So what now for Julius Baer? Just as it was moving to become more global, it may now not be able to. It was mooted to be interested in buying Coutts’ international business, which has been put up for sale by RBS, and while the diversification of costs to a non-CHF base would be useful in mitigating currency exposure, it would be risky, says Spick.
“We would be negative on Baer planning for further acquisitions, which may be the quickest way to rebalance currencies, but are also in our view the riskiest (execution risk),” he says in his report.
Some Swiss banks have just lost 20% of their commissions income. Add to that AUM, and the impact is now very urgent
However, the smaller Swiss banks are worse off still than Julius Baer. Christian Hintermann, head of transactions & restructuring financial services at KPMG Switzerland, says that the smaller Swiss banks tend to be purely offshore banks with their client bases mostly in Europe, and therefore working in mainly in euros – and not US dollar like their larger competitors with greater reach into emerging markets.
“Clients pay their commissions in euros, so some Swiss banks have just lost 20% of their commissions income because of the exchange rate move,” says Hintermann. “Add to that that assets under management, which are reported in francs, have also just been cut by some 20%, and the impact on net-interest income and the environment is now very urgent for these banks.”
The SNB move appears to have reinforced the structural rationale for consolidation – given the rising cost base and pressurized margins in an over-banked market – but now the M&A outlook is unclear.
Ray Soudah, founder and CEO of Millenium Associates, an M&A and corporate advisory firm based in Switzerland and the UK, says: “Costs will need to be cut between 5% and 10% at Swiss banks, which the small banks have no room to do but they cannot merge either. Because of the unpredictability of profit margins and foreign-exchange moves, in the near term there will be a cooling effect on M&A as valuations will be too uncertain.”
Hintermann says valuations are now lower as they tend to be based on net asset value plus assets under management (which are now much lower) but says that will depend on whether the euro/Swiss franc rate bounces back.
The need for asset disposals, mergers and outright closures in the industry is urgent. A report in August by KPMG and the University of St Gallen in Switzerland showed the writing was on the wall for the Swiss private-banking industry, particularly smaller banks.
The two institutions assessed the 2013 results of 94 of Switzerland’s 139 private banks excluding Credit Suisse and UBS, and showed a drop in return on equity from almost 14% in 2006 to just 3.3% in 2013. Small banks’ ROE was a mere 1.7% on average compared to their larger peers’ ROE of 4.4%.
Hintermann says that urgency has increased since the report last year, although he adds that the 2014 results will not take the exchange rate move into account. “There had been a hope that the markets would bail them out, but instead the contrary has happened.”