Hurt to different degrees in the credit crisis and struggling now to adjust their businesses to tougher market and regulatory times, Switzerland’s two biggest banks are returning to their roots.
UBS and Credit Suisse have this month unveiled plans to scale down their investment banks and reinforce wealth management to boost earnings and make future profits more reliable.
Wealth management is a much steadier business than investment banking, has lower costs and consumes significantly less capital. The latter has become particularly important as capitalisation needs have climbed. And, while profits in private banking have been shrinking, they remain much steadier then the ephemeral earnings in investment banking.
“Private banking and wealth management have always been the core pillars of Credit Suisse and UBS and will be in the future”, says Matthias Naumann, managing partner of the Boston Consulting Group in Switzerland and co-author of the BCG Global Wealth Report.
The two are particularly well placed compared with international rivals, such as JPMorgan Chase, Deutsche Bank or Barclays, which are also facing challenges with their business models. Switzerland’s famed bank secrecy is eroding, but the country retains a reputation for discretion, reliability and service. Wealthy foreign clients, worried about political and economic uncertainties at home, still regularly combine a Swiss nest egg with a second home, medical treatment, education or holidays.
“The legal environment and the difficult economic situation put a lot of pressure on private banking. Like in every other industry, securing the core business when critical times are ahead is vital”, adds Mr Naumann.
With SFr1,371bn in client assets under management UBS was the world’s biggest wealth manager until toppled by the Bank of America/Merrill Lynch merger. Credit Suisse, with SFr762bn, is smaller, but actually overshadows its rival if UBS’s big, independently run, US wealth management business is excluded.
Both banks plan to cater increasingly to so-called “ultra high net worth individuals” – their very richest clients, who are more active than the merely rich, and often require the sort of deals available only from a sizeable investment bank. Boosting co-operation between private and investment banking makes sense for both Swiss groups, as they try to improve client flows in investment banking. Moreover, access to investment banking products, such as private placements, helps differentiate them from smaller, but ambitious, rivals, such as Julius Baer or Pictet, which can offer fewer such services.
Investing more in emerging markets, such as Brazil and Turkey, and in Asia, where growth is much faster than in the mature Europe, is another shared strategy. And in both cases, growth will come partly by reallocating resources. Both banks plan to hire more relationship managers, but numbers – and funding – will be made up partly by streamlining slower growing, or even declining, markets, such as Europe.
“The decision is dictated by the growth opportunities. Both UBS and Credit Suisse are very well positioned. They have infrastructure and a brand name in these areas. Others lack those advantages”, says Beat Wittmann, a respected Swiss fund manager.
By contrast, Europe is likely to bear the brunt of cost cuts UBS and Credit Suisse say are essential to boost earnings. Credit Suisse last week said it would close its formerly independent Clariden Leu subsidiary and fold operations into the parent company, to help reach its goal of boosting private banking pre-tax profits by SFr800m a year by 2014. In 2010 pre-tax profits in wealth management, the key part of the division, were SFr2.53bn.
UBS is also looking to savings to help boost private banking gross margins to 0.95-1.05 percentage points by 2016, compared with an adjusted 0.97 percentage point today. Some analysts argue its plans do not go far enough. In 2005, the group sold its five independent private banks to Julius Baer at the top of the market. Many now believe UBS should divest its barely profitable US wealth management division and reinvest elsewhere.
“Why should you run a barely profitable brokerage business in the US when you can do so much more in Asia?” asks Mr Wittmann.
However sensible their plans, both banks could stumble. In Europe, where foreign customers have been most exposed to governments cracking down on tax evasion via undeclared Swiss accounts, UBS acknowledges it could lose SFr12bn-SFr30bn in assets in coming years through assorted clamp downs and amnesties.
Asia will also be challenging. Both banks enjoy blue-chip images, particularly UBS, in spite of its many slip-ups. But while reputation is important in brand conscious Asia, neither bank is alone in targeting ever more affluent customers there.
Most of the world’s top wealth managers have big Asian ambitions. From Switzerland alone, smaller Baer, Sarasin and BSI have invested heavily to build Singapore and Hong Kong hubs. All are competing fiercely for the same customers, and, as important, the same client advisers. Even with steadily rising local incomes, there may not be quite enough of either to go round.
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