Private banks face the squeeze

The merger of Lombard Odier and Darier Hentsch was the most visible sign of consolidation

Weak stock markets and tougher competition mean that Swiss private banks need to find economies of scale to stay in the black.

This content was published on July 30, 2002

That's the conclusion of a new study by Switzerland's largest private bank - Pictet in Geneva.

It says that although banks are launching cost-cutting measures, these are very often "rather timid" and therefore not likely to prune some of the excesses of the 1999-2001 period. As a result, says Pictet, 2002 looks like being another difficult year.

Switzerland manages about 35 per cent of the world's private and institutional offshore funds, estimated at $2 trillion (SFr2.89 trillion). There are 75 banks, including 49 foreign-owned institutions, active in asset management in Geneva alone.

Harsh conditions

The study says that after a turbulent 2001, market conditions remain harsh, client activity is subdued and despite the efforts to contain costs, most banks will post lower profits for the first half, if not for the full year.

"They're being hit quite strongly by the decline in the equity markets, as well as for some by the decline in currencies versus the Swiss franc," Pictet analyst Claudia von Türk, co-author of the study, told swissinfo.

"They've also built up quite a high cost base so that is also hitting results this year," she added.

High costs have already prompted moves towards consolidation; the most recent being the merger on July 1 of Geneva private bankers Lombard Odier and Darier Hentsch.

The deal, seen as more of a takeover of Hentsch, created a bank with assets under management of some SFr140 billion ($97.02 billion).

That agreement came on the heels of deal in March in which the Netherlands' Rabobank took a 28 per cent stake in Bank Sarasin, based in Basel, with an option to buy a majority stake.

Before that, the Geneva-based Union Bancaire Privée announced it was merging with Discount Bank and Trust Company.

Fragmented market

However, the study notes that despite the such deals, the market remains "highly fragmented", with many smaller players holding out in a business which traditionally has yielded high returns - analysts say a 30 per cent return on equity with as little as $10 billion under management used not to be uncommon.

"Further consolidation depends a lot on market conditions," von Türk commented. "If markets remain difficult, costs will be a consideration and we might see some more mergers."

Tax amnesty

Another problem faced by Swiss private banks, particularly in canton Ticino which borders Italy, has been the Italian tax amnesty that ended in mid-May.

The scheme, under which Italians paid a 2.5 per cent fine for repatriating funds illegally held abroad, is estimated to have prompted the return of €40-50 billion (SFr58.6-73.25 billion).

Pictet says that it is estimated that about ten per cent of the SFr300 billion worth of Italian assets managed by banks in Ticino will have been repatriated but some banks seem to have been suffering worse than that, with losses of 20-30 per cent.

Although not many banks have released figures, the Banca del Gottardo in Lugano has indicated it lost SFr2.5 billion of which it managed to recover SFR0.9 billion thanks to a subsidiary in the Italian city of Bergamo.

Recoup repatriated assets

This underlines the point that those banks with an Italian onshore presence have fared much better as they have been able to recoup some of the repatriated assets.

The Credit Suisse Group, for example, which has 35 outlets in Italy, expects a net loss of SFr2-3 billion, while UBS has been able to recover about half the repatriated assets.

The study feels that the Italian amnesty has not been too damaging for listed Swiss banks, although the timing in the current economic climate is "rather unfortunate".

One of the issues that Swiss banks must now be pondering is a scenario in which other countries follow the lead of Italy and introduce a tax amnesty.

"There's been some talk about Russia eventually doing something like that but I don't think that would be so harmful," von Türk says. "But if an important country for the Swiss banks, for instance Germany, were to follow suit, the impact would be much more dramatic"

This "potential threat" explains why many banks have decided to take a closer look at "onshore" banking after the amnesty.

In its outlook, the Pictet study says that in terms of assets under management and net new money inflows, it feels the big banks will generate a better performance in private banking than the asset managers.

It is hoping for "less hostile" markets in 2003, which would have a positive impact on assets under management and on profits, through performance and increased client confidence.

It adds that would then expect asset managers to start delivering a stronger performance in their asset gathering than this year.

by Robert Brookes

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