Despite the dramatic upturn in profitability, the nature of Swiss private banking has definitely changed. But what is this change and how ha...

Despite the dramatic upturn in profitability, the nature of Swiss private banking has definitely changed. But what is this change and how has it affected the market?

Almost without exception, most private banks in Switzerland have reported dramatically improved profitability in their most recent results. This applies equally to both the Swiss owned and foreign subsidiaries and to limited liability partnership banks, limited companies and even the listed or quasi listed entities.

This comfortable profit position can remind one of the “good old days” before the bubble finally burst in 2000/2001. Until then earnings were racing ahead, profits and net new money collection was almost consistently positive and banks were tremendously confident of their futures despite longer term challenges clearly on the horizon.

Investment in an external/international asset gathering infrastructure, however, was limited to the very few who foresaw the decline of recurring revenues and money flows into Switzerland.

What has irreversibly changed this time around is that the previous business model of relying mostly on standalone presences in Switzerland is no longer sustainable if measured by the growth or collection of new clients and or new money to manage. This is especially true in the area of private clients - as compared to institutional or custody only clients where some successes can indeed be observed.

This profound change is troubling management at all institutions where growth in real underlying business activity, the gathering of net new money inflows, is a concern. It is quite ironic that during the current period where profits are very handsome, that strategic concern at board and management level is at the highest level it has been for some years.

It is perhaps even more marked than at the time of the market crash in the early part of this decade. This is what has changed and this fundamentally challenging situation will have different solutions for different sets of participants, permitting all to be winners when these solutions are well and decisively handled.

We may ask ourselves “is this the beginning of the long anticipated M&A wave?” Differing management styles and the actual business situation will dictate the likely events. The recent deal between UBS and Julius Baer has attracted much attention as it possibly signifies a turning point in the M&A scene. Is it the beginning of the wave of deals often predicted in the past by many commentators including the present author?

In fact there have been over twenty deals of all sorts so far during 2005 in which at least one party had a private banking/wealth management constituent. These include SwissFirst and Bellevue, Banque Baring and ING and Corner Banca and Viseca amongst many others.

Most of these deals were relatively small in nature but cannot be overlooked as a market phenomenon. They all confirm that M&A has a serious role to play in corporate strategy with each having its special unique characteristics. Including the UBS/Julius Baer deal (which is really four deals in one) we have seen around twenty five deals so far this year. Not bad for a market that was previously assumed to be dead or at least very quiet.

Although at way under SFr10 billion, the enterprise value of all the deals together is still only a few percentage points shy of the total implied value of all Swiss private banks combined. What is common in most events in 2005 is the desire by the parties concerned to focus on their core strengths or to strengthen themselves as compared to their pre-deal status.

In the final analysis, buying and selling parties seek to attempt to control their destinies whether being able to achieve permanent strategic solutions, short-term financial benefits, or greater independence to design their future corporate landscapes.

The Julius Baer/UBS deals certainly increased the public awareness of the M&A potential in Switzerland but the reality is that well before this deal was signed most market participants continuously considered their options given their common actual issues. It is the real business landscape, the lack of real sustainable growth, not one particular deal, that is the driver behind the small or large M&A wave of the future.

Different managements approach the M&A issue in different ways. Some will be influenced by lifestyle choices, some by headquarter considerations, some by shareholder pressures and others by succession planning. They will all consciously or unconsciously come to a decision sooner or later which appeals to them, even it is to keep the status quo. Hostile activity is utterly unlikely to succeed even if is directed towards newly listed or relisted firms.

So who will be the winners and losers in the years ahead? Consistent and committed strategies are a key recipe for success. Infrastructure private banks like winners UBS and Credit Suisse will always prevail. They will attain even greater market shares of the global new money creation owing to their original smart decisions to establish or expand international networks and selective onshore presences to garner new clients. This diversifies risk from their concentration on traditional Swiss private banking.

These groups have also increased their brand awareness as a differentiator as compared to their peers and are now experiencing brand attraction over and above the value of their international networks.

They must, and will, continue their globalisation until such a time as they have achieved a significant diversification and until such a time when Swiss private banking is differentiated only by its service and investment performance competence rather than only by being the original safe haven centre. This latter reason will, of course, remain a valid raison d’etre given the allure of Switzerland in the eyes of private clients. These giants will never lose their Swiss identity.

Your guest columnist once predicted that there would be some twenty M&A deals every year and the delisting of some fifty to one hundred private banks from the license register of over three hundred, in the years ahead, (assuming no new ones are created). I fully stand by this prediction. I believe the majority of Swiss private bankers will increasingly want to use corporate M&A activity to address their challenges from a strategic level. This is especially likely when they are in such a strong position supported as they now are by good profitability.

The Swiss private bankers have the resources to act or be acted upon, or both. We must not forget the mergers side of the M&A tableau. Transacting mergers without paying away valuable goodwill cash, as opposed to premium acquisitions, is still an available option to market participants enabling alternatives to straight sales.

With consistent and well thought out strategies the majority of Swiss private banks can be winners be they sellers or buyers or true merger partners. The losers will only be those who have not thought through their situations as they would miss out on the various opportunities availing themselves to permit a bright future for what is a major global and renowned surviving industry - at least in the main…