Harsh realities dawn on Switzerland’s private banks

By 2013, Banque Cramer knew it had a problem. With just SFr2bn of client money, the 300-year-old Swiss private bank was too small to weather the radical changes sweeping through its industry, reports Financial Times.

Extra regulatory and compliance demands were driving up costs. Big advantages that traditionally helped Swiss banks lure customers were falling away as banks faced being forced to disclose information about their clients to foreign authorities and mandatory co-operation with tax probes.

Banque Cramer went all in, making the first of two acquisitions in a deal in which its founding family gave up some ownership. The banks’ assets under management are now just over SFr5bn but Christian Grütter, the chief executive, believes it remains too small for comfort.

“SFr15bn is the first hurdle that you need to pass to get into a comfortable environment to be able to withstand regulatory changes more easily,” he says. The bank remained on the lookout for more acquisitions.

Banque Cramer’s predicament is by no means unique. While UBS and Credit Suisse, the biggest Swiss banks, have client assets of SFr1tn and SFr860bn respectively, there are more than 100 Swiss private banks with assets below the SFr15bn mark. Most have not yet taken transformational action.

“The market is still underestimating the change,” says Stefan Jaecklin, a consultant with Oliver Wyman who works with private banks in Zurich. “Out of 280 banks [in the entire Swiss market] there are still a large number where I cannot tell you what they stand for and they cannot either.”

Ironically, experts say the Swiss private banking market has not already been whittled down to size because of continuing investigations into allegations that some helped clients avoid tax. Most Swiss private banks have yet to settle with the US on tax issues, and probes from other countries could follow.

“We would have seen twice as many transactions if we hadn’t had the US topic,” says a Zurich-based corporate finance adviser. “The entire sector has huge overcapacity . . . Most foreign institutions have in principle decided to exit the Swiss market, the only question they’re asking themselves is how and when.”

The industry’s challenges are widely acknowledged. Georg Schubiger, a former chief operating officer at Danske Bank, joined Vontobel in 2012 and was given three tasks by the midsized bank’s now 98-year-old chairman — restore profitability, get the business growing again and “create a value proposition in the new world”.

Mr Schubiger argues there is still a sweet spot for private banks even though he admits some traditional Swiss banking business models no longer work. He says “affluent” clients, or those with assets below SFr1m, have “basically disappeared” since the fee structure of private banking no longer makes sense for them now they do not get tax benefits.

Switzerland’s biggest banks, which are increasingly looking at private banking as an earnings driver, make much of their ability to create products in their investment banks or asset management units and sell them on. “In the areas we chose to compete in, we’re strong,” says Mr Schubiger. “I can buy brilliant products if we don’t have them.”

He says Vontobel has steered clear of the interest rate rigging, money laundering and other scandals that have ensnared many larger banks.

“Our bank is 91 years old; it has the same shareholders [since then],” he says. “Entrepreneurs love that, people with money in Asia are people who built up companies. They don’t want to be served by anonymous shareholders.”

Frédéric Rochat, director of midsized Lombard Odier, says clients from emerging markets seeking safety and stability still flock to Swiss private banks, as do European clients seeking diversification. The “Swiss-made quality of service” remains a selling point, he adds.

Yet Swiss banks must now be more selective in the emerging markets they target. “Relationship managers 10 years ago didn’t care where the money came from,” says Mr Jaecklin of Oliver Wyman. “Now you have to understand when you’re allowed to call clients in a particular jurisdiction, when and how you’re allowed to advise him.”

Large banks responded by restricting relationship managers to one market. Smaller banks — with assets under management of SFr5bn to SFr25bn — sometimes have more markets than they have staff. “I’ve worked with [small] banks covering 90 markets, there’s no way you can do that now,” says Mr Jaecklin. “They have to come down to 10, five, two — even one in some cases.”

Zurich-based Falcon Private Bank, which has assets under management of SFr16bn, serves clients in about 100 jurisdictions. Tobias Unger, its deputy chief executive, admits this is “way too much” and says the bank will cut its coverage to about 50 countries.

It still sees its future in emerging markets. “The growth rates are higher, regulation is lower,” says Mr Unger. “There are a lot of good reasons for clients to want their money offshore.”

Despite being confident about their own businesses, the bankers interviewed all believe many of their competitors will merge or close down. “There are quite a few banks that have realised this is the last generation,” says Mr Jaecklin. “They’ll milk it for as long as it still walks, and then it’s done.”