Swiss private bankers are pursuing acquisitions to boost profits as punitive tax agreements make the nation less attractive for rich foreign clients.
Union Bancaire Privee, the Geneva-based firm that ranked among the world’s biggest hedge fund investors as recently as 2008, agreed last month to buy ABN Amro Bank NV’s Swiss wealth- management unit for an undisclosed sum. Julius Baer Group Ltd. and Vontobel Holding AG have said they may make takeovers.
Deals are under consideration as the more than 160 private banks in Switzerland are seeking new ways to gain assets after a crackdown on tax evasion in the U.S. and Europe. The process may be accelerated by tax changes with Germany and the U.K. that are prompting clients to move money back to their home countries.
“This really is a question of growth or die,” said Arno Endres, head of research at Luzerner Kantonalbank AG in Luzern, Switzerland. Money management is “a size business, and if some banks are merging, it creates pressure on other participants.”
Only two Swiss banks were among the world’s top 10 wealth managers last year, with UBS AG third with $1.56 trillion of assets under management and Credit Suisse Group AG fifth with $865 billion, according to data compiled by Scorpio Partnership. Geneva’s Pictet & Cie. and Lombard Odier Darier Hentsch & Cie. make the top 20, along with Zurich-based Julius Baer.
The Swiss government agreed in March 2009 to adopt international standards on the exchange of information on tax evaders after being accused by Germany and the U.S. of helping to shelter cheats. The policy was the biggest change to the country’s banking secrecy laws since their introduction in 1934.
In the new business environment, private banks will probably need at least 100 billion Swiss francs ($126 billion) of assets under management to succeed, Endres said. It’s a level that would eliminate all but seven Swiss wealth managers.
Julius Baer, with 166 billion francs of client assets, counts Switzerland amongst its “focus markets for acquisitions,” said Jan Vonder Muehll, a company spokesman. The nation’s largest publicly traded private bank has about 1 billion francs of excess capital that may be used for purchases.
For UBP, ABN Amro’s $15.8 billion of assets will add “scale,” Chief Executive Officer Guy de Picciotto said last month. UBP, whose clients posted losses from investments tied to Bernard Madoff’s Ponzi scheme, is rebuilding after assets under management slumped 55 percent to 60.7 billion francs since the end of 2007.
ABN Amro is getting out of Swiss wealth management to focus on markets where it has a larger position, said Brigitte Seegers, a spokeswoman for the Amsterdam-based bank.
Swiss tax accords with Germany and the U.K., which end disputes over tax evasion by wealthy Germans and Britons with cross-border accounts, will spur acquisitions, said Andreas Lenzhofer of consulting firm Booz & Co. in Zurich. The amount of undeclared money in Switzerland is estimated by some observers at between 300 billion francs to 1 trillion francs, the International Monetary Fund said in May.
“These new tax agreements will accelerate consolidation,” said Lenzhofer. “They will make it easier to assess the risks within client portfolios.”
Swiss banks plan to levy a 26.375 percent withholding tax on interest, dividends and capital gains earned by Germans with offshore accounts. The rates for Britons will be 48 percent on investment income and 27 percent on capital gains. Revenue generated will go to the German and British treasuries, while the clients’ identities remain secret.
That will improve transparency, which was lacking when Julius Baer bought ING Groep NV’s Geneva-based wealth management business in October 2009, according to Lenzhofer. Buyers weren’t sure what percentage of a bank’s assets under management were undeclared client funds, which might be moved out of Switzerland during a crackdown by tax authorities.
The difficulty in valuing these assets has so far made potential buyers wary. There were 166 private banks in Switzerland at the end of last year, compared with 181 in 2005, figures compiled by PricewaterhouseCoopers LLP in Zurich show.
Zurich-based Vontobel is looking for a private-banking acquisition in Switzerland or Germany, Chief Executive Officer Zeno Staub said last month. A company with assets of 4 billion francs to 10 billion francs under management would hit “the sweet spot,” he said.
“For a dynamic buyer with a clear strategy and a large enough war chest, the opportunities to make value-adding deals are clearly increasing,” said Patrik Kerler, head of mergers and acquisitions for KPMG in Switzerland.
Coutts to Barclays
Foreign-owned private banks that lack size will be under particular pressure as margins on offshore assets are squeezed and European clients repatriate funds from Switzerland, according to Lenzhofer.
HSBC Holdings Plc’s Swiss private bank is above the 100 billion-franc threshold. The London-based bank might make an acquisition if it found a target with the right presence in emerging markets, Alexandre Zeller, the CEO of the company’s Swiss private bank, said in an interview.
RBS Coutts Bank AG in Zurich has less than a quarter of the client asset base managed by HSBC. Client funds at Barclays Plc’s Geneva subsidiary shrank in 2010 and were about 10 billion francs in April this year.
“It’s difficult to be a small Swiss bank,” said Gregoire Pennone, a spokesman for Banque Benedict Hentsch & Cie., a Geneva bank with fewer assets under management than Barclays. “But since we’re a young bank we don’t really have troubles with clients’ tax situations.”
Focus on Niche
Wealth managers of 10 billion francs and smaller should focus on niche markets to survive, according to Endres of Luzerner Kantonalbank.
While Swiss wealth managers are seeking to build networks in Europe and faster-growing Asian markets, those customers typically generate less revenue as local competition, higher personnel costs and lower fee levels squeeze margins.
“A client in Singapore is just not as profitable as an offshore European client in Switzerland,” said Florian Esterer, who helps oversee about $60 billion at Swisscanto Asset Management AG in Zurich. “As you start to grow your onshore emerging markets book, your margins will just come down.”
That will make it more difficult for smaller firms to compete with UBS, Credit Suisse and other global banks that find managing the wealth of millionaires an attractive alternative as more stringent capital rules reduce profits from trading.
“Smaller private banks will find it particularly difficult to manage a higher cost base and a lack of new money,” said Martin Schilling of PwC in Zurich. “We expect more sales of foreign banks, and independent Swiss firms remain the key buyers.”
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