Te near death of once widely accepted banking secrecy has led to a period of soul-searching in Swiss private banking, as the industry strives to re-invent itself. It would not be an exaggeration to say the upheavals facing Zurich and Geneva call into question the industry’s ultimate survival. Moreover, a clear decision by all of the Swiss authorities to adopt internationally acceptable, stable solutions to the external demands on the industry in relation to tax evasion charges may trigger certain opportunities for M&A activity in Switzerland.
But the situation in its entirety is altogether a more complex and challenging one. In addition to external factors such as tax evasion crackdowns and increased regulatory demands to clean up the industry’s image and strengthen the international standing of the sector as part of an overall financial stability plan, questions around structural risks are also reaching a crescendo. An expensive and unsustainable business model is struggling to cope with inflows of un-hedged foreign currency revenues, while the local currency continues to appreciate and costs continue to rise. As a result, cost-income ratios remain as vulnerable as ever.
Given the harsh business environment prevailing across the Swiss financial industry, academics and traditionalists might be forgiven for predicting significant consolidation through M&A activity. Examining perhaps one key indicator, it could be argued M&A has been at a record high in terms of assets under management changing hands in recent months.
The acquisitions of Sarasin by Brazil’s Safra, ABN Amro Suisse by UBP of Geneva and Clariden by Credit Suisse amount to a funds transfer to new houses of nearly SFr200bn (E166bn) in managed client assets. Although these are sizeable movements, the two largest were a result of one-off special events, hardly describable as an industry consolidating due to catalysing factors such as cost or regulatory pressures.
Rabobank exited its non-core holding in Sarasin at a profit after years of holding on to a standalone subsidiary then selling it on to a non-consolidator. Credit Suisse, in pursuit of a one-bank brand, integrated Clariden, aiming to hold onto as much of the Clariden client base as possible.
Even the sale of relatively smaller ABN Amro Suisse appeared driven more by head office-induced restructuring efforts, selling off non-core assets to raise capital to satisfy national and EU bailout terms and regulatory capital increase demands, than part of a traditional consolidation process. Heavily anticipated sector consolidation has not yet taken place at anything like the required pace, especially considering present stresses and short and medium-term perceived negative outlook for the industry.
In reality, such consolidation has effectively been stopped dead in its tracks, for several important reasons. First, the number of ‘bona fide prepared buyers’ –those able to face business risks and integration challenges as well as outbidding competitors – has fallen dramatically since the 2008 financial crisis and its aftermath, with this fall accelerated by taxation assaults on Switzerland from its neighbours and US authorities.
In statistical terms, M&A advisers have been misled into believing the demand side was, or is still, high by repeated expressions of interest from frustrated would-be ‘false’ consolidators. Such ‘consolidators’ wish to examine every opportunity, but discard them quickly as they are not fully prepared, unable to handle the risks, and hoping to find cheap acquisition ‘jewels’ absent of any serious challenges.
Thought to be an exception by some is the recent putative (not yet closed) acquisition of Merrill Lynch's non-US business by Julius Baer.Here again it was driven by the seller’s parent to generate much needed capital (much less than originally touted) with the Swiss component of the transaction relatively small and more importantly the deal is in essence an acquisition of client portfolios with a floor price, not a takeover of a brand and total legal entity business.
In the true sense this transaction can be alternatively described as a large potential purchase of clients in the belief that most wish to be transferred and that their relationship managers are willing to move over to a new culture with a different business model.
Strictly speaking this event is not a forced Swiss consolidation but a reflection of home country banking realities and considerations. It is quite ironic that a US bank is shedding a significant international offshore business to a Swiss and Swiss-based bank in the midst of ongoing negotiations by their respective governments and institutions on the subject of recovering unpaid taxes due by reportedly previously undeclared funds by US nationals.
In detailed, post-mortem examinations of the numerous Swiss acquisition opportunities either not pursued or dropped midway, it became apparent that the majority have been abandoned not because of price competition, but other factors. In particular, risks associated with ‘undeclared’ client portfolios, be they regulatory risks, tax risks, compliance risks or client retention risks (which increase dramatically after change in bank ownership).
