Private bank valuations under pressure despite rally

ZURICH (Reuters) - A recent stock rally and the prospect of Asian growth may be lifting private bank valuations off historic lows, but tax concerns have taken the premium off undeclared wealth for good.

An improvement in the sector's fortunes owes much to a surge in financial stocks in Europe since March, helped by relief at the stabilization of the banking system and signs of recovery in global economies.

"Financial stocks have been gaining 50 to 60 percent since the bottom of the crisis. This is clearly to be reflected in prices, even of just private banks," said Alexandre Zeller, chief executive of the Swiss arm of HSBC Private Bank.

Still, analysts say that private bank valuations, estimated to be often less than 20 percent of pre-crisis peak levels, are unlikely to scale those highs again: exposure to undeclared Western assets hurts, though there is upside for Asian exposure.

The peak was reached in late 2006 when acquirers paid 6, and even 8 percent of managed assets, bankers say.

"Clearly there have been small transactions during the crisis of much, much lower prices. I have heard figures of 1 to 2 percent," said Zeller.

"What is the price (now)? It's very difficult. It is probably higher than the bottom of the market," he said.

Recent dealmaking has been driven by sellers needing to raise cash, analysts said.

German lender Commerzbank has sold two Swiss private banking units to Switzerland's Vontobel and LGT Group of Liechtenstein for undisclosed sums and Julius Baer said on Sunday it was open to discussing a deal for private banking assets being put on sale by Dutch bank ING.

"These transactions are not a sign of a consolidation wave of the private banking segment, but a sign of problems at the ownership level of the banks. Everybody knows this is the bottom of the market," said Ray Soudah, founder of M&A advisory boutique firm Millennium Associates.

"Prices are now between 0 and 1 percent of quality assets under management excluding net capital and the need for any negative adjustment for impaired assets not fully provisioned."

"These percentages are also very indicative as each asset has a different revenue attached," Soudah, who has followed many transactions in the private banking space, added.

ASIA, TAX IN FOCUS

Private bank consolidation, infrequent and opaque at the best of times, ground to a halt in 2007 and 2008 after the subprime crisis erupted.

Italian insurer Generali paid 1.9 billion Swiss francs to acquire Swiss wealth manager Banca del Gottardo and its 36.3 billion Swiss francs of managed assets, the last sizeable deal before the crisis.

Vincenzo Braiotta, an M&A expert at Binder Corporate Finance, said pre-crisis deals like the merger of UBP and Discount Bank & Trust Company DBTC, the acquisition of Hyposwiss by St. Galler Kantonalbank and the deal between Rabobank and Bank Sarasin run at between 4 and 5 percent of asset management.

The ING deal, however, may show slightly higher multiples. The managed assets for sale are estimated at $35 billion. A source close to the sale process in Amsterdam has said the bids lodged for the whole package of assets have come in close to $2 billion.

The valuation needs to take into account about $800 million of equity and the attractiveness of the bank's Asian assets.

Asian client money is less sensitive to tax issues and has better growth potential, said Vontobel analyst Tobias Bruetsch.

On the other hand, banks attach little or no value or even a negative valuation to Western undeclared money stashed in offshore centers like Switzerland, which has relaxed its bank secrecy after coming under pressure from G20 nations.

Undeclared assets vary between an estimated 5 and 40 percent of Swiss private banks' assets, Soudah said.

"Looking at the acquisition of Dresdner Bank by LGT and calculating on the back of the envelope the multiple on the asset under management, this was substantially lower (than pre-crisis) with 1 to 2 percent of AuM," said Braiotta.

"The explanation for such a low multiple can only be the valuation of the offshore business, which probably was zero or negative."

(Editing by Sitaraman Shankar)