Cleaned-up Swiss private banks seen as M&A targets

ZURICH/FRANKFURT Wed Mar 30, 2011 10:21am EDT

A man uses his cell phone as he walks past a logo at the entrance of Swiss bank Julius Baer Group headquarters in Zurich October 6, 2008. REUTERS/Christian Hartmann

A man uses his cell phone as he walks past a logo at the entrance of Swiss bank Julius Baer Group headquarters in Zurich October 6, 2008.

Credit: Reuters/Christian Hartmann

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ZURICH/FRANKFURT (Reuters) - The latest clampdown by German and U.S. authorities on tax-evading clients at banks such as Credit Suisse (CSGN.VX) could make Swiss wealth management firms alluring takeover targets, bankers say.

That is because smaller Swiss private banks have been intensifying their cleanup of untaxed assets in an effort to limit the attention of foreign authorities, reducing risk for potential acquirers.

"The predators won't wait too long," said one M&A investment banker, who asked not to be named as he has an interest in these deals. "They will take a certain risk by buying the most attractive, cleanest banks and then take care of cleaning up any undeclared 'black' money."

Valuations of private banks have been falling. Having fetched up to 5 percent of assets under management before the financial crisis, they will typically command only 1 to 2 percent now.

That could present a mouthwatering opportunity for global banks such as Barclays (BARC.L), which makes no secret of its aim to become a top five wealth manager, and Wells Fargo (WFC.N) and Morgan Stanley (MS.N), whose wealth management arms have both flagged a willingness to do deals.

Pierre De Weck, head of private banking at Deutsche Bank (DBKGn.DE), said the combination of dual taxation agreements and a tax evader clampdown will pressure Swiss wealth managers clean up their books.

De Weck declined to comment on what this could mean for Deutsche's expansion plans. But asked whether these factors make Swiss wealth managers more attractive as targets, he said: "Perhaps in the medium term, but not in the short run."

The reason is, without clarity over the quality of the assets, bankers worry they may be acquiring a bunch of untaxed assets and a heap of trouble as the United States, Germany and others are stepping up efforts to flush out tax evaders.

"In every takeover there's the problem of undeclared assets. Do we want to subject ourselves to that? Hardly," Bank Sarasin BSAN.S Chief Executive Joachim Straehle said when the bank reported 2010 results in February.

In July, Straehle had said Sarasin was in the market for buys, but saw few suitable targets at the time.

CLEANUP HITTING VALUATIONS

So which banks could be targets? Names could include those banks which lost most ground on rivals during the financial crisis, bankers said.

The most commonly cited names include Union Bancaire Privee, which lost half its assets to client withdrawals and investment losses, but has settled litigation concerning its Madoff losses; EFG (EFGN.S), which recently spun off its disappointing hedge funds unit; and Julius Baer (BAER.VX), which some see as a choice target for a big-league player.

A key underlying concern for the sector is that political pressure to roll back customer confidentiality is causing some clients to flee Swiss banks and deterring many potential clients from coming on board. This is reducing inflows and limiting the amount of fees collected on assets, putting pressure on margins especially at smaller banks.

In the United States officials are investigating other banks after UBS (UBS.N)UBSN.VX paid $780 million in 2009 and agreed to hand over nearly 5,000 account names to the U.S. government to settle tax evasion charges.

An indictment by U.S. officials earlier this year charged four bankers who worked or had worked at Credit Suisse with encouraging Americans to dodge taxes.

In October Switzerland agreed to introduce a withholding tax on deposits as part of a tax accord with Germany. Germans hold an estimated 200 billion Swiss francs ($219 billion) in untaxed assets in Swiss accounts.

This dual taxation deal offers a way for Germany to tap some undeclared assets without Switzerland having to completely abandon secrecy. A similar agreement is being hammered out with Britain.

The rising costs of complying with new rules will add further impetus for smaller banks to seek economies of scale as their shrinking or stagnant asset base no longer provides an acceptable level of profitability from management fees alone. As the M&A specialist noted: "The main reason for consolidation is that private banks need critical mass in terms of assets under management to meet their various costs."

(Editing by David Holmes)

($1 = 0.9149 Swiss franc)

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