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DealTalk: Swiss banks court buyers as fear stalks industry
June 17, 2011 / 12:55 PM / 6 years ago

DealTalk: Swiss banks court buyers as fear stalks industry

<p>FThe building of the Union Bancaire Privee (UBP) is pictured in Geneva August 8, 2008. REUTERS/Denis Balibouse</p>

LONDON (Reuters) - Switzerland’s legions of small banks are struggling to arouse interest in their businesses from unenthusiastic buyers as they grapple with mounting costs and the pursuit of tax dodgers across borders.

“Banks with assets below $10 billion are looking for an exit, and many bigger ones are approaching owners, and investors to look for capital,” said one investment banker who asked not to be named because he was involved with these banks.

“Costs and regulatory requirements are driving the process, and these banks lack critical mass.”

Swiss banking is dominated by global giants UBS UBSN.VX and Credit Suisse CSGN.VX, but hundreds of smaller players in the past thrived off Switzerland’s ultra-strict banking secrecy laws, attracting billions from rich foreigners.

A crackdown by cash-strapped governments in the United States and Europe since the financial crisis has led to tougher - and costlier - regulation, an erosion of Switzerland’s coveted banking secrecy and squeezed margins.

But mid-sized banks seen as the most likely acquirers are wary of buying small rivals whose clients may be hunted by international tax authorities, and their assets will have to come cheap if they sell their business.

“We believe (small banks) will have to sell or give up their banking license and become wealth advisers,” said Teresa Nielsen, an analyst at Vontobel.

“What the price will be for such a wealth manager will depend on how many European offshore assets they have,” she said, because money held abroad may trigger the suspicion that it is undeclared for tax purposes.

Assets at many small banks have plunged since the financial crisis and the Madoff fraud as skittish investors pulled out money -- assets at Union Bancaire Privee have halved since peaking at almost $140 billion three years ago -- slashing their fee income and their ability to meet running costs.

A report last month by the Boston Consulting Group found the average cost to income ratio for Swiss offshore banks increased 5 percentage points to 72 percent last year, reflecting in large part, higher compliance costs and lower asset bases.

BUYERS’ MARKET

Swiss banking chiefs at larger institutions that could buy up and rescue the smaller rivals, have expressed reservations about doing so.

“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 results in February.

But with Switzerland in the process of signing deals to tax offshore assets held by German and British nationals, this obstacle to consolidation could be largely removed.

Another issue is the implementation of tough capital requirements, likely to be more rigid in Switzerland than elsewhere, which would limit how much money larger Swiss banks’ will have available to use on buying sprees.

“We are not actively pursuing mergers. Our primary focus is on building our capital base,” EFG International’s (EFGN.S) Chief Executive Lonnie Howell told Reuters in an interview.

Julius Baer BAER.VX has said it wants to make buys at home, but it is looking to buy a mid-sized rival and so is unlikely to offer a solution to small players being priced out of the market.

“We know the regulatory environment, we know the culture, and we are looking for something with assets north of $10 billion,” said spokesman Jan Vonder Muehll.

Switzerland is in part dealing with the consequences of having too many banks following an era defined by rapid growth and light touch scrutiny, said Sebastian Dovey, managing partner at consultant Scorpio Partnership.

“The problem now is sorting out banks’ operations and capabilities to work out the ones that really have a client base with investment potential that is worth buying in to,” he said.

“The simple fact is that at a lot of banks, the management really do not know the answer.”

Editing by Jon Loades-Carter

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