Melanie stern is section editor of Families in Business.
The family-owned private bank is almost dead, or that's what we would believe if we looked at last year's results of Swiss banking titans, UBS and Credit Suisse. Who has avoided the acquisition net and how are they remaining competitive? Melanie Stern reports
Another quarter, another reason for UBS to gloat: Q3 2005 results at the Swiss banking titan were the best in its 155-year history, driven by a 21% increase in pre-tax profits from its global wealth management business – which houses its private banking activities, to h758 million. More than half of all new money brought in this quarter (h20.2 billion) came from this part of the business; being a fair bit smaller than UBS' corporate and investment banking operation, it's obvious which part of the bank is more lucrative and more efficient. Credit Suisse, UBS' closest rival in wealth management and private banking, reported a 42% growth spurt in that part of its operations reporting net income of €473 million.
Not only was the financial press kept fat last year with stories of such grande fromages soaking up the last of Europe's traditional 'boutiques', mostly family-owned private banks the numbers back up what seems to be an open-and-shut case: the family-owned private bank model as it stands is almost dead.
It may not be that final. There are survivors of the UBS acquisition trend, but the stronger ones are those who have made some big and not entirely happy changes to their business, their family holdings, or both. Earlier last year, the Baer family of Swiss bank Julius Baer made an historic decision to reduce its stake from a controlling majority to around 18%.
Earlier it had said it was closing down its Swiss equity sales business, underperforming against its strategy to focus on the product needs of wealthy private clients – while the Lombard and Odier descendents bought themselves a future as a serious corporate player with their 2002 friendly merger with Darier Hentsch & Cie. One striking difference between the merged Lombard Odier Darier Hentsch & Cie's corporate personality and its family-owned rivals is its history of being involved in forward-looking initiatives to carve itself a place in the future, having co-founded the Geneva Stock Exchange in 1852 and in 1991, the Swiss Electronic Stock Exchange. Meanwhile, Germany's 100% family-owned and run private bank Sal Oppenheim announced 2004 its 'best ever' financial year after the h59.6 million sale of its asset management arm, saying that its retail derivatives were one of its strongest performers – a telling revelation in itself about the changes in private wealth buy-side demands.
One trend among families realising this need for adaptation is outsourcing of back- and sometimes middle-office functions to larger providers. But this shift requires full and frank audit of the business, identifying parts the family believes it is strongest in and can make the most money in, from the parts it is weaker in and could offload to a better provider at a saving. "The banks that are most at risk of being snapped up are those that continue with their commitment to full-service private banking. They need to look again at their target audience when their cost-income ratios do not support it," says Seb Dovey, partner at London-based private banking think-tank Scorpio Partnership. "As a family-owned private bank that doesn't have scale [as per UBS et al], for every pound they get in, the cost of servicing that pound through back office and compliance can be too much to bear. Family-owned banks need to determine where their priorities lie and act on that."
One sentiment that many family-owned private banks still maintain is talking up their ability to offer extra-specially strong privacy versus their titanic non-family rivals. True, wealthy families are still paranoid about anyone getting hold of their accounts, but this subject has seemed to occlude other equally pressing challenges. "We firmly believe [that privacy is our market's best defence] in the fight for new clients and assets," Eric Sarasin, head of private banking in Basel, Geneva and Lugano for Bank Sarasin explains. "We remain positive about the value of this unique selling point in our daily service to our existing clients, as well as to its value for gaining new clients." In outsourcing its back office functions, a family bank can focus on providing this front office service."
The other unique selling point family banks have is exactly that – being family controlled. "You see a lot of 'the-end-is-nigh' type headlines about these banks now, but that's nonsense," Dovey believes. "As an independent family-owned bank you can naturally position yourself more closely to your customer base, because you can identify with them and them with you. Private banking is a relationship business. I don't think it is the end for family owners. This will go on being a fragmented business."