Credit Suisse’s collapse reshapes wealth management

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The UBS emergency takeover of beleaguered longtime rival Credit Suisse, hastily engineered by Swiss authorities to contain a widening crisis of confidence in the banking system and reduce market panic, may have come as a shock to many industry observers.

But Ray Soudah, founder of Zurich-based corporate finance consultancy MillenniumAssociates, believes the takeover has been in the making since 2008, when the 167-year-old institution rejected a government bailout during the financial crisis, unlike UBS.

Credit Suisse’s aggressive growth strategy since then has been marred by a string of mishaps, including fines and penalties related to tax evasion, misplaced bets and other issues — all of which have increasingly reduced the bank’s size. With restructuring becoming a regular event, “it was inevitable” that at some point the bank would be acquired.

The collapse of Silicon Valley Bank in the US was the catalyst that finally triggered the institution’s demise. “Most bankers don’t know how to run a bank,” says Mr Soudah, who believes recent problems at US banks and Credit Suisse are “self-inflicted”, similar to the “management failures” of 2008.

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The collapse of Silicon Valley Bank has highlighted the mounting problems at Credit Suisse

The forced deal, due to close by year end, combines Switzerland’s two biggest banks to manage a combined portfolio of client assets in excess of $3.4tn. “The outcome will be much less than the current sum of parts,” says Mr Soudah, predicting the new entity may lose up to 20 per cent of aggregate business within two years of the deal.

Good business sense

It may appear good business sense for UBS to acquire its rival at a discount price of $3.25bn, versus the previous week’s market cap of $7.5bn, but lack of experience of similar transactions among senior UBS management leaves it facing a “massive task”. The story may also have further chapters, predicts Mr Soudah, with a second bid, potentially encouraged by the Swiss authorities, “not out of the question”.

From a market stability perspective, this situation is far from ideal, as we are left with a single systemic bank, larger than it was before

Shelby du Pasquier

The loss of the historic bank could prove disastrous for Switzerland, says Shelby du Pasquier, head of banking and finance at Geneva law firm Lenz & Staehelin.

“From a market stability perspective, this situation is far from ideal, as we are left with a single systemic bank, larger than it was before,” says Mr du Pasquier, pointing to the 2008 rescue of UBS by the Swiss National Bank. While UBS “has come out stronger and is now a profitable and strong institution,” such events could happen again in future.

UBS, he says, could potentially come out of the story even stronger and more profitable, while being careful about which parts of the bank to take over and which to offload, bearing in mind that most problems were linked to investment banking.

As UBS soars to lofty heights, bankers on the ground are concerned with how the new entity will be restructured

Colm Kelleher, chairman of UBS said the bank wants to keep Credit Suisse’s Swiss operation, while announcing it “will be running down the investment banking part of Credit Suisse, because UBS itself has an investment bank-like model.”

The takeover is expected to result in many of Credit Suisse’s 17,000 investment bankers losing their jobs as UBS winds down their unit.

The takeover of Credit Suisse’s retail and wealth management business is more of a certainty, likely to be prefaced by trimming its “reportedly huge book of Russian clients,” adds Mr Du Pasquier. 

Massive job losses

The remaining “political headache” will follow a bloodbath of cut jobs, with as many as 40,000 jobs in the firing line. These cuts will affect Zurich in particular as UBS looks to cull overlapping roles and reduce Credit Suisse’s investment bank.

“UBS will need to act very quickly to identify those relationship managers they want to keep and reassure them they will have a place in the new organisation, to prevent them from leaving, taking clients with them,” says Mr Du Pasquier.

While over-extending itself in investment banking, following the acquisition of First Boston and DLJ more than a decade ago, Credit Suisse achieved success in offering an integrated proposition, believes Gerard Aquilina, partner at family office advisers Cone Marshall and former senior staffer at HSBC, Barclays and UBS. “Credit Suisse did a good job in addressing the primordial problem of getting investment bankers and private bankers working together,” he says.

UBS will need to act very quickly to identify those relationship managers they want to keep 

Shelby Du Pasquier

Clients will initially want to bank with institutions that are ‘too big to fail’, but many will vote with their feet once service levels fall, expects Kim Cornwall, a former senior banker who now provides learning and development training to banks and financial institutions. UBS may even welcome these losses if clients have assets of less than $20m with the bank, he says.

Benefiting smaller institutions

Smaller private banks will likely benefit, as they promote their boutique status and ability to better service clients, states Mr Aquilina, recalling his time as UBS vice-chairman more than a decade ago, when many mega clients “simply hated their experience there”. These types of clients, he believes, will take refuge with the likes of Pictet, Lombard Odier, Bordier and other small to mid-sized Swiss banks.

Clients may be concerned about being overexposed to the new entity, says Mr Du Pasquier, with many seeking to withdraw funds previously spread over both institutions.

The merger creates a “huge opportunity” not only for smaller private banks or Swiss cantonal banks, but also for independent wealth managers, believes Nicole Curti, CEO at Geneva-based independent asset manager Capital Y.

Nicole Curti, CEO at Geneva-based independent asset manager Capital Y, believes the merger is good for smaller banks, but is ultimately worried about the size of the new entity

Previously partner at multi-family office Stanhope Capital and today president of the board of the Alliance of Swiss wealth managers, Ms Curti predicts a crisis of confidence may drive the financial industry toward a new model, based on “smaller, leaner organisations, where the left hand knows what the right hand does,” as opposed to mega banks.

“People say ‘too big to fail’, but I say ‘so big it will fail’. Clients will feel safer with different institutions, including independent wealth managers who can look after them, overseeing all their banking relationships.”

Concerns about management and team turnover persuaded Ms Curti against relying on Credit Suisse for custody of her clients’ assets for the past eight years.

People say ‘too big to fail’, but I say ‘so big it will fail’

Nicole Curti

While UBS is one of her firm’s partners, Ms Curti now worries about erosion of “checks and balances”, with UBS left as Switzerland’s only large universal bank, “absorbed by all these internal issues they will have to resolve”.

The new entity is “too big for the country, and it’s too big to service clients” she says, sharing widespread concerns that issues at Credit Suisse may “contaminate” UBS.

UBS’s goal should be maintaining trust and confidence of its client base when integrating a business with “deep organisational issues”. It is also important to keep the trust of clients, both in the marketplace and in Switzerland in general.

“It is a challenge for all of us”, she adds, expecting that the government, regulator and UBS management will all be busy dismantling this “colossal entity”.

UBS Chairman Colm Kelleher (left) and Swiss finance minister Karin Keller-Sutter (right) still have work to do

Job losses from the merger may create an opportunity for independent wealth managers, overseen by Swiss regulator Finma since the start of 2023, to pick up quality staff, while some may decide to set up their own shop or join smaller private banks, says Ms Curti.

Whatever happens, one expected result of today’s banking crisis will be a knee-jerk reaction of increasing regulation, driving up costs for all banks. But former bankers are mostly sceptical of its effectiveness.

“As usual, regulators have failed and not one CEO has been held accountable of their mismanagement and corruption since Madoff and the 2008 financial crisis,” says Mr Aquilina. “People have short memories.”

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