Credit Suisse thinks the very rich can help it surpass UBS
Growth in ultra high net worth clients is helping the bank overtake UBS
Ten years ago Credit Suisse was the most prominent bank in Switzerland, overshadowing its troubled rival, UBS. The subsequent merger of UBS with Swiss Bank Corporation went on to push Credit Suisse into the shade. But attitudes are about to change.
Compared with UBS, Credit Suisse is relatively unscathed by the credit crisis. Its wealth business is on the front foot and bidding for global dominance through a variety of initiatives targeted at such areas as ultra high net worth clients and US opportunities.
Credit Suisse is renowned for its One Bank integrated approach, which encourages investment banking, asset management and private banking to work together.
It is convinced this appeals to the growing pool of ultra high net worth individuals, many of whom own businesses. The message from UBS on this front has been confused by its decision to divide the three at an operational level, although UBS said co-operation and cross-referrals will continue.
A Credit Suisse spokesman said: “We’re seeing attractive opportunities. The bank has hired lots of good talent and has the biggest global reach of all its peers. We’ve taken on many ultra-wealthy clients – a core market for us.”
Credit Suisse’s revenue has surged following the launch of its One Bank initiative in 2006. It has estimated that revenues resulting from cross-divisional collaboration were Sfr2.5bn (€1.5bn) in the first half of this year. It expects to make Sfr10bn during 2010, which would be a record for the bank.
A source close to the bank said: “Credit Suisse and UBS’ strategies are different. UBS’ private bank managed cheap funds for the investment bank, which was uneconomic. It meant UBS had to replace the loss of capital with risky assets. Credit Suisse investment bank will not offer a discount for in-house transactions.”
As its rivals flounder in credit-related losses and haemorrhage clients, Credit Suisse’s private bank, led by Walter Berchtold, is signing up a substantial number of them.
Over the past year its private bank picked up 450 relationship managers, many from Goldman Sachs and Citigroup. It plans to hire another thousand by the end of next year. The private bank grew its net new assets 8.2% to Sfr15.4bn in the second quarter this year.
It is offering new products to woo high and ultra high net worth clients. This includes a sophisticated investment fund, which sets the threshold for minimum subscriptions at $10m (€6.7m).
Credit Suisse also wants to attract more Middle Eastern clients, who have shown an appetite for a product that involves the bank offering more loans secured on investment portfolios. Credit Suisse is developing a higher profile in the US, where UBS is floundering. Its does not rule out making acquisitions.
According to Merrill Lynch and Capgemini, wealth is expected to reach $51.6 trillion by 2011, growing at an annual rate of 6.8%. The Middle East is one of the fastest growing regions, with high net worth population expanding by 11.9% a year.
Analysts say UBS’ woes are in inverse proportion to Credit Suisse’s success. UBS last week declared a second-quarter loss of Sfr358m, plus fresh credit writedowns taking it to $43bn. It lost client business totalling more than Sfr17.3bn.
By contrast, Credit Suisse enjoyed net wealth inflows of Sfr17.4bn, almost the mirror image of UBS, in the second quarter.
Pre-tax profits in the period fell 89% to Sfr281m. However, the results were an improvement on the first quarter, when investment banking pre-tax losses hit Sfr3.5bn, and 5% ahead of consensus estimates.
Credit Suisse said: “Given market conditions, these are solid results that demonstrate the resilience and earnings power of our business model and our success in reducing our risk exposures.”
Cubillas Ding, an analyst at Celent, a Boston-based financial research consultant, said: “UBS’ reduction in personnel numbers in its wealth business, in addition to cost-cutting measures, are likely to translate to a more sluggish pace of growth in these areas.
“This will allow competitors more leeway in gaining market share, as peers like Credit Suisse and Julius Baer have benefited from positive fund inflows and hiring being stepped up.”
Morgan Stanley analysts agree the two banks have divergent futures. In a recent report, Morgan Stanley said Credit Suisse private bank’s net new money will stabilise at 6% between now and 2010. By contrast, UBS may suffer outflows.
Ding added: “The damaging effects from the epicentre of the crisis within UBS’ investment bank have spread to the private banking franchise. Reputational issues are eating into the bigger wealth and asset management businesses.”
Despite these positive factors, Credit Suisse remains at risk from collateral damage from the credit crisis. In the first quarter it made Sfr5.3bn in writedowns on leveraged loans and structured products.
Net writedowns fell to negligible levels in the second quarter but chief executive Brady Dougan said: “We anticipate that the current challenging market conditions will persist over the near-to-medium term and we will continue to manage our business conservatively.”
Credit Suisse’s image has also been hit by the decision of UK regulator the Financial Services Authority to slap a £5.6m (€7m) fine on the bank relating to trading writedowns unearthed in February.
One analyst said: “It’s certainly not going to help their reputation, but it’s a relatively small amount and affected the investment bank rather than the private bank.”
The likes of UBS argue that risks result from putting different businesses in a single silo. UBS chairman Peter Kurer said: “Our review has clearly revealed the weaknesses associated with the integrated ‘one firm’ business model.
“Some of these weaknesses – such as the blurring of the true risk-reward-profile of individual businesses – are the source of substantial risk, as we have seen in the past few months.”
But other analysts say that the calling card for large banks such as UBS and Credit Suisse is the ability to service ultra-wealthy clients with one-shop private investment banking services.
A Credit Suisse spokesman said: “We want to be the premier bank globally, focusing on quality, not quantity. Of course size matters in a global business and it is our objective to grow globally in the core markets.”
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