The Swiss private bank fell from last year’s record highs. This week’s results from Julius Baer, UBS, Credit Suisse and Vontobel may confirm future trends.
In a presentation in May, Julius Baer leads Philip Rickenbacher, warned that the bank was leaking customer assets. His comment reinforced doubts about the profound impact of the financial market correction on the Swiss private banking sector.
EFG International, which is also listed, already seems to have confirmed this perception, reporting Thursday a drop in its profit.
After two record years in 2020 and 2021, the potential for disappointment is great.
Earlier this year, UBS reported its best first-quarter performance since the financial crisis, beating the relatively modest targets it set almost prematurely last February. This overrun makes the job all the more difficult for the CEO Ralph Hammer to impress investors with the bank’s results on Tuesday.
Credit Suisse‘s position is much more uncomfortable. The bank warned the market and investors that it would suffer another loss in the second quarter. In the first quarter, it posted worryingly weak business while continuing to weather a series of house fiascos.
Management under the CEO Thomas Gotstein and president Axel Lehman have taken no short-term steps to improve matters and are instead closely following the strategic shift announced last year.
The good tone
Rickenbacker appears to have struck the right tone for the environment the industry currently finds itself in, particularly against the monosyllabic responses from Credit Suisse and confident assurance from UBS. During his presentation, he indicated that cost-cutting measures, including personnel expenses, would offset the impact of higher technology expenses. Although his growth targets are still there, they have become more conservative.
Rickenbacker is doing well with analysts; in a widely discussed Barclays report, the UK bank recommended holding Julius Baer shares, while viewing UBS and Credit Suisse shares as a “sell”. UBS shares are down 5% year-to-date, Julius Baer is down 27% and Credit Suisse is down 40%.
Barclays analysts prefer Julius Baer’s looser margins, recurring revenue and capitalization requirements to the other two banks. They see UBS’s earnings projections as overly optimistic, noting that levels of invested assets, and therefore earnings, are highly dependent on market movements. They also don’t see much wiggle room in further cost cuts and doubt it will be able to buy back stock in 2023 the same way it has in the past.
Increase in capital?
The reason for selling Credit Suisse is pithy as the difficult environment coincides with internal challenges. The bank could thwart this by further reducing investment banking activity, but management will likely try to push through.
In May, media speculated that Switzerland’s second-largest bank would need to raise up to $1 billion in fresh capital in the second half. UK analysts also assume the bank is planning a capital raise over the next 12 months, further diluting its shareholders.
None of this is good news. Barclays analysts also believe that the Swiss private banking sector is facing lower volumes, less new money and lower (secured) Lombard loans, as well as general pressure on margins. They could also face so-called structural outflows due to ongoing geopolitical tension and further sanctions against exposed and wealthy clients.
Barclays also points to the possibility of the United States adopting sanctions against wealthy Chinese in the same way it did against Russia.
Such a move could affect up to $500 billion in assets held at the three banks, he said. Given the current uncertainty, it’s probably a virtue for managers at Julius Baer, UBS and Credit Suisse to keep an eye on costs and earnings as best they can.