Wave of private bank M&A set to break

Swiss private bank Julius Baer announced two strategic alliances last month aimed at building international scale at the same time as developing its core market focus in Europe.

Naturally, all eyes are on its cooperation agreement with Bank of China (BoC). More a commercial bank than a wealth manager, BoC has ambitions to be a full-service international player. Its alliance with Julius Baer will allow it exclusive access to a private bank.

At the same time, Julius Baer will be able to provide its clients with commercial and investment banking services in the Chinese market, as well as local investment knowledge. Julius Baer also benefits through the integration of BoC’s Swiss subsidiary in Geneva.

In Italy, Julius Baer is pooling assets with Kairos and taking a 20% stake in the combined entity, say reports. The venture will be branded Julius Baer SIM-Kairos and will have its own banking licence. The Swiss bank will retain an option to raise its stake or acquire the Italian venture.

Founded in 1999, Kairos is a wealth management and funds group with 115 staff, €5 billion under management and operations in Milan, Turin, Rome, Lugano, London and New York.

Both deals show a keen focus on up-and-coming wealth management players that are on a growth curve and would benefit from the firm’s Swiss brand. As alliances, these deals provide flexibility around management and culture that give the partners time to align on strategy.

There is a contrast between these deals and Julius Baer’s proposed acquisition of Merrill Lynch’s international operations, which would be a marriage of two well-established names with distinct cultures and diverse clients.

The Merrill deal would fast-track Julius Baer’s push to build scale by adding $90 billion in AUM to the Swiss bank’s $178 billion. This would potentially push Julius Baer into the top 10 global private banks, according to our Private Banking Benchmark.*

Taken together, these deals highlight the importance for wealth management players to build scale, international reach as well as depth in key markets.

Last month, Scorpio Partnership’s Private Banking Benchmark underscored the extent to which the dual forces of global regulation and economic turbulence are making operating conditions difficult for the wealth management sector.

Large international wealth managers outperformed smaller firms in terms of net new money, income and profitability, in spite of significant additional costs associated with global compliance challenges.

Firms that were successful through 2011 recognised the importance of accessing new growth markets and continued to invest in building their global reach, rather than becoming mired by the markets or distracted by the fast pace of regulatory change.

Achieving this focus was no mean feat. The big banks saw their costs spike 18% on average, underscoring the importance of management conviction to a growth strategy in last year’s unsettled operating environment.

Smaller firms, too, had a tough time. Europe’s sovereign debt crisis combined with the US deficit debacle highlighted spectacularly the structural challenges at the heart of the West’s economic meltdown.

Wealth managers whose businesses are concentrated in these markets had nowhere to hide. Net new money continued to dry up and the economic crisis pushed client risk aversion back to the levels seen in 2008-2009. In these conditions, it is hard for private banks to maintain their income levels.

Smaller Swiss banks, in particular, saw weakening performance across all key indicators, highlighting the need for these players to adjust to the new global wealth management reality.

That reality is characterised by lower margins in mature markets, increased costs of compliance and continued client caution. In numbers, it means cost-income ratios between 78% and 85%.

To be successful, firms either need global reach or a highly specialised approach. Larger firms may also examine their international books to determine if they have the right scale, reach and margin to justify the enhanced regulatory risk.

Meanwhile, the pressure for consolidation in the middle tier will probably throw up some interesting transactions in the coming months.

Julius Baer’s growth strategy in Asia, Europe and globally is evidence of one Swiss player taking on this challenge with a clear strategic focus.

* Scorpio Partnership publishes an annual Private Banking Benchmark ranking the top 20 global private banks by AUM. Its 2012 edition covered 201 wealth management entities.

Bank of America was listed top with $1.67 trillion in AUM, followed by UBS, Wells Fargo and Morgan Stanley all in the $1 trillion club. Julius Baer was listed in 16th place with $178.8 billion.