Pictet & Cie. and Lombard Odier & Cie. are adding client assets faster than their biggest rivals as Geneva’s largest closely held wealth managers adapt to the demise of Swiss banking secrecy.
Assets under management at Pictet exceeded the 2007 pre-crisis peak last year and rose to a record 301 billion Swiss francs ($311 billion) at the end of March, the firm said. Lombard Odier said assets climbed 15 percent to 164 billion francs in 2012 as Geneva’s oldest private bank met its target of attracting 7 billion to 8 billion francs of net inflows.
Pictet and Lombard Odier, founded in the wake of the French Revolution, are outpacing the average growth rate among the world’s 20 biggest private banks, said Sebastian Dovey, head of London-based research firm Scorpio Partnership. The Geneva firms are vying with UBS AG and Credit Suisse Group AG (CSGN) for emerging market millionaires as a global crackdown on tax evasion forces European and American clients to withdraw funds.
“Pictet and Lombard Odier are in a class of their own among the Geneva private banks,” said Dovey. “They’re both globally-recognized franchises with alluring international brands.”
Pictet was 11th and Lombard Odier 20th in Scorpio’s wealth manager ranking published last July. The list was headed by Bank of America Corp. (BAC) and Zurich-based UBS, which both had assets in excess of $1.5 trillion.
The Middle East and Latin America remain growth regions for cross-border centers such as Geneva, said Bernard Droux, a managing partner at Lombard Odier and president of the Geneva Financial Center, a lobby group.
“We are seeing net new money coming into most major Swiss private banks,” said Droux. “The bankers’ expertise, Switzerland’s political stability, the strength of the Swiss franc and quality of life all make Geneva attractive.”
Fitch Ratings Ltd. rates both Geneva firms AA- based on their low balance-sheet and credit-default risk and diverse sources of revenue. UBS (UBSN) and Credit Suisse have ratings two steps lower, which reflects the risk profiles of their investment banks.
“Pictet and Lombard Odier are better placed than smaller competitors to mitigate the challenges,” said Christian Kuendig, a financial services analyst at Fitch in London, who points to their ability to open branches outside Switzerland and attract pension funds and other institutional clients.
Pictet, which was involved in financing the Ohio-Mississippi railway in the mid-19th century, reported 13 billion francs of net inflows last year. The bank also employs 662 people to help manage 115 billion euros ($151 billion) for institutions.
Lombard Odier, which helped finance shipping lines and railways at the beginning of the 19th century after its foundation in 1796, has increased its asset-management business by more than 40 percent to 38 billion francs since 2008. The bank hired Carolina Minio-Paluello as deputy chief investment officer from Citigroup Inc. earlier this month. She will report to CIO Jan Straatman, who joined from ING Groep NV in December 2011.
Geneva wealth managers with less than 10 billion francs of client assets should consider cutting fees and offering new services such as corporate advisory or private equity, according to Martin Schilling of PricewaterhouseCoopers AG in Zurich.
“I would be really surprised if they could survive without adapting their business models,” Schilling said. “Clients are more demanding and margins will be lower and if you want to be successful you have to offer a niche, something special.”
A quarter of Swiss private banks are no longer operating profitably, with smaller wealth managers facing a “critical” situation as fees drop and compliance costs increase, KPMG said in December. The number of banks in Switzerland dropped to 312 in 2011 from 330 in 2007, according to the Swiss National Bank, which publishes figures for 2012 next month.
Pictet and Lombard Odier are attracting new clients as Switzerland tries to shed its image as a tax haven amid a U.S. probe of whether the country’s biggest banks, including Credit Suisse and Julius Baer Group Ltd. (BAER), helped Americans evade taxes.
Pictet is cooperating with a “general inquiry” from the Justice Department, the bank said in November, adding that it’s making it a priority to ensure that business with U.S. clients complies with laws and regulations. As many as 30 percent of Geneva’s banking jobs may be eliminated amid an “avalanche” of new laws and regulations, bank managing partner Nicolas Pictet said last June.
Switzerland proposed a bill today that it says paves the way for the country’s banks to resolve a tax-evasion dispute with the U.S. The bill authorizes Swiss banks to cooperate with U.S. authorities and transfer information while safeguarding their interests, the government said in a statement.
The Swiss government has been in talks with the U.S. for more than two years to end a DOJ investigation of at least 14 financial firms. That will force wealth managers in Geneva and Zurich to raise their game, said Martin Brown, a professor of banking and finance at St. Gallen University in Switzerland.
“I don’t think it’s sufficient to have good dining manners and be good at golf,” he said. “Good bankers are going to distinguish themselves by providing sound and independent advice, now that the tax advantages won’t matter anymore.”
Net inflows at Pictet and Lombard Odier may slow in the coming quarters after the banks decided in February to end the unlimited personal liability of their managing partners, said Dovey. The existing structure, where eight managing partners share the profits but assume personal liability for losses, was a “selection edge” for many clients and enabled the two banks to charge higher-than-average fees, he said.
From Jan. 1, the two banks will establish corporate partnerships overseeing limited liability companies, a structure that is simpler for international regulators to understand and that will make it easier for the bank to grow overseas, according to Pictet Senior Managing Partner Jacques de Saussure.
“Clients choose us less for our legal structure than for our management skills, our performance and our financial solidity,” Pictet said in an e-mailed response to questions.
Hans Geiger, a retired Swiss banker and professor of banking at the University of Zurich, isn’t so sure.
“They’ll lose their key distinction. They’ll lose their magic,” said Geiger. “Geneva will still be a private banking center in 20 to 30 years, but the question is whether it will be strong, profitable and growing?”