Switzerland’s financial industry is ripe for deal-making as more banks make peace with U.S. tax prosecutors, the chief executive officer of Julius Baer Group Ltd. (BAER) said after announcing his latest acquisition.
Switzerland’s third-largest wealth manager agreed to buy the European operations of Bank Leumi Le-Israel BM (LUMI) as the two banks prepare to settle charges that they helped Americans evade taxes.
“There will be M&A activity resulting in disposals and mergers of banks,” CEO Boris Collardi, 40, told reporters on a conference call today. He gave voice to a trend that has already begun as foreign legal probes, low interest rates and the mounting costs of regulatory compliance erode returns.
Julius Baer surged as much as 8.8 percent, the most since October 2009, after reporting an increase in profit for the first half of the year and saying its integration of non-U.S. Merrill Lynch assets acquired from Bank of America Corp. was on track. It was up 8.3% at 39.60 francs at the close of trading in Zurich.
In April, Morgan Stanley agreed to sell its private banking business in Switzerland to J. Safra Sarasin Holding AG. HSBC Holdings Plc last month sold some client assets to LGT Group, the bank owned by the family of the prince of Liechtenstein. Standard Chartered Plc is seeking a buyer for its Geneva private bank.
Julius Baer said it has entered into a “strategic cooperation agreement” with Bank Leumi and will acquire the Tel Aviv-based bank’s wealth operations in Switzerland and Luxembourg.
Leumi’s private banks in Switzerland and Luxembourg have about 5.9 billion Swiss francs ($6.6 billion) and 1.3 billion francs under management respectively, Zurich-based Julius Baer said. The transaction, expected to be completed in early 2015, calls for a goodwill payment of 10 million francs in cash.
“Leumi was a very good opportunity to pick up,” Collardi said in an interview with Bloomberg Television today. “It was too good to pass.” The capital impact from the transfer of the Swiss business is between 60 million francs and 70 million francs, Julius Baer said.
The two firms are among about a dozen Swiss wealth managers under investigation by the Justice Department. More than 100 other Swiss banks entered a disclosure program at the end of December to try to negotiate settlements. Both the criminal probes and the disclosure program will accelerate mergers, according to Collardi.
The investigations of Julius Baer and Leumi follow a $780 million settlement in 2009 by UBS AG, Switzerland’s largest bank. In May this year, Credit Suisse Group AG’s main bank subsidiary paid $2.6 billion and pleaded guilty to helping Americans cheat the Internal Revenue Service. Switzerland’s No. 2 lender reports second-quarter earnings tomorrow.
Julius Baer has said it expects to pay a penalty to settle its tax dispute and can’t reliably assess the size of the fine. The bank gave no new information on the matter today.
“The discussions are ongoing,” Collardi said. “In the end we will find a fair and equitable solution for the group and I think we can reasonably say that this is now a topic of a few more months and not years.”
Bank Leumi said last month that it was in discussions to settle with the Justice Department and two people familiar with the matter said the deal won’t include a guilty plea. Liability for resolving Leumi’s dispute will remain with Leumi’s parent company, Collardi said.
“We are in advanced talks with the U.S. Department of Justice in order to reach a final resolution,” Lee Neumann, a spokesman for Israeli bank, said today by telephone.
Net income climbed to 178.3 million francs, up from 114 million francs a year earlier, according to the Julius Baer’s half-year financial report. Gross margin, a measure of operating income divided by managed assets, narrowed to 95 basis points from 102 basis points a year earlier. A basis point is a hundredth of a percentage point.
Adjusted profit, which strips out certain expenses and provisions, advanced 10 percent to 288 million francs. Net new money of 7.5 billion francs was near the top of the bank’s target of 4 percent to 6 percent growth in annual terms, helping boost managed assets to 274 billion francs at the end of June, from 264 billion francs two months earlier.
The Leumi deal shows Julius Baer’s “acquisition-driven business model” is still intact, with “a list pages long” of companies that want to get out of unprofitable private banking markets, Tim Dawson, a Geneva-based analyst at Helvea SA, who has a hold rating on the stock, said in a telephone interview.
Integrating Merrill Lynch’s international wealth businesses “continued successfully” in the first half of the year, Julius Baer said. While the transaction may add 60 billion francs in client assets, the bank is cutting jobs as the integration is initially seen weighing on profits.
The deal, which includes units in about 20 locations, such as Switzerland, the U.K., Hong Kong and Singapore, has added about 50 billion francs of client assets booked with Julius Baer so far, the company said in today’s statement. Julius Baer revised down transaction, restructuring and integration costs to 435 million francs, from a previous estimate of 455 million francs.
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