The Swiss Come Out Of The Vault

Hunched intently over a conference table, puffing a Philip Morris and sipping a Diet Coke, Marcel L. Ospel is the model of a modern Swiss banker. A born trader who left school at 15 to apprentice with a stockbroker, Ospel, 42, is spearheading a high-visibility move by Swiss Bank Corp. into the rough-and-tumble world of trading options, futures, swaps, and other high-octane financial derivatives. "These are the products of the '90s," notes Ospel, an SBC board member. "We want to be at the forefront of the business."

Only a few years ago, such brash talk would have earned Ospel the scorn of more conservative colleagues all across Switzerland. Not anymore. While the plunging Tokyo stock market forces chastened Japanese bankers to beat a retreat from international markets, it's the once-stodgy Swiss, flush with capital, who are suddenly raising eyebrows. In securities trading, money management, and trade finance, Swiss banks are emerging as the ones to beat.

Some have already turned their international units into potent money machines. In his hillside office overlooking the church spires of downtown Zurich, Walter Knabenhans, chief trader for Credit Suisse, quietly tallies up the revenues its London-based affiliate, Credit Suisse Financial Products, has produced this year on its $300 billion portfolio. "In the first quarter, $120 million," says Knabenhans. "Ditto for the second quarter. It's almost unbelievable."

TIME BOMBS. While trading is perhaps the most volatile and high-risk area of international finance, the Swiss have little choice but to look outside their own borders for growth. Their once formidable ability to attract deposits from around the world has ebbed badly. A big reason: a nagging recession coupled with stubborn inflation that has eroded confidence in the Swiss franc. And global pressure has forced the Swiss to roll back their longtime pledge of absolute bank secrecy. Since 1987, bankers say, the estimated $1.1 trillion in assets the Swiss manage for investors at home and abroad has barely grown at all. "We're nothing special anymore," concedes Bank Baer Chairman Nicolas J. Baer. "We have to compete."

The recession has also battered bank balance sheets, prompting Moody's Investors Service Inc. to strip Credit Suisse and Swiss Bank of their prized AAA credit ratings. A drop of as much as 40% in housing prices is threatening to produce large losses in the banks' $300 billion home-mortgage portfolio. And commercial real estate vacancy rates are rising, with some 11.5 million square feet of office space now unoccupied in Zurich alone. "There are some unexploded bombs in domestic real estate," admits Credit Suisse executive board member Hans Geiger. "We'll have some headaches."

The Swiss already have their share of international headaches. To be sure, the major Swiss banks, with capital ratios still far exceeding international standards, haven't fallen to the level of such beleaguered institutions as Citicorp. Says SBC President Walter G. Frehner: "We're sleeping very well at night." Yet SBC is stuck with such shaky foreign credits as $140 million to the late publisher Robert Maxwell and part of a $150 million loan to the Reichmann real estate empire.

NEW PLAYERS. All of these pressures have spurred the Swiss banks' new focus on performance. Since 1990, when Credit Suisse rescued its First Boston Corp. affiliate, burdened at the time with $1.1 billion worth of problem bridge loans, CS has seen its stock market profits explode as Wall Street has blossomed. Swiss Bank, meanwhile, has been earning the envy of competitors by issuing new varieties of certificates of deposit that permit depositors to play the stock market. Based on equity swaps, the new CDs are one of the most successful products to emerge from a joint venture formed in 1990 between the bank and O'Connor & Associates, one of Chicago's most profitable options-and-futures trading groups. With O'Connor now accounting for 1% of the daily trading volume on the New York Stock Exchange and 8% of U.S. equity-option activity, the venture generated more than $70 million in revenues for SBC in 1991, says SBC's Frehner. Swiss Bank recently took over the entire partnership.

Meanwhile, Union Bank of Switzerland, already a major player in the London stock market, has taken over Chase Manhattan Corp.'s U.S. money-management unit and emerged as one of Wall Street's top program traders. Even the smaller fry are on the move. Bank Baer, with just $4 billion in assets, is launching its first mutual fund in the U.S.

Back home, the Swiss are cutting costs and restructuring. After last year's scrapping of a longtime pact that barred lenders from competing on interest rates, nearly 100 small banks have merged with larger competitors. The big banks are rushing to replace branches with automatic teller machines. And they are moving forcefully to modernize Swiss bourses to generate even more trading profits. What sells now is performance--and the Swiss seem determined to come through, even if it means they must take some uncharacteristic risks.

                            Earnings      Percent
                          per share*      change
                         1991    1992**
      SWITZERLAND        $223     $263     18%
      SWISS BANK           26     29       12
      CS HOLDING          197     218      11
      *Bearer shares**Estimate