Swiss Banks Feel a Sudden Chill

Bulk up or die? Sarasin's deal with Rabobank may start a rush

Just a year or two ago, a marriage between a top-notch Swiss private bank and a foreign financial-services group would have been unthinkable. Yet on Mar. 4, Basel-based Bank Sarasin & Co. traded a 28% chunk of its shares for the international private-banking units of the Netherlands' Rabobank Group. That such an elite institution as the 161-year-old Sarasin would even consider joining forces with Rabo--a cooperative bank rooted in the farm business--is shocking enough. But what really stunned financiers is that Sarasin's 10 well-heeled partners gave Rabo an option to buy their shares and launch a takeover bid. The landmark deal, says Sarasin Chairman Georg F. Krayer, will "secure a successful long-term future for [Sarasin] in a challenging international environment."

Challenging, indeed. On the same day that Sarasin unveiled its alliance, it said last year's profit plunged 45.7%, to $100 million, and assets under management shrank 6%, to $25 billion. The story is much the same throughout the Swiss Private Bankers Assn., whose 15 members are largely grouped around Geneva's elegant Rue du Rhone and Zurich's affluent Bahnhofstrasse and manage an estimated $600 billion for the very rich. After a decade of go-go growth in which they sucked in billions of dollars from around the world, the likes of Pictet & Co. and other classy, conservative, and, above all, discreet institutions are losing customers and market share. The same is true of some of their bigger rivals, such as Julius Baer Holding Ltd. and Vontobel Holding, which are usually grouped with the banques privées, though they differ because they are not partnerships with unlimited liability. "Behind their solid oak doors and genteel brass nameplates, some private bankers are biting their nails," says one Zurich financier. "They fear their days could be numbered." Indeed, on June 3, Geneva's two oldest private banks--Lombard Odier & Co. and Darier Hentsch & Co.--said they will merge to gain more heft against bigger rivals and to cut costs.

The economic downturn of the last two years clearly has hurt the private banks' investment performance and profits. But they are also suffering on other fronts. For one, they have traditionally produced only average returns, and their clients are now demanding better performance. These clients are entrusting more of their money to global giants like UBS that boast superior information technology and costly specialist staff. Meanwhile, bank secrecy, long a main selling point for private banks, is under attack as Swiss authorities try to track down terrorist money in the wake of September 11. "Many of us are worried," admits one private banker. "Nearly every day brings bad news about banking secrecy."

As if that's not enough, private banks hemorrhaged billions of dollars this spring as Italians repatriated flight capital to take advantage of a tax amnesty back home. All told, about $25 billion has flowed back across the border to Italy. The big worry now is that other European Union countries could introduce similar amnesties.

To be sure, Switzerland retains its reputation as the safest of safe havens. And new money is coming in from trouble spots such as the Middle East. Michel Y. Dérobert, secretary general of the private bankers' association, notes that much of the money returning to Italy is being managed by Italian branches of Swiss banks or by partner banks there. And he argues that private banks needn't fear big rivals. "Competition has increased, and technology has become more sophisticated," he says, "but many of our clients still want to deal directly with the bank rather than with a computer." Moreover, some private bankers are confident they can adapt. Geneva-headquartered Bordier & Co. is outsourcing its info-tech systems to cut costs. Other banks, such as Zurich's Rahn & Bodmer, are hunting business from the merely rich--people with net assets of $1 million or so--rather than simply the superrich.

But Sarasin wasn't so sure it could adapt. The letter to shareholders explaining its deal with Rabobank said it could not realistically expect to achieve "the critical mass of assets under management" nor "the resources and distribution network required to develop a substantial international, onshore business."

Meanwhile, predators are circling. Deutsche Bank's new chief executive, Josef Ackermann, a Swiss, says buying a Swiss private bank would plug a hole in the German giant's wealth-management business. Britain's HSBC Holdings PLC has also been on the prowl. Zurich's gossipy cocktail circuit is alive with rumors that Vontobel or Pictet could be on the block. The banks decline to comment on rumors. It seems only a matter of time, however, before more private banks are private no more.

By David Fairlamb in Zurich

    Before it's here, it's on the Bloomberg Terminal.