Trump’s Triumph Spells Better Times for Swiss Wealth Managersby
U.S. interest-rate rises seen as ‘blessing’ for private banks
UBS, Julius Baer benefit from dollar-denominated investments
Swiss wealth managers’ eight lean years may finally be ending.
Since the financial crisis, companies such as UBS Group AG and Julius Baer Group Ltd. have seen margins shrink amid record-low interest rates and a crackdown by the U.S. on banking secrecy. As the new government fuels expectations for higher interest rates, Switzerland’s banks stand to benefit because they still hold a large proportion of clients’ assets in dollars, said Martin Moeller, head of equity-portfolio management at Union Bancaire Privee in Geneva.
“These policy moves are a blessing for private banks, especially those with the bulk of client assets in dollars,” said Moeller, who manages 2.3 billion Swiss francs ($2.2 billion) in stocks including UBS shares, said by telephone. “They’ve been desperate for some relief.”
Higher interest rates in the U.S. could prompt wealthy clients to move out of cash and into higher-fee investment products, and allow firms to stop waiving fees on money funds. They could fuel a further rally in the dollar, boosting client assets when translated into Swiss francs, and allow the banks to make more on loans to the rich. Credit Suisse Group AG, Switzerland’s second-largest bank, has said it aims to almost double lending in its international wealth-management unit by 2018.
Switzerland’s private-banking industry, a pillar of the country’s economy, has shrunk as sub-zero interest rates in Europe have made it harder for companies to generate revenue. The rising cost of regulation and government-led initiatives against tax evasion have also weakened profits at firms that specialize in courting the rich from offshore hubs such as Switzerland and Singapore.
Yields on 10-year Treasuries have already risen more than a percentage point from their July low, accelerating their surge after Donald Trump’s surprise victory in the Nov. 8 election. Trump, a critic of the Federal Reserve’s ultra-low interest-rate policies, has vowed to increase spending on infrastructure and investors appear to be taking him at his word, fueling market expectations for higher inflation and rising interest rates.
Separately, the Federal Reserve raised interest rates by a quarter-point last month and signaled that three increases may be warranted in 2017.
Higher U.S. rates would benefit UBS, the world’s largest wealth manager. The Zurich-based company oversaw more than 1 trillion dollars for clients in its Wealth Management Americas business at the end of June, and more than a third of its non-U.S. wealth management client assets are in dollars.
Julius Baer, the No. 3 Swiss wealth manager, has 44 percent of its assets in the U.S. currency, according to company reports. While Department of Justice tax probes have discouraged many international managers from providing offshore accounts to rich Americans -- Julius Baer exited the business -- the dollar is also often the preferred currency of affluent people in emerging markets.
Almost half of Julius Baer’s revenue is in U.S. or Hong Kong dollars, compared with 14 percent of costs in those currencies, according to the company. The dollar’s 5 percent increase against the franc in the fourth quarter should, therefore, help improve the bank’s cost-to-income ratio.
Such conditions have contributed to a 35 percent drop in the number of Swiss private banks during the past decade, according to an August report by KPMG.
Pressure on Margins
“Gross-margin pressure has been relentless, in large part because Swiss rates are low,” said Mike Clements, who helps manage about 17 billion francs as head of European equities at SYZ Group’s asset management unit, and is invested in Zurich-based Julius Baer. “An easier U.S. rate environment will provide some respite from this.”
Private banks have also had to contend with clients who are often reluctant to trade and invest their money, Lucy MacDonald, chief investment officer for global equities at Allianz Global Investors, told Bloomberg Television’s Anna Edwards and Yousef Gamal El-Din in November. If those customers start taking more risks with their money and surpluses of cash are redeployed into equity markets, “wealth management looks interesting,” she said.
While U.S. interest rates are poised to rise further in the months ahead, there are no expectations that European rates will increase anytime soon. And although the Fed’s long-anticipated move in December was “a nice little kicker” for international wealth managers, it won’t compensate for the tougher European rate environment and other factors depressing earnings, according to Tomasz Grzelak, an analyst at Baader Helvea AG in Zurich.
Still, the prospect of higher U.S. borrowing costs has helped Swiss financial stocks pare their losses for 2016. UBS gained about 15 percent from the U.S. election through December, bringing last year’s decline to 18 percent. Julius Baer has climbed 12 percent, leaving it down 7 percent for the year.
EFG International AG, a Zurich-based firm focused on cross-border private banking, also ended the year on a high note. Its shares climbed 23 percent from the election through December, though they lost 42 percent during 2016 as investors digested the acquisition of Swiss competitor BSI SA. EFG reported a gross margin, a measure of revenue divided by client assets, of 84 basis points for the first half of the year -- down from 119 points in 2007.
For Manish Singh, chief investment officer of London-based Crossbridge Capital, 2017 heralds the end of deteriorating market conditions for financial firms and a glimmer of hope for those that can find ways to earn fees from the rich.
“A pick-up in economic activity means asset prices will increase, the wealthy will feel more wealthy, and managers’ margins will improve,” Singh, who helps oversee more than $3 billion, said by phone. “More appetite for risk, more trading activity, more lending. That’s got to have a positive impact.”