The Great Debate UK
LONDON, April 23 (Reuters) – Swiss banking is not dead after all. Just a week after UBS admitted that it would lose 2 billion Swiss francs ($1.71 billion) in the first quarter, its smaller rival Credit Suisse unveils a profit of the same magnitude.
UBS’s entanglements with the Feds suggested Swiss banks, with their confidentiality, fancy products and high fees, were done for. But CS has shown that there is life in the old dog yet.
Some of the outperformance was illusory, as so often the case with investment banks. CS took a 365 million franc gain thanks to the further deterioration in value of its own debt. And there was a further benefit of an estimated 1.3 billion francs thanks to the “market rebound”.
However, the underlying performance was still much better than anyone had expected. CS has won share across many businesses thanks to the forced exit of much of the competition.
In the core private banking division, CS enjoyed a net inflow of 11.4 billion francs. Wealthy Americans seem to recognise that an Obama administration will not turn a blind eye to tax evasion or even avoidance: the U.S. is not high on the source list of funds. UBS clients withdrew 23 billion francs over the same period, so there has been a net loss to the Swiss system, even if not as severe as feared a week ago.
It appears that the rich around the world still value the “geographical diversification” (perhaps political too) and confidentiality that Swiss banks try to offer. Indeed, CS is on a hiring spree in Asia at a time when HSBC, Citigroup, Societe Generale and Barclays have all been shedding private bankers.
Like Goldman Sachs, CS also benefited from more trading and a bigger market share across a range of investment banking markets. CS shone in interest rates, American residential mortgage-backed securities and investment-grade underwriting, among others.
This result looks even more impressive when you consider that it comes at a time when CS has shrunk its balance sheet and also cut the amount of risk it is taking. Quarterly revenues more than tripled against the same period in 2008. However, investors should not read too much into this result. Trading volumes arising from the “market rebound” will surely tumble as some semblance of normality returns.
Moreover, there are signs that the world’s wealthy have learned some hard lessons from the crisis. Customers of investment banks everywhere now know that they were sold complex products simply to generate high fees for the banks.
CS revealed that clients had shifted out of securities into cash. Moreover, within their securities portfolios, its rich customers had reduced their holdings of “managed investment products”. Their holdings of structured derivatives products are languishing at half their peak levels and are unlikely to rise.
All of this translates into lower recurring commissions and fees. CS has responded with “more transparent, liquid and efficient solutions” — probably code for higher management fees. Making these stick if the products and pricing really are transparent may however be as tough a sell as a CDO these days.