Mid-sized banks rediscover former swagger

In the money: Bank Sarasin has seen its net profit rise by more than 50 per cent on last year Keystone

Switzerland's mid-sized banking sector is enjoying a revival in fortunes thanks as much to strategic changes as prevailing economic conditions, experts say.

Institutions such as Julius Bär, Vontobel and Sarasin together with newcomer EFG are reaping the rewards of aggressive international expansion in emerging markets and staff hiring sprees.

The sector has dragged itself back to prosperity since the dotcom bubble burst in 2001-2, but there could be a danger they overreach themselves as the revival costs start to mount.

For the moment half-year financial results show the sector to be in rude health. Bank Vontobel reported a 27 per cent improvement on net profit from 2006, Julius Bär posted a 28 per cent increase while Bank Sarasin and EFG recorded growth exceeding 50 per cent.

These results paint a completely different picture from the burst dotcom bubble era when the sector was perceived to be squeezed between the larger banks and smaller specialised boutiques.

Merger and acquisition rumours have faded since Switzerland’s biggest bank, UBS, quietly sold its Julius Bär stake in May. Basel-based Sarasin was the only bank to offer substance to the rumours when it sold a controlling stake to the Dutch Rabobank in January.

All have employed slightly different recent strategies: Vontobel specialises in investment banking, Julius Bär bought UBS’s SBC wealth management division, EFG aggressively hired client relationship managers – specialists in dealing with wealthy clients – and Sarasin sold its brokerage business and merged with Rabobank.

International expansion

But the one thing they have in common is expanding their operations outside Switzerland’s borders to actively find the growing wealth being generated around the world.

“The good economic conditions help, but that is not the full story,” Professor Hans Geiger from Zurich University’s Swiss Banking Institute told swissinfo. “We always knew that having a private bank in Switzerland would make money, but the key is to get the customers, and these banks have exported the model.”

He added: “Five years ago Julius Bär was a Swiss-based bank with some outpost in the United States, but now about a third of its staff is outside the country. EFG have more people outside Switzerland than inside.”

Bank Vontobel is using its office in Vienna to tap into eastern European wealth, while Sarasin attracted SFr6.1 billion ($5.1 billion) of new money in the first half of the year.

“The new record first-half result bolsters our conviction that we are on the right track in… our greater emphasis on international expansion,” Sarasin chief executive Joachim Straehle said last month.

But the race to hire more staff to manage the assets of the expanding wealthy classes comes at a price. Julius Bär’s costs increased 13 per cent in the first half of 2007 compared with 2006 and 19 per cent for Bank Sarasin.

Warning issued

Credit Suisse research analyst Oliver Müller told swissinfo that the banks must keep one eye on possible lean times in the future.

“They have changed their management structures and are trying to expand internationally, especially in Asia, to further leverage their franchise. As a result the top line is improving, but on the other hand they have had to acquire personnel in order to support that growth,” he said.

“They are posting a decent revenue growth but the price is high. This is a different situation to 2001-2 but the result could be the same three or four years down the road if growth decelerates and revenues increase at a slower rate but the cost base remains constant. That is the risk of growth.”

swissinfo, Matthew Allen in Zurich

Key facts

2007 first-half net income results:
Bank Vontobel: SFr168.4 million (27% up on 2006 first-half)
Julius Bär: SFr518 million (+28%)
EFG: SFr158 million (+56.9%)
Bank Sarasin: SFr101 million (+54%)