What is the «Trump» effect on dealmaking among private banks, how can banks cut costs more intelligently, and why does it make sense for smaller firms to think about giving up their bank license? AlixPartners consultant Ralph Kreis tells finews.com what to expect on the dealmaking front in the next few months.
Mr. Kreis, How do you see consolidation in the banking sector in the next weeks and months, given the surprising outcome to the U.S. presidential election?
It’s here to stay. If markets and the economic outlook remain as they are, consolidation should accelerate, but the trend running counter to this is persistent uncertainty in Europe after Brexit and what influence the Trump presidency and U.S. policy will have on financial markets – that’s going to put the brakes on a few things.
To consolidate, banks have to be able to form a judgement about the current and future market environment, how the transaction impacts their activities and affects their target setup. Finally, the question really is, do they want to add the additional risk of a transaction on the uncertainty of the current situation?
«More strategic deals: buying diversification or expertise»
Another factor which has hampered deals until now is the pace of change in the industry: no other sector has seen as many transformative changes in the last less than ten years than Swiss banking. When looking at deals, which are almost always hugely disruptive for both seller and buyer, organizations are also thinking about how much change they can expose their employees and organizations to.
I think we’ll see more transactions based purely on strategic logic: buying diversification, or expertise which allow me to better serve my target market. The pressure to consolidate is here, and it’s being compounded by cost pressure and regulatory changes.
Switzerland is still quite attractive as an offshore haven for a variety of reasons including political and currency. What do Swiss banks need to do to benefit from that?
Banks need to give careful thought to what their offering is, for which clients, where they can truly compete, and differentiate themselves from the competition, which incidentally is no longer simply other offshore Private Banks but also increasingly local players in the client’s home country.
Costs are also a constant theme, but I would like to see more «intelligent» cost-cutting, like closing some activities where banks are no longer competitive, instead of the broad-based cuts we have seen. This means making very specific decisions about what the bank is no longer going to do, and thinking about where it could reinvest those funds for growth.
As a result of the clean-money strategy, there’s been a tendency to cut all over except in control functions, but now banks need to «profitize» their activities more effectively as well as industrialize them in order to ensure that they can remain competitive in the mid-term.
What are some of the options that smaller firms should be thinking about in terms of their setup?
It’s common knowledge that if I don’t have a particular forte and I’m simply living off the old private model, I’m a dying breed. Either I reinvent myself, find something that distinguishes me from my competition and convince my clients of its value, or I’ll slowly disappear.
That doesn't necessarily mean I have to give up completely and put myself up for sale; it could mean that I’m cooperating far more closely with other players in areas which are highly commoditized today, like cross-border rules, investment capabilities or custody. There are numerous players in the market that smaller firms can plug into for these types of services and benefit from rather easily.
«Identity question: do I need a bank license?»
We are seeing smaller firms float test balloons to see if they can distinguish themselves and their investment process, or with a specific innovation that is unique to them, or cultivate a niche, while others appear to be waiting it out and risk falling into the dying breed.
In terms of the niches, we’re seeing an interesting identity question among money managers in general, who are asking themselves whether they need to be able to book assets themselves, for example. I don’t think so: if I have a clear competitive edge on what I do, I don’t have to do everything myself, and can buy certain services, reduce my own complexity and focus on my strengths.
Giving up a bank license as part of a focus and concentration as a wealth manager is undoubtedly a dramatic step, and would lead to some clients leaving. But it could also allow firms to take a step forward, to sharpen their profile, to acquire new clients, and to attach to another platform as the market develops and new opportunities arise.
Buyers can be choosers. What does that mean on a practical level?
It is a buyer’s market, so it’s natural that we’re going to see a lot of cherry-picking in banking transactions. Either I can purchase an entire firm – with all the advantages and drawbacks – or I can carve out the best bits, those which best suit my existing activities, and buy only those.
Buying an entire bank even if I don’t need or want all of it is easier in some respects: I can wind down the existing vehicle and then integrate it, ideally cleaning up and sorting out the assets I want to keep before closing the deal. Carving out assets can be a little more complicated. Buyer and seller have to settle on a process, clients and relationship managers have to be convinced to join the buyer and there will inevitably be some clients who won’t find a new home in the acquiring firm.
«Avoiding trouble with clients down the road»
It’s a matter of agreeing how to proceed in an efficient a manner as possible for the client and the seller, and also make it as legally and financially certain as possible for the buyer and the seller, who both want to avoid trouble further down the road.
Both situations today usually involve ending a client relationship. This process was the exception before 2006, it practically never happened except in the rare criminal cases. To «exit» a client because they aren’t profitable enough or they belong to a market that the bank has decided to give up is very novel.
If banks were a bit clumsy with doing so in the beginning, they have become more professional about it. There is an attempt to make it a good experience as opposed to being made to feel you’re bring thrown out on your ear.
What are some other opportunities to cooperate?
I think the digital wave is going to be a huge challenge for banks. Much like relationship managers need to learn everything about the regulation in the markets they are active in, banks also have to ensure that they can customize their offering in a digital way that fulfills all rules and regulations.
This is going to mean considerable costs, especially for small- and mid-sized firms who want to ride the digital wave. This is one area where banks can economize: there are a number of firms today that offer solutions for wealth managers. It goes back to a question of identity: firms will have to ask themselves whether they’re obliged to do everything on their own or if they buy services that are available in the market.
«A question of options - not always a pretty picture»
It’s also a question of options, and that’s not always a pretty picture. Firms with subcritical size have to partially abandon what they have been doing until now, and usually immense pressure is needed to make major changes like these. I think many firms are feeling the pressure, but they’re not standing with their backs against the wall and they are not forced to react yet.
The industry is still quite profitable, and many have revenue streams on their current client books which allows them to survive, if not thrive. Their revenue is dwindling, but it’s still there. A decision to break with that, take a step forward and give up part of the business and invest for growth is a very difficult one.
Ralph Kreis is a consultant with AlixPartners in Zurich. He is a former UBS banker and veteran observer of Swiss banking who joined Alix earlier this year from Boston Consulting Group (BCG).
