Beat Wittmann, a Swiss banking expert with three decades of experience, in an interview with finews.com advocates a merger between Credit Suisse Switzerland and Julius Baer. The international business of Switzerland's No. 2 could go on to present itself as a 'super merchant bank'.

Beat Wittmann, the big European banks don’t seem to have overcome their problems after the financial crisis of 2008. Why is that?

Many governments do all they can to keep their big banks as ‘national champions’. That’s how the enormous structural surplus capacity can persist. In truth, nobody needs Germany’s Commerzbank, Bankia from Spain or Monte dei Paschi di Siena in Italy.

The circle of shareholders of such banks often is extremely fragmented and prevents change. This makes is very difficult for activist shareholders to take influence. That’s also how wages of board members and executives can stay at such extreme levels, detached from the long-term development of value and strategy.

«The winner takes it all»

Last but not least, there’s still a policy of ‘last man standing’ prevailing, in the hope that market share is to be won through the failure of competitors.

U.S. companies have been bursting with strength for years. What was it that they have done better?

The U.S. Federal Reserve bank, stock exchange supervisor SEC and the Treasury shortly after the crisis forced big institutes to recapitalize, to write down radically, to merge where necessary and adjust their business models and strategies. These were the preconditions for the recovery.

Since then, banks have steadily improved profitability and increased their market share – to the detriment of non-U.S. and in particular European banks. The current trend by the U.S. administration to deregulate and the normalization of U.S. monetary policy are amplifying this effect, in line with the credo of ‘the winner takes it all’ – which the Americans evidently are.

In Switzerland, for one-and-a-half years, Credit Suisse (CS) has been struggling with another reorganization. How confident are you?

Judging from the developments of the past 30 years, there is little reason to be optimistic and hopeful and wishful thinking is no strategy. Like the great majority of European universal banks, CS is undergoing a major reorganization once every business cycle – eight to ten times in total already – and shareholders have witnessed an epic destruction of value.

Will the planned IPO of the Swiss unit be of any help?

Currently it looks as if the initial public offering will be called off again – probably as the healthy profits achieved in Switzerland help cover for the problems of the international business.

«Shares of European banks are at historic lows»

Shares of (CS Switzerland) would be worth buying if such a CS Switzerland was going to actively consolidate the Swiss asset management market, for instance by merging with Julius Baer. CS would be able to position itself as a ‘super merchant bank’, in line with its historic DNA and – in a certain way – in keeping with its founder Alfred Escher.

Why is it so difficult for big banks to improve capitalization?

Deutsche Bank is an excellent example. Good money has endlessly been used to cover for bad money, undermining the credibility necessary to attract new investors.

The management never substantially adjusted the business model or its strategy. The bank never sold assets that weren’t part of its core business and there is still a gigantic cost savings potential. I cannot help thinking that the top management is being guided by the personal compensation and the principle of hope.

Would you invest in big European banks?

Valuations admittedly are at historic lows and positive factors are gaining in importance. The consolidation by way of the EU banking union is a good thing. From an economic perspective, there is a certain reflation, which translates into an improved consumer, business and investor confidence.

Also, there’s been a significant flow of capital for mergers and acquisitions from the U.S. to Europe for quite some time, and Chinese investors are strongly interested in European, and in particular in Swiss companies. Based on this, I would invest in big European banks through an index, because it is cheaper, and evaluate especially interesting cases separately.

Examples for such special cases are spin-offs at universal banks, for instance in asset management; fintechs and infrastructure firms, deep value/distressed opportunities and candidates for shareholder activism.

Beat Wittmann is the chairman and a partner at Zurich-based Porta Advisors, an independent financial advisory. His career in banking spans the best of 30 years, with stints at UBS and CS as well as Clariden Leu and Julius Baer. In the years from 2009 through 2015, Wittmann first worked as an independent asset manager and under the roof of the Raiffeisen Group.