The market for bank takeovers has remained surprisingly dry in Switzerland. This is something that could be about to change, Jean-François Lagassé, who is head of banking consulting at Deloitte Switzerland, told finews.com.

Mr Lagassé, if we go by recent market rumors and share price movements, mergers of big banks are suddenly on the table again. Has something changed fundamentally after many years have passed without such deals taking place?

Not really. There have been no cross-border mergers between big banks in Europe since the financial crisis. On a national level, we have seen some mergers in Spain and Italy. But those were probably born out of necessity. So for 14 years not much has moved in the European consolidation- and I don't see why that should suddenly change unless there are black swan events taking place.

Where do the hurdles lie? Still in politics?

European governments still favor keeping their national banking champions instead of seeing a consolidation of the sector across Europe. The United States of America has gone through this consolidation during the last financial crisis. The four largest banks control 50 percent of the banking market in the USA.

Would official Switzerland also put up a fight if a foreign institution wanted to take over a major local bank?

The regulator would certainly scrutinize such a bid and pay particular attention to safeguarding the interests of clients and the stability of the financial centre. From this point of view, only a very limited number of companies would even be considered for such a bid.

But there are smaller deals that are taking place. In June, the Graubuendner Kantonalbank surprisingly took over the Zurich BZ Bank. So consolidation is rolling on the domestic front after all?

It is noticeable that there have been far fewer transactions than usual this year. Last January, the Geneva private bank Gonet took over the local competitor Degroof Petercam. This was essentially an exit of the foreign parent company, and we were allowed to accompany this sale. Since then, things have remained quiet - apart from BZ Bank now. In this transaction, the focus was probably on the succession arrangements. Over the past decade, on the other hand, we have seen at least ten banking deals every year in the Swiss market. Most of these have taken place in the wealth management sector.

Has a trend just broken off there?

There is an existing pipeline of transactions. But these are not materializing, for example, because there is a widening gap in price expectations between buyers and sellers. And one should not forget: 2021 was an exceptional year for the industry. The institutions have earned so much that the pressure to consolidate seems less. But the situation could already be turning again to the disadvantage of the weaker players. The first half of 2022 will not be as good as the same period last year for the banks.

What happens in the second half of the year?

It is quite possible that some foreign banks will go over their financial performance and reconsider an exit from Switzerland. Smaller private banks may also be forced to merge or sell. These institutions are not only challenged in terms of profitability: They are simultaneously confronted with investment in digitalization, the generational change of their clientele as well as new investment trends such as sustainability and private market investments. Because their low level of profitability does not allow them to invest in the above-mentioned themes, their competitiveness with larger banks is lagging.

«There are several players currently in talks»

Last year's takeover of the Geneva-based Reyl Group by the major Italian bank Intesa Sanpaolo showed that medium-sized private banks are also for sale in this country.

Correct, and there are several players currently in talks. We were also involved in the Reyl transaction - but that deal was an absolute exception both in terms of its structure and governance.

In what way?

It is very rare for a large banking group to allow a minority shareholder to keep the brand and even entrust him with the management of an entire line of business. Now, of course, many family-run Swiss banks are thinking: if we could find such a combination, we would be seriously interested.

What are the chances?

There are not so many combinations possible. The best thing is for these institutions is to consult with us, as we have insights into the strategy of many wealth management players.

How many deals do you expect in Swiss Private Banking by the end of the year?

It's very difficult to make a prediction here right now. Certainly considerably fewer than ten.

One field for takeovers has suddenly opened up very wide in recent months: In view of the licence deadline at the end of the year, consolidation among independent asset managers is getting underway. What else can be expected here?

We have been talking about this consolidation for 20 years. Now it has at least begun. Interestingly, almost only larger players with at least 1 billion francs in assets under management are involved in this consolidation- i.e. they represent less than 5 percent of the independent asset managers in Switzerland.

« We counted around 15 deals in the last twelve months. »

For smaller providers, the question of licensing is not clear and they are attached to keeping their independence and their clients are attached to their wealth manager. That is a big risk, which in our experience has already deterred buyers. Nevertheless, more deals are in the pipeline. We are only at the beginning of this new wave.

How many transactions have you counted? finews.ch has reported on larger transactions such as the purchases of Reyl Intesa Sanpaolo, Quaestor Coach, Bank Syz and Focus Financial.

We counted around 15 deals in the last twelve months. By no means all of them have become public.

What will happen in this regard at the end of the year when the deadline of the Swiss Financial Market Supervisory Authority Finma expires?

If asset managers have not started the authorisation process by 30 June 2022, it will be difficult. I could imagine Finma imposing criminal and prudential sanctions for this whom have been filing late or continuing an activity without having the appropriate authorisations. . Solutions for the asset managers could then be to 1) merge with regulated peers, 2) offer the client assets to the banks and enter a fee sharing agreement or 3) close operations.

So the banks would be the winners of this forced consolidation?

That is quite conceivable. For banks, the connection with asset managers also offers the possibility of selling their own products and services to a wider clientele. Larger regulated external asset managers will also be winners of this consolidation.

That said, for every independent asset manager for sale, there are 50 potential buyers.

How do you explain the huge demand?

If external asset managers manage to take over others, they also gain an advantage of scale. External asset managers with scale and professionally organized represent a real alternative to private banks.

As far as Swiss banking as a whole is concerned, there is currently a lot of talk about a turning point. The discussion about Switzerland's neutrality and the expected decline of Switzerland as a leading offshore centre give little confidence for the future. What do you expect?

Switzerland has declared that it will adopt the OECD  sanctions against Russia. In doing so, the country has chosen a camp; at least Russian assets are now flowing out of the country and are being booked elsewhere, for example in the Middle East or in Asia. With the trend toward deglobalization, we can expect to see more regional approaches in wealth management again, with hubs for the respective surrounding region.

«Banking groups such as UBS, Credit Suisse or Julius Baer, Pictet and EFG which have been present in Asia for a long time, will clearly benefit from this development.»

So the Swiss banking centre would only be left with the surrounding Europe, which is relatively weak in growth and full of trade barriers?

The Swiss private banks will probably continue to be of interest to the super-rich who want to diversify their assets geographically in countries with strong political and economic stability. For example, it is suspected that many countries will soon have to resort to tax increases because of the looming recession and rising interest rates. Countries with low taxation, such as Switzerland, would become more attractive to wealthy individuals.

But?

Our projections also show that the leading status of Switzerland as an offshore financial center could be overtaken in a few years as competition is increasing. This is because, as you noted, Switzerland's core markets (European, Middle East and Africa) are generating little wealth creation. However, large international banking groups such as UBS, Credit Suisse or Julius Baer, Pictet and EFG which have been present in Asia for a long time, will clearly benefit from this development.

So would smaller players have to push into the growth regions again? Many have just withdrawn and segmented their client portfolios.

These institutions often lack the financial means to expand in international markets. They have to primarily invest in digital, technology, service and product capabilities and talent.

With these projections, are we really only talking about lower growth or actually the loss of client assets?

We expect annual volume growth of six percent for the Swiss private banks. This puts the private banking center behind global competitors such as the USA and Luxemburg that are grown faster over the past recent years. On the other hand, Switzerland did very well during the pandemic and net new assets grew more rapidly during that period which is a reflection of a flight to safe havens during turbulent times.

Jean-François Lagassé, who heads banking consulting at Deloitte Switzerland and is responsible for wealth management on a global level, has worked on many of the country's bank takeovers. The French-speaking Swiss has been with for Deloitte for 14 years. Previously he worked at Pricewaterhouse Coopers (PWC).