Europe's private banks and asset managers are facing a crisis as business models are hollowed out by negative interest rates, the chief executive of Edmond de Rothschild has warned.
Vincent Taupin, who has run the Swiss bank since March, also cautioned that neither acquisitions or attracting more money from customers offers an easy answer for the industry.
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Edmond de Rothschild had looked at acquiring troubled Zurich-listed asset management group GAM and the Italian wealth management arm of banking rival Julius Bär, Kairos, but neither was worth its asking price, Taupin told the Financial Times in an interview.
Although GAM's valuation has plunged below SFr4 ($6.32) per share from nearly SFr18 in January last year after one of its flagship bond funds was wound down, Taupin said: "Frankly, [even] at SFr3.50, I will never buy it".
Taupin's appointment was part of a restructuring of Edmond de Rothschild in which its shares were delisted from the Zurich market, with full control taken back by the Franco-Swiss branch of the Rothschild family. A long-running commercial dispute with the Franco-British Rothschilds, owners of the unrelated Rothschild & Co, was also settled. Edmond de Rothschild, now headquartered in Geneva, has assets under management of just over SFr165 billion.
The bank has a war chest of up to SFr1.5b to spend on acquisitions, Taupin said, based on excess capital of roughly SFr800 million and a willingness to take on additional debt.
But the 60-year-old French banking veteran, a former chief executive of Crédit du Nord, said acquisitions were very hard to get right.
"Integration kills the business," he said. "The difficulty is to really appreciate the stickiness of clients. What would be the interest to buy an asset manager or buy a bank if you discover that after everybody has left?"
"Let's say I'm a competitor," he added. "You learn that this bank is going to be sold to XYZ, what do you do? You give a phone call to the team and say, by the way, I'll pay you this amount with a bigger bonus, please come."
The often vicious competition for staff in the private banking world, exemplified by the recent scandal surrounding the defection to UBS of Credit Suisse's former wealth management chief Iqbal Khan, is indicative of the pressure private banking business are under.
Europe's banking industry has come under sustained pressure in recent years, as margins have dropped to historically low levels thanks partly to central banks' unconventional monetary policies. The private banking industry, with its dependence on income from narrow spreads generated by the deposits of wealthy and risk-averse clients, has been particularly hard hit by low and negative interest rates.
As the debate in Europe over the effects of negative interest rates intensifies, Switzerland's central bank chief, Thomas Jordan, last week said that they were "essential" for the Swiss economy and would persist for the foreseeable future without a major improvement in the global economic outlook.
The sector's biggest players, such as UBS and Credit Suisse, have juiced returns with new lending services to wealthy individuals, but many small and medium-sized companies have struggled to adapt.
Because most private banks are not listed, the industry's crisis has not necessarily appeared in headlines, Taupin said.
"We hardly know what is going on inside . . . I think for those who have not evolved in the last years, it starts to be difficult. For those who have based their profitability on putting their cash at the central bank, it starts to be really difficult."
"The good old times where . . . any kind of money you raised, you could put it at the central bank and make at least 400 basis points out of it, those are behind us."
Increasing assets under management is no longer the main driver of banks' profitability, Taupin said: "It is useless to raise money at stupid prices."
Edmond de Rothschild has been insulated to some degree from the pressures thanks to its early championing of illiquid and highly specialist investment opportunities for clients. Such assets are among those now in the highest demand thanks to the uncorrelated yields they offer, Taupin said.
The bank's premium fee structure has also been a buffer, Taupin said. "We do negotiate [on fees]. I'm not a masochist. But only down to a certain level."
"I would prefer us to be more expensive, to be frank. The question for me is, [anyone] can say I have collected a lot of money. But if on this money I make only two basis points, what's the point?"
Written by: Sam Jones
© Financial Times