UBS and Credit Suisse both operate mid-sized asset management divisions. finews.com analyzes why the two need to decide now whether they will go big or go home.
Switzerland’s two largest banks are best known for private banking and to a lesser extent as investment banking players.
In the shadow of those heavyweight divisions, both UBS and Credit Suisse operate small, boutique-like asset management arms.
For years, asset managers were able to clear a healthy margin merely by showing up – that’s how much organic growth helped mid-tier players.
Modest Profit Contribution
At UBS, this business makes for more 10.8 percent of pretax profit. At Credit Suisse, asset management was folded into the private bank more than four years ago, and makes for 8 percent of pretax profit. At both banks, the units absorb little risk, making them an attractive growth proposition – in theory.
Now, bigger players like U.S. specialist houses Blackrock and State Street as well as German insurer Allianz are outflanking the mid-tier.
Tarting Up With Fishnet Stockings
To be sure, the fate of asset management at big banks isn’t a new issue. UBS’ then-unit head John Fraser pursued a potential sale years ago, a process one source likened to a loose woman putting fishnet stockings on to attract business.
Fraser left UBS two years ago to run Australia’s Treasury; Ulrich Koerner (pictured below) now holds his job.
Several years on, the asset management conundrum has come into focus again because size is again forcing the question: growth in the key U.S. market is drooping, and it is becoming harder for smaller players to succeed against pure players with scale, unless they are highly specialized.
Bulk Up or Get Out
Where does this leave the Swiss? Facing a tough decision over whether to bulk up or abandon the business entirely – particularly in the key U.S. market, according to finews.com analysis.
Both UBS and Credit Suisse have said asset management – from fund of hedge funds to real estate, fixed income and equity fund products – is a key component of their business, but both have yet to answer the more fundamental question of how they are going to compete.
Rivals have already moved: France's Amundi bought Pioneer from Unicredit late last year, giving it a considerable presence in the U.S. for the first time.
Failed State Street Tie-Up
Both major Swiss banks have been there: UBS agreed an asset management joint venture with U.S.-based State Street nearly five years ago, but the deal fell apart over the question of which would take 51 percent of the combined entity, and which would be the junior partner.
Credit Suisse has gone about it differently: it got out of fund management early, selling its activities to Aberdeen Asset Management in 2008. Four years ago, it offloaded an exchange-traded funds arm to Blackrock.
Left with remnants such as alternative investment boutiques and real estate funds, former asset management head Robert Jain’s philosophy was a «multi-boutique» one. When Jain left for billionaire Izzy Englander’s hedge fund last year, long-time investment banker Eric Varvel (pictured above) was brought in as a «fixer».
UBS' Grunt Work
It remains a collection of fiefdoms with a few standouts, such as high-income and total return funds run by U.S. fund manager John Popp. Credit Suisse has made few references to «multi-boutique» since Jain left, and there are few hints from Iqbal Khan, who runs the unit where asset management is now housed, on his views.
To be fair, Credit Suisse has been preoccupied with a wide-ranging revamp under Tidjane Thiam and a capital-boosting program.
Meanwhile at UBS, unit head Koerner is doing the grunt work of cleaning up asset management, lowering spending, streamlining and distribution initiatives – but it is simply unclear to what end. He may be sprucing up an asset for a potential sale, or trimming it into shape in order to more easily hoover up acquisitions.
He is far off a 1 billion Swiss franc pretax profit target for the unit.
U.S. Squeeze
The spending clean-up aside, the question facing the Swiss – as well as incidentally European asset managers such as Deutsche Bank – is largely one of how many products do they want to offer, and how big should their U.S. presence be.
The U.S., the world’s largest market for asset management, isn’t growing. With interest rates presumably in the rise, the asset management market will tighten. The strategic dilemma for Europeans in the U.S. is, effectively, to go big or go home.
UBS' Plans?
To be sure, going home isn’t giving up: unlike some U.S.-focused houses, European firms like UBS are in a good position to tap the flourishing market in Asia, for example, or more modest growth in Europe.
Media-shy Koerner has given scant hints about where UBS is headed. This may not even be clear yet to UBS’ top management – and indeed it doesn’t immediately need to be until Koerner can present a cleaner platform.
Immediate problems loom in the U.S.: UBS has just lost O’Connor star Dawn Fitzpatrick (pictured above) to George Soros’ hedge fund, and needs to figure out how to stanch the bleeding from her departure.
