The Swiss private bank's record result speaks for its nearly completed transformation. CEO Philipp Rickenbacher's optimism belies deeper problems of the bank as well as the wider wealth management industry.

Europe's private banks haven't sustainably solved their eroding profit problem, addressed in recent years with increasing spending cuts, or the fact that their service models are outdated for their clients – that's the conclusion of a McKinsey study on 102 private banks in Europe, released on Sunday. 

The consulting firm predicts the pandemic-induced crisis will be far more dramatic for wealth managers than the 2008/09 financial crisis.

On Monday, Switzerland's largest private bank, Julius Baer, posted a record result – thanks to a trading surge as well as hot demand for structured products. In short, the wealth player managed to monetize the panicked market ructions of March and April. 

Agile, Efficient For 2020

CEO Philipp Rickenbacher didn't spend much time on the topic in Julius Baer's presentation on Monday. Instead, he focused on the strategy shift he has pushed since taking the top job in September: Julius Baer is in the midst of a transformation, said Rickenbacher (himself a former McKinsey consultant).

Following a round of spending cuts just before the pandemic, the bank is on the way to being more agile and efficient, he noted. The bank's spending will show the fruits of these efforts in the second half of 2020, he said.

Overdue Digital Renewal

Julius Baer is closer to clients and will use digital channels more than in the past, he said. Improvements like video-onboarding – which Swiss regulator Finma permits since 2018 – or WhatsApp notifications for clients could have been introduced several years ago. It is doubtfully enough refurbishment to carry Julius Baer through the next decade.

The 130-year-old wealth manager's challenges have come into much clearer focus through the coronavirus crisis, which Rickenbacher sees as an opportunity. His fundamental problem is persistent and structural margin erosion as well as stagnating revenue from fees.

Problem Child Kairos

In particular, Italian subsidiary Kairos weighs heavily. Unless Rickenbacher can reverse the asset manager's fortunes, Kairos will continue to bleed assets and see fees evaporate.

His other major problem is negative interest rates: the income pillar collapsed dramatically in the first half. There is no antidote – and monetary conditions don't call for any change to ultra-loose macroeconomic policy anytime soon.

Finma, Other Legacy Issues

The third big issue is that Julius Baer still isn't in an orderly state, according to its lead regulator, Finma. Rickenbacher described the bank's compliance with its supervisor's orders as nearly completed in terms of improvements to its risk framework against money laundering.

But Finma's orders go beyond that: Julius Baer cannot undertake any major acquisitions until next year – a massive interference in its strategic freedom. The bank's fourth problem is other legacy issues related to the sanction: Julius Baer may have to pay as much as 335 million euros ($383 million) for a messy Lithuanian case.

Unreliable Market Fortunes

Rickenbacher has pushed through forceful changes in his first nine months in the job with considerable momentum. However, the first half showing isn't the result of these strategic measures, but quick, market-driven profit.

Julius Baer and Rickenbacher won't be quite as lucky with market turmoil at the back end of 2020.