Swiss private banking has climbed down from last year’s record highs. This week's results from Julius Baer, UBS, Credit Suisse and Vontobel could confirm future trends.

During a presentation in May, Julius Baer head Philipp Rickenbacher, warned the bank was leaking client assets. His comment solidified the doubt that the financial market correction was having a deep impact on the Swiss private banking industry.

EFG International, which is also listed, already seems to have confirmed this perception, reporting a decline in profit on Thursday.

Uncomfortable Position

After two record years in 2020 and 2021, the potential for disappointment is large.

Earlier this year, UBS reported its best first quarter performance since the financial crisis, surpassing the relatively modest targets it had set for itself quasi-prematurely just this February. This overachievement makes it all the more difficult for CEO Ralph Hamers to impress investors with the bank's results on Tuesday. 

Credit Suisse's position is much more uncomfortable. The bank has warned the market and investors it would make another loss in the second quarter. In the first quarter, it displayed a worryingly weak business while continuing to work through a series of homemade fiascos.

Management under CEO Thomas Gottstein and chairman Axel Lehmann haven't taken any short-term steps to improve matters and are instead closely hewing to the strategic redirection announced last year.

The Right Tone

Rickenbacker seems to have found the right tone for the environment the industry currently finds itself in, particularly against Credit Suisse's monosyllabic responses and UBS's self-confident poise. When he made his presentation, he indicated that cost savings measures, including personnel expenses, would offset the impact of higher technology spending. Although his growth targets are still there, they have become more conservative.

Rickenbacker is coming off well with analysts; in a widely discussed report by Barclays, the British-based bank recommended holding onto Julius Baer shares, while it rates UBS and Credit Suisse shares as a «sell». UBS shares have fallen 5 percent since the start of the year, Julius Baer is down 27 percent and Credit Suisse has lost 40 percent.

Too Optimistic

Barclays analysts prefer Julius Baer's margins, recurring income, and looser capitalization requirements, over the other two banks. They see UBS’ revenue projections as too optimistic, noting that invested asset levels and with that, earnings, are strongly dependent on market movements. Nor do they see much leeway in further cost cuts and doubt that it will be able to buy back shares in 2023 in the same way that it has been doing in the past.

Capital Increase?

The rationale for selling Credit Suisse is pithy as the difficult environment coincides with internal challenges. The bank could counteract this situation by shrinking the investment banking business further, but management is likely to try to muddle its way through.

In May, media speculated whether Switzerland's second-largest bank would need to raise up to $1 billion in fresh capital in the second half. The British analysts also assume that the bank is planning a capital increase over the course of the next 12 months, further diluting its shareholders.

Additional Sanctions

None of this is good news. The Barclays analysts also believe the Swiss private banking industry is facing lower volumes, less new money, and a decline in Lombard (collateralized) lending, as well as general pressure on margins. They could also face so-called structural outflows as a result of continued geopolitical tension and further sanctions against exposed, high-net-worth clients.

Barclays also points to the possibility of the US enacting sanctions against wealthy Chinese individuals in the same way it has been doing against Russia.

Such as move could affect as much as $500 billion in assets held at all three banks, it said. Given the uncertainty out there, it is probably a virtue for managers at Julius Baer, UBS and Credit Suisse to keep an eye on costs and revenues as best as they can.