Two long-standing Swiss banks stumble. Their problems in both cases were caused by management decisions.

The Credit Suisse (CS) debacle has in recent months partly obscured the fact that other Swiss banks are not necessarily in the pink of health either. Two long-time players stand out: Vontobel and Julius Baer. Both financial institutions are generally regarded as solid and stable but have recently failed to impress on the stock market. Over the past six months, the two have each shed around 16 percent in value.

Julius Baer has come under pressure in recent weeks due to its problematic client relationship with Austrian entrepreneur and investor René Benko while Vontobel has been mired in some difficulties for some time now. In September 2021, Vontobel was still trading at 88 Swiss francs per share. Now it is available for 47 Swiss francs.

«Investing Is the New Saving»

But the reasons for the slide in Vontobel shares can be traced back almost four years. At that time, under the leadership of Board of Directors Chairman Herbert Scheidt and CEO Zeno Staub, it underwent a reorganization under which it defined itself as an investment firm and no longer a bank. From then on it focused on investment expertise. Staub was quoted as saying «Investing is the new saving,» while Vontobel mutated into an active investment manager with dedicated investment opinions (high conviction).

But subsequent volatility on financial markets made investors more cautious or led them to turn increasingly to passive strategies (using index products). This meant that Vontobel did not achieve the hoped-for influx of funds or revenues, as is clear from the current figures and also highlighted in the quarterly report at the end of October 2023.

Risk-averse Investors

There are no signs of this situation changing for now. Investors will remain risk-averse until there are signs of an easing on the interest rate front, i.e. when the cycle of interest rate hikes has peaked. In the meantime, funds will continue pouring mainly into passively managed financial products.

So from this perspective, Vontobel’s strategy is proving problematic, particularly as there is almost no sign of a change. Staub’s successors at the top of the company, Christel Rendu de Lint and Georg Schubiger, have already signaled they will not be making much in the way of any change to the existing strategy. So the path taken almost four years ago with good intentions is now proving to be a strategic mistake, as the Vontobel share price clearly shows.

Provisions in the Millions Erode Earnings

A strategic blunder has recently become apparent at Julius Baer too. The Zurich bank used to boast it was a «pure player,» that is a financial institution that focuses on balance sheet-friendly asset management business with private clients and is therefore very cautious to grant (Lombard) loans which would also require big guarantees.

But it is now evident that Julius Baer did not always completely adhere to this practice. The bank granted Benko very large loans, which he is now no longer able to service. Consequently, Julius Baer had to make substantial writedowns a week ago. With provisions in the millions, its net profit for 2023 will be down on the previous year, as the bank has also been forced to admit. Unsurprisingly, markets did not take too kindly to this news, with the Julius Baer share temporarily imploding by more than 10 percent.

Risk of Conflicts of Interest

As with Credit Suisse and US investor Bill Hwang’s hedge fund Archegos, large business loans were granted to keep a private client on board. And vice versa. This increases the risk of a conflict of interests, which can now be seen with Julius Baer and Benko and therefore also represents a departure from the much-acclaimed «pure player strategy».

But this issue should also give other financial institutions food for thought as several banks have recently started offering corporate finance services, including loans, to small and medium-sized companies. Although this expands the range of services a bank can offer, it always comes with higher risks, especially if the corporate customers are going through a sticky patch – a more frequent scenario given the current rise in interest rates, persistent inflation and soft consumer spending.