Shortly after the credit problems of the Zurich-based bank Julius Baer with the Austrian entrepreneur and investor René Benko became known, the question of the resignation of CEO Philipp Rickenbacher followed. But is such a demand justified?
The CEO usually takes responsibility for incidents that could potentially put a company in significant difficulty. In the case of Julius Baer, the extent of the damage from the Signa debacle only became apparent in stages after the bank failed to be transparent about the matter when it unveiled its quarterly report.
Shortly afterward, it had to make further clarifications, as reported by finews.ch. This made not just clients more mistrustful, but also investors, who then dumped Julius Baer shares on the stock market.
No Update Until February 2024?
The situation has not improved significantly in the meantime. The traditional Zurich bank remains in a vulnerable position. Within Julius Baer, it is thought likely that the share will remain under pressure until the annual results for 2023 are unveiled on February 1, 2024. That is because the bank does not apparently want to provide any further update until then: specifically, on how the operational business is performing and whether a share buyback program is being implemented.
But February 1, 2024, is still some time away, especially as research by finews.ch reveals that several U.S. hedge funds are currently asking Swiss financial market experts for their assessment of the situation at the venerable Swiss bank, probably as they want to know whether to short the Julius Baer share, i.e. sell it without owning it. Professional speculators are betting on the price going south.
Specifically, they are borrowing stocks from a broker and selling them on the market. Before they must return the borrowed stocks, they will purchase them – ideally at a lower price – on the stock market and return them to the broker. If people start to take note of these types of transactions, it will make it even more difficult for the company to break free from a downward spiral.
Questionable Value
Julius Baer has so far set aside provisions of 70 million Swiss francs on a single exposure totaling 606 million Swiss francs to a «European conglomerate». Markets have long assumed that companies from Benko’s Signa Group owe the private bank the loans. According to media reports, the borrowed sums are split into three tranches and primarily secured with shares of the Signa Group and mortgages on Signa real estate in Germany.
The value of the stocks is likely to be questionable by now, and the German Signa real estate often consists of retail spaces, whose valuations are doubly under pressure due to the difficult situation in retail and rising interest rates. Financial experts have no problem doing the math: the higher the write-down, the lower the bank’s profits will ultimately be.
Is the Board of Directors Responsible?
Considering this, it is pertinent to ask about the future of the current CEO. Or put differently, his stepping down could be the crucial indication that a shift in market perception is underway.
But CEO Philipp Rickenbacher recently stated in the «Neue Zuercher Zeitung» (in German only) that private debt loans are always granted based on clear governance principles and thoroughly reviewed by the credit department, the relevant committee of the executive board, and the risk committee of the board of directors. Even the controversial loans to the major client (read: René Benko) would also have gone through every approval stage.
If this is the case, the board of directors would be responsible. But a spokesperson for Julius Baer has said that there is currently no discussion of someone accepting responsibility.
Oswald Gruebel’s Signal to the Markets
Even though it is clearly not an easy decision, the resignation of a CEO can indeed mean a lot. He or she can be «part of the solution» as former UBS Chairman Marcel Ospel explained when he resigned in the wake of the UBS crisis; indeed, a resignation plays a significant role in resolving a problem.
That was quite clearly demonstrated during the resignation (in German only) of the then UBS CEO Oswald Gruebel in 2011. He very quickly accepted responsibility for the misconduct of a trader in London who plunged the Swiss major bank into serious difficulties after engaging in prohibited speculative trading.
In this case, Gruebel deserves high praise for taking the rap, even though he personally had never had anything to do with the matter. In doing so, he sent a signal to the markets, which ensured that it did not become a «UBS» issue, but simply remained the doings of a low-ranking stock market trader in London. At the same time, Gruebel restored confidence in UBS and its stock by resigning, so that the whole affair ultimately remained a footnote.
Striking Example
With his actions, Gruebel avoided an even bigger problem and one that particularly affects the Swiss financial hub: the media in the English-speaking world closely scrutinizes the activities of Swiss banks and never misses a chance to publicly criticize even the most minor of problems. The Credit Suisse debacle this year – which was very much not about minor issues – provided a striking example of this. Julius Baer now also runs the risk of the British and U.S. media targeting CEO Rickenbacher, which will significantly complicate the bank’s ability to solve its problems.
Gruebel’s swift resignation in 2011 helped UBS get out of the line of fire and set the stage for a new strategy under Sergio Ermotti that remains in force today and has contributed to the bank’s success.
Untimely Problems
In contrast, the problems at Julius Baer have come at an inopportune moment. Switzerland has barely freed itself (more or less) from the Credit Suisse debacle only for the problems of the smaller Zurich traditional bank to put the reputation of the Swiss financial hub once again under the spotlight, especially abroad. Questions about the credibility and reputation of the industry are once again being raised.
Even in this situation, stepping down as CEO can mark a turning point.
