Until about 2000, both banks had run along roughly similar lines: business silos managed along geographical boundaries, with senior management layered above; everybody reported to a board that straddled the lot.
In 2000, Credit Suisse, which was still trying to make the bancassurance model work, combined its Swiss domestic banking operations, the Winterthur insurance operations, personal finance and e-business units into a new operating division, Credit Suisse Financial Services (CSFS).
The aim was to use the unit to target the high net worth (HNW) sector on a pan-European basis and extend its strong position in the Swiss online market across the continent.
Then, in another reorganisation in 2001, Credit Suisse sliced the bank in two, lumping the private bank in with CSFS and creating CSFB as a silo with institutional asset management.
Few were more critical of the changes than Credit Suisse chairman Oswald Grübel, who was then in charge of the private bank. Rumours abound about his opposition to the changes to the private bank. According to sources, Mr Grübel was adamant that such a ‘high-touch’ business as the private bank could not be grouped into what was essentially the retail bank. The story goes that he was forced to resign for his criticisms, but that he refused to vacate his office and that all his staff continued to work for him as if he was still in charge. He was reinstated. “I’m not sure how true any of the rumours are but it sounds very like Ossie; it sounds very Swiss,” says a private banking contact.
The army of online HNW clients that were needed to support Credit Suisse’s investment in IT infrastructure and the additional 1000 relationship banker/support staff it had hired did not materialise. Europe’s wealthy did not want a do-it-yourself style service, no matter how clever the technology. Credit Suisse had completely misunderstood the level of hand-holding that HNW and private banking clients still wanted.
Even worse, the changes severed the relationship between CSFB and the private banking and wealth management operations. As HNW clients began to look for the sort of structured products and other complex instruments that investment banks build so well, this proved to be a big mistake.
“When you split a bank into two huge fiefdoms, it is inevitable that communication will break down between the distribution and manufacturing arms,” says Cath Tillotson, partner and head of research at global wealth management think tank Scorpio Partnership. “In this structure, it becomes more difficult to feed back on general client needs: whether clients wanted structured products, credit derivatives, high yield, one-month or three-month products. Compare that with UBS’s strategy, which maintained the traditional model: each business line had a say on the board and communication between them was encouraged – if not mandatory. Where Credit Suisse broke the bank into two, very separate pieces, UBS focused on building up its cross-selling capabilities.”
A different story
While Credit Suisse was torturing itself, UBS went from strength to strength. It is now the biggest private bank in the world by some margin. According to figures that both banks released earlier this year, UBS has SFr1463bn under management in its private bank and wealth management businesses, while Credit Suisse is about one-third of that size – in third place behind Merrill Lynch – with SFr539bn.
Growing its own operations is only half the picture. UBS has built an entire infrastructure around third party distribution of its products and services, called Bank for Banks. Basically, this is the UBS architecture: every product available to a UBS private banker is available to private bankers from other banks, piped out over the internet or into a dedicated terminal. “I would be surprised to find a single private bank without at least some UBS structured products in its product range,” says Ms Tillotson. “It’s hard to fault UBS’s private banking strategy. If you were going to design a private banking operation, this is what it would look like on paper.”
Although it may be difficult to catch up with UBS now that it is so far out in front, Credit Suisse’s chances must not be underestimated. First, Mr Grübel is back overseeing the private bank from the chairman’s seat, and industry pundits expect him to effect a turnaround: known as an innovator, when he was last in charge Mr Grübel introduced capital guaranteed and market neutral products for clients.
Equally promising, Credit Suisse, which is always quick off the mark in emerging markets, seems to have stolen a bit of the march in Asia. It is one of the fastest growing HNW markets in the world – about 9% versus about 4% in Europe. In the last year alone, Credit Suisse grew its assets under management there by 20% and its headcount by 30%. It has also recently relocated head of Private Banking International, Joachim Straehle to Singapore, signalling a firm belief in the region’s growth potential.
Comparing this with UBS’s strategy which has been largely focused on acquiring in Europe, it looks like Credit Suisse is trying to take the Asian territory before UBS gets there. UBS does not split out its figures for Asia; its Q1 report said was that wealth management had received “strong contributions” from Asian clients.
What lies ahead?
So what is the future for these two historic rivals? In spite of disappointing Q1 figures, in which investment bank revenues dropped by 9.2% (dragged down by weak trading results in securities, derivatives and commodities) by pretty much any measure, UBS’s prospects look good. And its growing confidence is palpable. Mr Fox happily reports that, in Q1, the bank was number one in global equity capital markets (ECM) and number six in the US. In M&A, global co-head Rick Leaman says the bank has moved to number five in the league tables in announced global deals in Q1 2005 from 12 in Q1 2004. “In terms of our backlog and our revenues, things are moving in a direction that we’re pleased with,” he says.
Mr Moelis believes that UBS can make it to number one. All he needs is time. “In the US, we’re young. We’re a four, five-year old name, while firms like Goldman and Morgan have been doing it consistently for 50 years. To be number one, we’re going to have to provide excellence in our service to our client base consistently for several years. We have to do it over and over and over again,” he says.
But there is some debate about whether such good times can keep rolling for UBS; or if, at least, the Q1 results are evidence that it will be difficult to maintain the pace that it has set itself.
Too much success?
In wealth management, the only weaknesses relate to UBS’s very success: it is now so big that in Scorpio Partners’ client feedback, clients have complained of becoming “just a number”, that they are part of a “retail” banking operation, or that individual bankers do not know every product or service that is available: the standard things that can slip in a very large operation. A related gripe from some clients and third-party bankers is that UBS products are pushed onto them. These go against the basic tenets of managing HNW clients and the service principles that have made Swiss private banking world famous.
Is there a size beyond which a private bank can grow and still provide the level of service that such clients expect – and has UBS overstepped that mark?
It could also be argued that UBS’s success has yet to be tested in the context of its much bigger investment banking franchise. After all, the main reason why the bank was one of the few that did not suffer after the TMT bubble burst and the markets bottomed out was its weakness in M&A and corporate advisory. It had not fully participated in the boom either. So, while other firms were pulling back and cutting staff numbers, UBS had the chance to build its investment banking franchise – and at bargain prices.
By growing M&A and other advisory businesses, UBS will be as exposed as its competitors in the next downturn. “Now that they are a larger player on the M&A side, they’re probably also being urged somewhat to give credit to a lot of their counterparts. If there’s a downturn in one of the sectors on the credit side, [will they] be in a position to bear as little risk as they did in the downturn that we saw a couple of years ago?” wonders Cheuvreux’s Mr Stark.
In any event, UBS’s more cautious approach to risk may not put it in a strong position to capture the financial sponsor-related business that is increasingly dominating investment banking revenues. In Q1, 40% of US ECM activity was led by private equity groups and, by value, their buyout activity accounted for 27% of the total Q1 M&A volume. Banks are increasingly having to put their own capital on the line if they want to win deals, and some analysts argue that UBS’s reluctance to play a big role in the leveraged lending sector or to aggressively pursue high yield business could limit its success across its investment banking business
“If you want to be in the big IPOs, you’ve got to lend it to the big LBOs [leveraged buy-outs]. [Sponsors] tend to use as IPO bankers the guys who financed them,” says one UBS insider. “It is a definite weakness in terms of our ability to build revenues and fee pool share.” He says that whether or not UBS should be a bigger player in this business is the subject of a “debate” between the group and the investment bank. “If you ask the guys in Zurich, our conservative risk appetite is a strength; if you ask the guys who deal with sponsors, it’s a weakness. But if the market is going that way, we need to be in on this business. If there is a crossroads ahead for UBS, then this is it.”
Former glory
At Credit Suisse, many have worried that the bank has lost too many good people to recover its former glory. Some say Mr Mack took cost cutting and risk control too far. In addition to slashing costs, he virtually eliminated proprietary trading and pretty much pulled the firm out of commodities – both businesses that have driven profits at other investment banks while equities and M&A were in the doldrums.
When Mr Mack cut out the fat and the danger, did he also cut out the heart of what made CSFB a successful investment bank? People used to go to work for CSFB because it was the sort of entrepreneurial firm that let people ‘go for it’ and rewarded success. “Now if you take an organisation like that and then say, ‘OK, we can’t continue to do business this way’, guess who you’re going to lose? The people who brought in most of your business,” says Ray Soifer, chairman of Soifer Consulting.
When Mr Mack was himself knifed last year (reliable sources say it was because he thought a merger with Deutsche Bank was the solution to CSFB’s problems; Zurich apparently disagreed), it set off another exodus of senior talent, most notably leveraged finance guru Bennett Goodman, the biggest name in its merchant banking and private equity franchise. CSFB made headlines as it sank to fifth in the high yield league tables in Q1.
And yet CSFB is still ahead of UBS in its financial sponsors business. Its head, Harold Bogle, is seen as a serious dealmaker and one of the most experienced sponsor-bankers on Wall Street. CSFB’s emerging markets and commercial mortgage businesses may not be as tip-top as they used to be, but they can be redeemed. Likewise, Credit Suisse insiders believe that although there have been set backs in M&A and ECM, it can make a come back. In prime brokerage, where it is much smaller than its competitors, it got 20 “best in class” awards for the levels of its service in a Global Custodian survey of hedge funds. Hope for the future is back on the agenda.
More importantly, last year Credit Suisse realised that the model was still not right and instituted another shake-up. It is bringing the investment bank firmly under the control of the parent company and has made a lot of noise about integrating the constituent parts of the business. With Mr Mack out, Mr Grübel – who used to have to share the helm with him – is in sole charge. In echoes of its rival, there is talk at the bank of building a group culture, of better co-ordination and co-operation, of consistency and best practice. Politicking is out.
Getting the team right
Is this just another reorganisation? If success is measured by finding the right management team, perhaps not. At UBS, Marcel Ospel was accused of picking a succession of lacklustre managers for Warburg Dillon Read, as was, until he finally struck gold with John Costas. Merrill Lynch bank analyst Jacques-Henri Gaulard believes that, similarly, Credit Suisse now has got the team right and that it can fire on all cylinders. “The crucial difference between Credit Suisse now and Credit Suisse at this time last year is that this is a new management team, and they are working as a single unit. Mr Grübel nominated all the current executive board members. This makes it a very different place from the old, divided Credit Suisse and Credit Suisse First Boston, which were alienated from each other, didn’t communicate and were dominated by political rifts. This new set-up brings the bank the integration that it so badly needed.”
And is Brady Dougan, Mr Mack’s replacement, the man to finally take the firm back to where its venerable history says it should be? Mr Gaulard thinks so. While Mr Mack was cleaning up the business and sorting out the legal mess, Mr Dougan has worked his way around just about every bit of Credit Suisse’s business. He has dirt under his fingernails and is liked and respected by colleagues. Where Mr Mack was a communicator and a visionary, Mr Dougan is an operational guy who can deliver. He is a workaholic who loves his firm. Mr Mack came from a very different culture; Mr Dougan is a Credit Suisse man who commands loyalty. “And this is what Credit Suisse needs right now,” says Mr Gaulard. “It doesn’t need someone iconic; it needs someone close to the ground, who is good at delivery. Mr Mack was great at cutting cost, but it may have been done at the expense of the franchise.”
Others, like Mr Stark, are more sceptical, wondering if Credit Suisse’s announced reorganisation in December is proof that it has ceded its place at the bulge bracket table. “It’s more credible for it to try to refocus and have more of a niche strategy,” says Mr Stark.
The battle of the Swiss Giants is back on.
