Generali Group may divest itself of its Lugano-based arm BSI after a boardroom coup at the Italian insurer. The move could significantly reshape the competitive landscape and underlines how the expected consolidation in Swiss private banking is far from over.
Pressures for a shrinkage of the Swiss private banking sector, beset by problems like US and European regulatory assaults on offshore banking, compressed margins and the high costs sparked by the surging Swiss currency, are ramping up.
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Mark Branson, head of banking supervision at the Swiss Financial Market Supervisory Authority, expects consolidation to sweep the countrys private banks.
Switzerland will probably end up with fewer small banks as rules become stricter about accepting new funds and checking clients tax compliance, Branson declared in a published interview.
There is widespread speculation that Lugano-based BSI, with client assets of CHF78bn ($82bn), could be the next high-profile acquisition target.
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By GlobalDataJulius Baer and Raiffeisen sit by the window
Bank Julius Baer and rival Raiffeisen Group, owner of a chunk of Bank Vontobel, are seen as potential bidders for BSI. However, Baer may be diverted by the prospect of acquiring the $90bn assets business of Merrill Lynchs non-US wealth business, which its parent, Bank of America, put up for sale in April.
In a statement, Baer stressed: "Given the early stage of these discussions [with BofA], the outcome is entirely open."
This is if, as expected by analysts, Generali acts to restructure after its capital was depleted by exposure to Italys sovereign debt.
Key investors, led by investment bank Mediobanca, orchestrated the ousting of chief executive Giovanni Perissinotto in a vote of no confidence at the start of June.
Most board members voted for the replacement of Perissinotto after a 50% fall in Generalis earnings, and its stock price trading near its lowest level in more than 20 years.
Replacement CEO Mario Greco will start by cutting costs at Generali by creating synergies at group level, according to Milan analysts. He will also review whether Generali should stay in private banking.
The insurer has asked Mediobanca and JP Morgan to assess possible asset sales, newspaper Il Sole 24 Ore reported, although it added that the high profitability of BSI and of US unit Generali USA made the decision to sell one of the two assets difficult.
Generali needs 5bn
Nonetheless, brokerage firm Chevreux estimates that Generali needs around 5bn in fresh capital, a sum which may be difficult to raise in volatile markets and thus potentially requiring the sale of non-core businesses like private banking.
BSI, which started out life as Banca della Svizzera Italiana, was acquired by Generali in 1998. It was later expanded by the acquisition of Banca del Gottardo in 2007 for CHF1.3bn.
BSI reported an upbeat performance for 2011, with net new money inflow 8.8% higher at CHF6.7bn. That brought total assets under management (AuM) to CHF77.7bn, up from CHF76.2bn in 2010.
Ray Soudah, founder of Millenium Associates, an independent M&A advisory firm to the financial services industry, considers that BSI is a "well-managed private bank".
Soudah said it furthered its concentration on the Italian and Ticino markets by absorbing Banca del Gottardo.
While that deal generated significant cost-saving synergies, it anchored BSI more in an Italian-focused region, thus further increasing its concentration risk.
"As a result, its attractiveness to suitors has diminished over time because of this focus, despite expensive efforts to diversify into the growing Asian wealth markets in recent years," Soudah says.
Julius baer acquisitions’ hunger
For Bank Julius Baer, BSI could prove an attractive target. AuM for the first four months of this year at Baer rose to CHF178bn, up 4% from the end of 2011.
While the combined CHF256bn of AuM for Baer/BSI would still leave Baer trailing its big rivals, UBS and Credit Suisse, it would significantly strengthen the Zurich-based bank.
It would leave it less vulnerable to predators eyeing targets in what is expected to be the steady consolidation of Swiss private banking.
Dieter Enkelmann, Julius Baers chief financial officer, has signalled that acquisitions remain the strategic priority.
If no targets present themselves, the bank could launch further share buybacks, up to a maximum value of CHF500m.
"Baers main focus is centred on targets which fulfil our core criteria," Enkelmann says, including a strategic fit on wealth management as well as a cultural fit between the two combining organisations.
The ambitious Raiffeisen, which owns 12.5% of Vontobel, could also consider a BSI takeover.
Both Baer and Raiffeisen were in the race for Sarasin, owned by Rabobank of the Netherlands. Brazils Safra group eventually acquired a controlling stake in Sarasin.
At the start of the year, Switzerlands oldest private bank, Wegelin & Co, agreed to sell all of its non-US business to Raiffeisen amid a dispute with US tax authorities.
Most of Wegelins clients and staff were transferred to a brand new bank, Notenstein Private Bank, a subsidiary of Raiffeisen.
Still, an outright BSI sale is not necessarily the only solution for Generali, according to Soudah.
"The best outcome from a financial perspective for Generali shareholders would be to keep BSI as profitable as possible and IPO it once financial markets stabilise," the M&A man contends.
In the meantime, BSIs domicile could be switched to Geneva and the name and image of the institution changed "to slowly and steadily steer away from its humble origins," Soudah believes.
A spokesperson for BSI said the bank "continues to be strongly focused on our objectives, and we are convinced we are well positioned to reach them."
