made its first impact felt directly on the private banking
business. EFG International, among the most strongly growing
private banks, reported that its relationship officers had to spend
much time reassuring clients during the third quarter of 2007, even
though the bank itself has no subprime exposure
losses.
As a result, EFG client assets under management were flat in the
quarter, at CHF87.0 billion ($76 billion), compared with the
CHF86.9 billion registered at the end of the second quarter. This
reflected an inflow of net new money of only CHF1.5 billion, a weak
performance compared with the CHF9 billion of net new money
generated during the first half of 2007. In addition, assets under
management generated as a result of acquisitions are well off the
pace of EFG’s CHF10 billion to CHF15 billion target.
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EFG explained, in a quarterly business update, that the quarter saw
considerable “turbulence” in global markets, although it stressed
it had not incurred any losses as a result of exposure to the
subprime sector. But the uncertainty had a “bearing on client
activity”, it said. Client relationship officers “spent a
considerable amount of time advising and reassuring clients in
relation to the wider market environment”. This confluence of
factors has resulted in flows of net new money that were lower than
in recent preceding quarters, EFG said.
At Bear Stearns International, analyst Christopher Wheeler observed
that, in comparison with what he termed the “disappointing” quarter
at EFG, UBS – itself a bank deeply mired in subprime exposures –
still managed to bring in record levels of net new money in its
wealth management operations during the third quarter.
Greater problems
EFG seems to have experienced greater problems in bringing in new
money than its larger competitors, Wheeler noted. “Clearly, any
blip will raise questions about the very different (EFG) business
model,” he said. “While it is far too early to suggest the business
is hitting a wall, given the high rating the stock has enjoyed, the
third-quarter data will see the stock lose something of its lustre
in the short term.”
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By GlobalDataEFG stressed that it still has a plentiful supply of potential
M&A transactions and is in “advanced negotiations” on a number
of deals that should spur new growth. “In several cases, heads of
economic terms have been agreed and detailed contracts are being
negotiated,” it said.
EFG voiced confidence that it will attain its acquisition target
for 2007, declaring it “remains a disciplined acquirer, and has
turned aside opportunities recently on account of price, as well as
vendor representations and warranties. It also detects signs of
greater realism on the part of sellers, and is confident looking
beyond the current year.”
Risk appetite
Credit turmoil also affected the confidence and risk appetite of
clients at Credit Suisse’s wealth management operation. Credit
Suisse, reporting a 31 percent fall in quarterly net income to
CHF1.3 billion, said it is “too early” to predict an end to the
credit market turbulence that caused $1.9 billion of write-downs
and its first profit decline in a year.
The wealth unit attracted CHF9.7 billion in net new money during
the three months to September, the second-smallest gain in seven
quarters. This was down from CHF10.9 billion in the third quarter
of 2006 and compared with an average forecast by analysts of
CHF10.7 billion. The annualised gain in net new money inflows in
the third quarter was 4.5 percent, below a target of 6
percent.
The results from Credit Suisse’s asset management division produced
the biggest surprise, with pre-tax income falling to CHF45 million
in the quarter. This was primarily due to a CHF146 million ‘fair
value’ adjustment to around CHF7 billion of assets, whereby the
bank acquired collateralised debt and loan obligations to reduce
the risk in the funds. Analysts believe CHF366 million of this sum
represents indirect exposure to US subprime risk. In all, asset
management had net outflows of CHF20.9 billion in the quarter,
mainly from money market funds, and investment assets fell by 5
percent in an outcome analysts say they believe will cause “some
concern”.
Credit Suisse CEO Marcel Rohner indicated that it is unlikely its
securities unit will return to profit this year.
Reassuring clients
UBS reported net money inflows into its wealth management business
of a record CHF40.2 billion in the third quarter. Overall, UBS
recorded a net loss of CHF830 million for the third quarter as the
bank took a writedown of $260 million on about $12.9 billion of
loans to fund closed funds leveraged buyouts. UBS is known to have
moved very early to reassure private clients and this seems to be
reflected in a buoyant quarter for attracting new private banking
investments.
Record loss
Merrill Lynch earlier reported the biggest loss in its 93-year
history on $8.4 billion of subprime and related writedowns, leading
to the ousting of CEO Stan O’Neal. The write-down was equivalent to
about 20 percent of shareholders’ equity.
Citi casualty department
Another casualty of the crisis, Citigroup chief executive Charles
Prince, resigned as the bank disclosed that subprime mortgages and
associated securities lost as much as $11 billion of value in the
past month, a plunge that may wipe out one-half of its profits so
far this year.
Former US Treasury Secretary Robert Rubin will become chairman, and
Citi’s most senior executive in Europe, Win Bischoff, will be
interim CEO. The bank will now begin a search for a permanent CEO
in order to restore it to health. Rubin, 69, a former co-chairman
of Goldman Sachs, will sit on a search committee.
Citi said credit market upheavals in October impaired by as much as
one-fifth its $55 billion book of subprime mortgages and related
bonds. The writedown costs, which will be recorded in the fourth
quarter if markets do not recover, add to the almost $7 billion of
costs for bad debt, bond and loan losses the bank recorded in the
third quarter.
“Significant uncertainty continues to prevail in financial
markets,” Citigroup said in a statement. But it said its capital
ratios “will return within the range of targeted levels by the end
of the second quarter of 2008”, allowing it to maintain the current
dividend.
Analysts at CIBC World Markets and Morgan Stanley have told clients
to be cautious of Citi shares. CIBC’s Meredith Whitney said Citi
may have to sell assets because it needs to raise $30 billion of
capital.
Prince, who had become increasingly isolated amid public calls by
some analysts to resign, declared last year that 2007 would be the
year of “no excuses”. He becomes the third banking chief to be
ousted as the credit crisis spreads, after Merrill’s O’Neal
departed and Peter Wuffli resigned as UBS CEO last July.
While Prince had been credited with cleaning up Citi after a series
of equity research scandals on Wall Street and involvement in the
Enron and Worldcom sagas, he has presided over a bank now deeply
mired in subprime issues and experiencing a plunging stock price.
In Japan, he famously bowed in apology before Tokyo regulators in
2004 after they shut Citigroup’s private bank for money laundering
infractions by clients.
Société Générale stars
At Société Générale, private banking recorded third-quarter net
income of €51 million ($75 million), a 41.7 percent increase on the
like period of 2006. New money inflows amounted to €2.4 billion
compared with €1.7 billion the previous year. Net inflows for the
first nine months of 2007 totalled €6.7 billion or 13 percent of
assets on an annualised basis. Total assets under management
reached €75.5 billion, a 14.5 percent increase. The gross margin on
private banking assets was high at 107 basis points and continues
to reflect structured products’ increased share in total revenues,
Société Générale noted.
Operating expenses increased 25 percent in the quarter, due to
continued recruitment and infrastructure investment in Europe, Asia
and the Middle East. The turbulence in the quarter did hit the
bank’s asset management business, which recorded net outflows of
€12.6 billion. This was due mainly to withdrawals from money market
funds and the contractual termination of three CDOs managed by TCW,
a Société Générale Asset Management subsidiary. Net income fell by
41.2 percent to €40 billion. Assets under management increased by
8.5 percent to €374.6 billion on a year-to-year basis.
During the period, Société Générale acquired ABN AMRO’s UK private
banking business, with £1 billion ($2.08 billion) of assets under
management.
Deutsche Private Clients
Deutsche Bank’s revenues rose 19 percent at its Private Clients and
Asset Management business to €2.6 billion for the third quarter.
Asset and Wealth Management revenues grew by 24 percent to €1.1
billion, partly reflecting “strong performance fees in retail and
alternative asset management, and the increased invested asset
base”, it said.
Deutsche Bank took a €1.5 billion hit on relative value trading in
debt and equity, structured credit products and residential
mortgage-backed securities in the quarter. However, its profit rose
31 percent as tax credits and gains from asset sales outweighed the
first loss at the securities unit in five years.
