BANKING - Rationalisation - isn't that something that usually happens to other people?

The Swiss have taken the initiative in demonstrating that the word “unthinkable” does not apply to the world of banking. In effect, the Swiss Bank Corporation and Union Bank of Switzerland mega-merger has swept away a number of fallacies, among them the notion that European banks cannot hold near-monopoly positions in their home markets and, especially, the sanctity of merchant banking jobs. Rationalisation in the banking sector has almost always been associated with laying off superannuated backroom paper-shufflers and dozy tellers. Now 6,000 expensive merchant bankers are to learn the meaning of the word.[ Indeed, there is every reason for them to see this as a cause for rejoicing, for they have always applauded rationalisation in the banking sector, and on their sacrifice rests the success of the merged bank’s expense reduction. United Bank of Switzerland, as the new entity has been christened, hopes to achieve cost savings of SFr3bn to SFr4bn a year. Analyst John Leonard at Salomon Smith Barney considers this a realistic target and emphasises that the overall 13,000 headcount reduction is the principal driver behind this cost-cutting exercise. There were a host of reasons for Switzerland’s two big banks to get together, although it must have been a bitter pill for UBS’s chief executive Mathis Cabiallavetta to swallow, as the deal amounts to a reverse takeover of his bank by his smaller and more efficient rival. SBC will provide the new group’s chief executive and three of its four divisional managers, while UBS gets to keep its initials on the logo. Both banks looked around and saw the landscape littered with mergers: Chase and Chemical, Credit Suisse and Winterthur, Salomon Brothers and Smith Barney, Belgium’s Banque Generale and Banque Bruxelles Lambert, the cross-border deal between Finland’s Merita and Nordbanken of Sweden and, if rumours are to be credited, in due course Barclays and NatWest. “The SBC-UBS merger opens a new dimension in the impending consolidation of the European banking sector,” says Leonard. He refers to the size and scope aspect of the transaction and the fact that it demonstrates how far-reaching cost savings can be between two overlapping institutions. Leonard believes further consolidation is on the cards in France and particularly in the overbanked German market. So it is no longer jobs for life for Swiss bankers, a fact that should serve notice on the atrophied labour markets of other EU countries such as France and Spain, where the very whiff of job cuts sends workers scurrying to the barricades. The other aspect worth focusing on is that, because of the significant presence of the cantonal banks, the merged group will have a market share of just 25% to 35% of the Swiss market – so farewell to the sacred cow of opposition on monopoly grounds that may be holding up takeover approaches by other big European banks. This fact has probably not gone unnoticed by Barclays’ Martin Taylor when pondering his strategy vis-a-vis the DTI, should he decide to go for NatWest. At the stroke of a pen the Swiss have created one of the world’s top five banks in terms of total assets, market capitalisation and total equity. With a market capitalisation of SFr85bn the new bank will rank among the world’s top four financial service providers. The combined group will also be among the largest global asset managers, with total assets under management nudging the $1 trillion mark, outweighing those of its nearest European competitor, Credit Suisse, by more than two-to-one. The investment banking business falls into the arms of SBC, whose Warburg Dillon Read alliance will enjoy a top-tier ranking in Europe, and also in Asia through its partnership with Japan’s Long-Term Credit Bank, although it will still lack sufficient scale to compete head-on with the Wall Street heavies. This will compel UBS’s management to face the decision of whether to spend a lot of money on taking out one of the big US securities houses, such as Lehman Brothers, in order to break into the superleague of US investment banking. Barclays and NatWest spent a lot of time pondering this dilemma and the result was that within weeks of one another they both unloaded their equity businesses on foreign buyers. The problem for UBS is that if they decide to go that route it will almost certainly entail further blood-letting in Europe, for which they may not have the stomach after the expensive exercise of shedding 6,000 merchant bankers from the payroll. The combined group will rank as the world’s fourth-largest institutional asset manager with more than $500bn in managed institutional assets. In consumer and corporate banking the bank will start with about 550 branches and five million customers. In time, fewer than 300 of these branches are likely to survive. UBS will combine its mezzanine finance and equity investment activities into a separate business line, with targets of a SFr4bn portfolio and more than SFr600m of income by 2002. One area where the new UBS stands to shine is in private banking, a business that gained its due recognition in 1997 when the big three split out their private banking operations as stand-alone units and SBC announced that for the first time, private banking had overtaken investment banking as the group’s top profit spinner. With nearly $600bn in private banking assets under management, the new bank will set a more exclusive threshold of SFr1m for its high net worth individual clients (SBC’s minimum was SFr600,000 and UBS’s was SFr100,000), thereby ensuring the highest possible returns. UBS plans to rush through the integration of its private banking businesses within the next two years to lay the basis for a growing onshore presence in Europe, the US and Asia. It is not surprising that private banking and international asset management, with their exceptionally high returns on equity compared with at best 10% for merchant banking, will be less savaged by job cuts than any other area of the business.

Jules Stewart is a freelance journalist.