the-view-from-geneva

The view from GENEVA

Participants
Lawrence Howell, EFG Private Bank
Eric Borner, Banque Privee Edmond de Rothschild
Marco Nauli, Clariden Bank Eric
Schaerer, Mirabaud & Cie

Venue: The Mandarin Oriental Hotel du Rhone, Geneva

What are your strategies for expanding your businesses in Asia?

Lawrence Howell
: We started our Asian business four years ago, and have seen strong growth. Asia is a core part of our business. We have 50 private bankers in Asia out of 150 globally. We have a full branch in Hong Kong, a merchant banking branch in Singapore, and are applying for an investment advisory company in Taiwan, and creating a branch. We are looking at opening offices in Jakarta and in discussions in Bangkok about doing the same. We have an office in Beijing and are looking at Shanghai. We have 150 staff and Sfr4 billion under management in the region. We make Sfr10 million in profit from Asia and aim to triple that within two years. We are growing assets in the region about 20-30% per year.

If the client wants bank with us onshore, or offshore in Switzerland that is their choice. We have Taiwanese clients who book in Singapore, and Singaporeans booking in Hong Kong. Some old money from Hong Kong and Singapore books in Switzerland. We have a full array of booking options, serviced locally. We have exactly one person of Western origin out of 150 staff in Asia. We find local clients respond better to people that speak their language. We offer 24 hour a day trading in all markets and all currencies. We are really trying to compete with Citibank, UBS and HSBC.

Marco Nauli: We have maintained offices in Singapore and Hong Kong since 1985 and 1988 and have just hired Urs Brutsch [from ABN AMRO Private Bank] to be our chief executive for Asia. He is reviewing our strategy in the region. Asia is definitely going to become a much bigger part of our business. That is the intention.

Eric Schaerer
: We are a niche player in Asia and have had a marketing office in Hong Kong since 1997. We book all assets in Switzerland and have been visiting the region to service clients since 1989 - mainly in Taiwan and Hong Kong. We feel it is too early for an institution of our size to target the China market, but we will continue to focus our efforts on Hong Kong, Taiwan and Japan.

Eric Borner: Our business in Asia is also very niche and we book all our Asian assets in Switzerland. We feel that Taiwan offers the best potential for our growth. Regarding China, we are actually penetrating the market by using our existing Taiwanese clients who have gradually set up their business in the Shanghai region.

Is it the case that the average Asian client would prefer to book their assets in Singapore rather than Switzerland these days?

Nauli: It is quite hard to define the "average" Asian client. It depends a lot on which part of Asia they come from. For example, Indian clients may have a completely different perspective to Southeast Asian clients on where their assets are booked.

In our bank we have a balanced approach and it is very client-driven. Some clients put their long term family wealth in Switzerland. But if the client wants to book locally we should offer them the ability to do so.

Schaerer: There have been a lot of journalistic articles on this subject over the past 18 months or so - talking about Singapore as the Switzerland of the East. The percentage of high net worth individuals coming from Asia has increased and within Asia there are more wealthy people who don't think they need to book in their assets in Switzerland. In the last four years it is clear that Singapore has seen the biggest increase in assets in the private banking world but it comes mainly from Asia.

I understand there is a cooperation being discussed between Singapore and Switzerland for training private bankers. The courses are about to start.

For me, Singapore will become a centre of excellence for private banking in Asia but it won't necessarily be detrimental to Switzerland or other European financial centres in the global scheme of things. I have read so many articles about Switzerland losing to Singapore, but I don't fully agree.

Borner: In the last 10 years Switzerland has done a lot in terms of training professionals. And I do believe that the high net worth individuals we are servicing will maintain their assets in both locations - rather choosing Switzerland for their long term investment profile and Singapore for their short term local private banking needs. Therefore, I think that it is essential for institutions to maintain a presence in both locations.

Nauli: What we should do is combine the advantage of Singapore's location and combine it with the professionalism of our people. Private banking requires good systems and professional relationship management. In Switzerland we have been dealing with high net worth individuals for a long time and you can't replicate that quickly. Our challenge will be to set up our own organizations in Singapore, bringing our expertise from Switzerland. Then we can profit from the growth of Singapore as a private banking booking centre.

Schaerer: But you will need to hire local people too. Rich Chinese families often prefer to speak to someone in their language.

Howell: The reality is that the Singapore as a private banking centre is in relative ascendancy, and Switzerland is in a relative decline. Singapore is located in a Chinese-run country, which is a wonderful place for Taiwanese, Hong Kong Chinese and Mainland Chinese to book assets. They also happen to be the fastest growing economies in the world. A lot of the Taiwanese and Mainland Chinese don't speak a word of English and so there is a major move of money from Northern Asia to Singapore - and not Switzerland.

In contrast to Switzerland, Singapore is also surrounded by countries where the sovereign risk is higher. How many people are moving money out of Germany into Switzerland because they are worried about governmental stability? They used to in the 1970s when there was a communist threat. There is a sovereign risk concern in Asia and Singapore is surrounded by countries where there is sovereign risk and Singapore is a safe haven. Hong Kong is not comparable today, because it is part of China.

The relative decline in Switzerland will also be accelerated by the European Union countries which will have rolling tax amnesties to bring assets back from Switzerland. This will slowly sap those assets from Switzerland that are booked here for tax reasons. So there are some very fundamental issues that favour Singapore.

The point just made about taking our expertise here in Switzerland and exporting it to Singapore is absolutely spot-on. Then Switzerland can benefit from Singapore's rise. But I am not so convinced that Switzerland will be a growth market for private banking.

Schaerer: I agree that Singapore is becoming a centre for Asian wealth. But I have yet to see large quantities of European or American money move to Singapore.

People will still pay a premium to buy Swiss watches. Does the same not apply to private banking? Are people not still prepared to pay the premium to be in Switzerland?

Nauli
: It is a good question. Is there still a premium commanded by Switzerland? Yes, in certain products. But high net worth individuals from Asia are becoming less inclined to pay a premium to use Switzerland and they have pricing power. That's why we have margin pressure.

At the end of the day, it all comes down to the personal relationship between the bankers and the client. If the perfect service is delivered, then clients will pay the price.

Borner: I am a portfolio manager by background and with global interest rates quite low, clients need better advice on investment. This is an opportunity for Switzerland. Singapore does not have the same degree of expertise in global investment management that Switzerland has.

But I agree, when I compare different fee schedules, we are, in certain areas, more expensive in Switzerland than Singapore.

Schaerer: There are a limited number of offshore centres in the world where people feel it is safe to keep their money and have it managed. I still believe that Switzerland is one of those places. But the Japanese or the Taiwanese may want to keep some of their money in Switzerland, if only from the diversification point of view. It is a choice and it has nothing to do with paying a premium.

Howell: There is also the issue of perception. I feel there is a dual reality of fees and costs. The perception is that Switzerland is more expensive. It is one of the reasons there is strong resistance among Asians to booking in Switzerland.

There is a real cost in Switzerland, which is stamp tax. And if your clients trade a lot, they have to pay 17 basis points. The other perception of cost is the fiduciary placement fee for deposits. Asians go nuts about this. They hate it. They may be getting a 1.5% yield on a euro deposit in Singapore and leaving a half percent spread, and conversely paying no spread here, but paying a fee of a sixteenth - and they still complain about the fee. Asians aren't big fee-payers, and certainly not in the deposit area.

The third issue is that brokerage rates are much higher than in Asia. But in general Swiss banks now negotiate those.

So very often it is the perception of Switzerland being high cost combined with the reality of the stamp tax, that still creates a feeling that Switzerland is expensive - whereas it isn't as expensive as it appears to be.

Nauli: The Swiss, often by law, have to show the fee, whereas in other financial centres it can be included in spreads. That is why there is a perception of Switzerland being expensive.

Howell: There is also a split. Old Asian money has been in Switzerland a long time and understand this. It's the new Asian money that sees these fees and thinks Switzerland is expensive.

Schaerer: In 15 years of managing Asian client money from Switzerland I have never had a significant complaint about fees - except on the short term deposits.

Switzerland has 367 banks and 90 of those are foreign banks that choose to manage their clients' assets from here. If you take the last five years, there are still new banks coming here. They come because they know we have trained people, we have language skills, and are centrally located - although if we want to go to Asia, we Geneva bankers need to fly out of Zurich.

Nauli: That is an issue for Asian clients. How easily can they fly to see their private bank?

Howell: Very easily for Zurich. [Howell is based in Zurich.]

Nauli: Then again, clients don't come too often, unless they are coming for a holiday.

Howell: Yes, if they are opening an account they want to come to the bank. But after that it is very rare.

When you think about ‘Switzerland' as a brand, what do you think defines it for private banking services?

Schaerer: It is the political stability, and its aura of reputation. It still has a very good reputation in Asia. Asia is the part of the world where the most new wealth will be created in the next 25 years, and the challenge for the Swiss will be to adapt.

But is there an aspirational quality for the clients in Asia of opening an account in Switzerland, just like buying a fine Swiss watch?

Howell: I would say that it is not the same thing as a fine Swiss watch. That's because fewer of the clients are as Europeanised as they once were. So there isn't the same sense of status attached to Switzerland. Yes, it continues in a certain segment, but it is not as pervasive as it used to be. In the past, you could count on the taipans of Hong Kong and their circle all having an account in Switzerland, and skiing in Gstaad. But the guys who have worked themselves up from factories in the New Territories and now Shenzhen, they have probably not even seen a ski slope, much less think about going to Switzerland.

But there is a segment that wants to bank in Switzerland and it is quite substantial. These are Asians who don't want to see Asian private bankers, but European private bankers. But there is another segment that feels differently. The fastest growing segment is not, however, the one that feels that Switzerland is a critical brand component in their collection of brands.

Nauli: The old money sees the advantage of Switzerland - that the investment management here is very international and gives diversification. Secondly, I cannot stress enough the personal relationship between the client and the relationship manager - which tends to be of a much longer duration in Swiss private banks than elsewhere in the world.

By law, is it still the case that a Swiss private banker is not allowed to say anything about their client? Surely Asian clients must value such discretion?


Howell: Yes. There is a sense that you are more likely to have discretion about your personal affairs if you entrust your assets to someone who doesn't chat to your friend's friend at the monthly cocktail party circuit - and try to impress them with what you know about their affairs. In Switzerland you don't get such cocktail party chat.

But the reality is that most business we have in Singapore is not from Singaporeans, but Taiwanese or Chinese. So gossip - risk is not pressing.

But I would agree that most sophisticated clients would rather not have locals knowing about their assets.

Nauli: Bank confidentiality is not something that simply requires a law. It is a cultural thing that has grown over centuries in Switzerland. When you enter the private banking business in Switzerland it is already in your blood, and you know how to deal with it. In Asia I have seen situations where prominent people enter a room and people start talking about this person at the table. In Switzerland, you are more likely to see a private banker turn their head away from a prominent figure - rather than show they know the person, when it is clear the person doesn't want to be recognized.

Borner: One of the first things a banking clerk in Switzerland learns is you should never write down the name of the client with the number of the account. It takes some time to educate local staff in Asia about that.

A lot of people perceive Swiss banks to be only about capital preservation and not asset growth - unlike say the US houses. Is that a perception that is valid?

Schaerer
: We are taught as private bankers that rule number one is wealth preservation. So we are less aggressive than the new generation of wealthy people possibly want. Luckily for us the Asian economic crisis helped people learn some hard lessons. In today's climate we are all talking more about wealth preservation than growth. We are no longer talking about two digit returns as the norm.

Borner: The lessons learned in the crisis has helped the reputation of Swiss private bankers.

Nauli: Clients always take a relative performance approach during good markets - and judge us versus local stockmarkets - and then take an absolute performance approach in difficult markets.

The best example is that we had a fund that won an award for the best five year performance in the TMT sector. But the bottom line was that the client who invested in that fund five years before had lost money. That's the difference between a relative performance approach and an absolute performance approach. In absolute terms the client lost money, even though relative to the market the client did well. We think clients are now thinking more about wealth preservation.

Is it similar to the 19th century, where wealthy families were happy to make a 4-5% return on a constant basis?

Nauli: If you can make a 4-5% return in the near term - and we see markets being difficult - you are doing quite well. However, if any region booms again then clients may once again return to a relative performance approach - and make comments like, you gave me 5%, but the local Asian markets grew at 20%.

Schaerer: With clients booking locally, there can be a different profile for different portfolios. The part booked in Singapore could have a more aggressive ‘local' profile than the part booked in Switzerland.

Howell: It's a hopeless situation, because greed always outweights fear. Relative performance always makes a return when markets are hot. I have been through enough cycles now to have seen this time and time again.

Marco Nauli mentioned earlier that his view was that markets were going to be difficult. Do others agree?

Borner: I agree with that view. Looking at next year we are all aware that global economies are cooling down and that this year has been a good year for earnings in the US and we don't think that situation will be repeated next year. So we are not that optimistic next year on global equities performances.

Nauli: There are always asset classes where you can improve your performance.

Howell: There are no easy answers now. If you look at May, June, July and August, there wasn't an asset class where you would have made money. You couldn't be in equities, you couldn't be in bonds, you couldn't be in hedge funds. You couldn't even be in capital guaranteed investments because the zero coupon bond underlying those things also got smashed. There was no way out. To my knowledge that was the first time you had a simultaneous disaster in almost every asset class. Even real estate was topping out, and commodity markets where peaking - with metals collapsing 10%. We are living in somewhat anomalous times.

Look back at January - how many people would have predicted that interest rates for long term bonds would be going down? Nobody. Who would have predicted that oil would be at $55 a barrel? The last time you had oil as a major issue was back in the 1970s when you had this anomalous market situation called stagflation.

This dramatic increase in oil prices will suck capital into oil-producing areas where the efficiency of converting that capital into productive use is relatively low - and that won't be good for the global economy.

Schaerer: There's no shame at this time in holding cash. 2005 could rather be a currency game situation.

But even cash is difficult. What if you are US dollar-based and the dollar depreciates 30%?

Schaerer: You can play with options or other currencies. You are right; you cannot just sit there and watch the erosion of the US dollar.

If you are bearish on the dollar should you be buying gold?

Howell: I was never bullish on gold. It doesn't have current income. I think what has happened with gold is partially supported by the price of oil. Russia used to sell a lot of gold, and is now holding it. But I am not so bullish on gold.

In terms of the dollar, you need to line it up against trading partners where the US has a deficit, such as China, Japan, and Korea. The Korean won, for example, should appreciate dramatically against the dollar.

The mood around the table seems a bit pessimistic.

Borner: I prefer the word "challenging".

Nauli: It was relatively easy to make money in the 1990s and it has now become a lot more difficult to manage money. It will remain difficult, but there are always opportunities.