UBS, Credit Suisse Said to Explore Sharing Back-Office Costs

(Bloomberg) -- Credit Suisse Group AG and UBS Group AG are in talks about combining some back-office functions to cut costs, according to people with knowledge of the matter.

Switzerland’s biggest banks -- competitors in investment banking and wealth management -- are in early-stage negotiations about co-operating in areas such compliance, settlements and trade processing, the people said, asking not to be identified because the matter is private.

UBS Chief Executive Officer Sergio Ermotti said as recently as last week that banks can no longer afford separate back-office functions because of tighter profit margins. His Credit Suisse counterpart, Tidjane Thiam, said in 2016 that his firm was in talks with another lender he didn’t identify about sharing databases and servers.

UBS was little changed at 16.93 Swiss francs as of 9:42 a.m. in Zurich, while Credit Suisse gained 0.5 percent to 16.1 francs. Representatives of the lenders declined to comment.

"An increasing percentage of costs are influenced by compliance requirements," Michele Hess, a partner in regulatory and compliance at PwC in Zurich, said by phone. "Banks are hiring more staff and there is heavy investment in technology planned or taking place," as lenders respond to the European Union’s overhaul of market rules, known as MiFID II, and the Swiss regulator puts emphasis on anti-money laundering and cross-border tax issues.

Banks globally are facing increasing regulation and low interest rates, as well as higher costs, to fund future growth. In Switzerland, banks have in recent years held talks with the stock exchange, which is owned by the lenders, with a view to sharing back-office functions on a larger scale.

Setting Precedent

A cost-sharing deal between the country’s top banks could set a precedent for other firms to revive efforts to work together.

The Swiss private-banking sector has been shrinking over the past decade as the nation’s famous banking-secrecy rules are stripped away. Compliance costs have become a particular burden for smaller wealth managers, forcing many out of business and prompting some foreign banks to leave the country.

Client confidentiality is one potential stumbling block to a UBS-Credit Suisse deal, one of the people with knowledge of their latest deliberations said. UBS has also talked to other lenders and external advisers about reducing back-office costs, according to two people familiar with the matter.

UBS’s Ermotti is now in his seventh year as the CEO of the country’s largest lender and has stepped up cost-cutting. The bank could employ about 30 percent fewer staff in a decade as technological advances change the industry, he said in an interview with Bloomberg Markets last year.

For his part, Thiam has made cost cuts a key pillar of his strategy, announced in 2015, to reduce Credit Suisse’s dependence on its trading business. He’s also aiming to lower the bank’s adjusted cost base to below 17 billion francs by the end of this year. It stood at 17.7 billion francs at the end of 2017 with the bank’s cost-to-income ratio at 90.4 percent. The same ratio was 81.5 percent at UBS.

One big cost block for banks is compliance. Nine out of 10 financial services industry executives globally see increasing compliance costs, consulting firm Accenture wrote in a report last year.

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