Credit Suisse Spy Drama Signals a Deeper Malaise

(Bloomberg Opinion) -- Private bankers have been gripped by their very own thriller this week, complete with Credit Suisse Group AG spying on a departing executive, an alleged car chase and a bust-up. Managing money for the rich isn’t what it used to be.

Prosecutors are probing the incident and Switzerland’s second-largest bank is conducting its own inquiry to determine who among the firm’s top executives was involved in ordering Iqbal Khan to be followed. It has the potential to cost Chief Executive Officer Tidjane Thiam or other senior executives their jobs, Bloomberg News reported on Wednesday.

The denouement of what appears to be a case of surveillance gone wrong remains far from certain. It’s quite possible that the Credit Suisse chairman Urs Rohner ends up exonerating all senior managers of any wrongdoing. The shadowing of its former head of private banking may have been legal. What’s more, the lender would have wanted to do all it could to avoid Khan poaching star bankers as he joins the world’s biggest wealth manager, UBS Group AG. Khan is due to start there next week.

If the worst case scenario happened and Thiam was asked to leave just as his three-year turnaround plan for Credit Suisse starts to deliver, the lender may well be able to manage a succession reasonably well.

Whatever the outcome, though, the wealth management industry’s deeper challenges are difficult to ignore. Attracting and retaining money from the rich has become a much harder business without the blanket of Swiss bank secrecy, which was ended recently for international clients. Add the fierce competition from rivals, and clients’ changing preferences for where they stash their cash, and it’s clear that Switzerland’s famous discretion and personal touch will no longer cut it on their own.

Since the financial crisis, private banking has lured in lenders from around the world because of the relatively low levels of capital needed and the steady returns. For UBS, and Credit Suisse after it, doubling down on wealth management became an attractive alternative to their securities units, which ran wild ahead of the crisis — costing them billions in losses.

Just this week Deutsche Bank AG confirmed plans to expand in wealth management, saying it would bolster its client-facing staff by 50% by next year. And Goldman Sachs Group Inc. said it was having another stab at setting up in Switzerland to serve Europe’s rich.

The macroeconomic backdrop is hardly rosy either. Global growth is slowing and margins remain under pressure as central banks cut rates deeper into negative territory. Charging wealthy clients for deposits is becoming the norm, but who knows how customers may react? They could simply move their money elsewhere.

The economic outlook and geopolitical risks mean wealthy clients are often doing fewer transactions than they used to anyway. As appetite for buying shares and bonds wanes, wealth managers are having to adjust to portfolios that include much more complicated products. 

The revenues from this type of business can be lumpy, as Credit Suisse has shown. In the first quarter of 2019 the bank boasted of the lucrative equity derivatives that it had placed on behalf of private clients. There wasn’t much mention of the activity in the second quarter.

To be sure, Asia is home to the world’s highest number of billionaires and has low penetration in private banking, so it offers huge opportunities. But as I’ve argued before, if this business means providing finance to billionaires that’s covered by illiquid assets such as buildings or plantations, then such loans have yet to be tested in a real downturn.

And if that weren’t enough, spending on compliance and technology means its hard for banks like UBS and Credit Suisse to rein in costs. Perhaps it’s not so surprising that Credit Suisse, having lost its head of international wealth management to its biggest rival, might have been desperate to limit the damage.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2019 Bloomberg L.P.

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