This is how private banks lose their innocence | Stock exchanges newspaper

How does a supposedly conservative private bank come to grant loans worth hundreds of millions of francs to a single customer? At least since November 20th, when Julius Baer was forced to communicate impairments on the loan portfolio amounting to 82 million francs. This is the question that concerns the Swiss financial center.

Hardly anyone still seriously doubts that the value adjustments largely arise from a business relationship with the Austrian real estate tycoon René Benko. Julius Baer has never commented on the suspected commitment. But that doesn’t stop investors from anticipating a stark scenario.

The largest Swiss private bank has lost almost 15% or around 1.8 billion Swiss francs in market value since the fateful communication about the risk of loss hidden in the loan portfolio. The bad news cost Julius Baer shareholders three times more money than the bank could possibly lose, according to the wildest media speculation to date about the size of a Benko exposure (600 million Swiss francs).

Certainly, it is not implausible that the bank was fobbed off with insufficient collateral when concluding the alleged loan transactions. The Swiss financial portal “Insideparadeplatz.ch” quoted an insider this week after the bank had a 250 million loan covered by airy shares in Benkos Signa Holding. A former private bank CEO, who continues to work in the industry as a consultant, believes the financial blog’s speculation is correct, as he said in an interview with Börsen-Zeitung.

The industry expert believes that Benko will probably remain an isolated case in Julius Baer’s loan portfolio. But it is a fact that larger asset management banks expanded their lending business to sometimes unhealthy levels in the years of negative interest rates from the beginning of 2015 to autumn 2022.

The expansion of the credit business can be verified and confirmed at many banks. Julius Baer also increased its own loan portfolio by almost a third between the end of 2014 and the end of 2022, while customer deposits only increased by a little more than a fifth during this time. In absolute terms, the difference still left 5 billion Swiss francs more customer money than loans on Bär’s balance sheet. At times, the customer assets on the balance sheet represented a fifth or more of all assets managed at Julius Baer.

This is too much. The investment business is only lucrative if banks can invest their customers’ money in such a way that they also generate commissions. This pressure was even greater than usual during the negative interest rate regime. The banks sometimes paid the penalty interest on their customers’ uninvested deposits from their own funds. An expansion of the credit business could provide some relief.

However, granting real estate or corporate loans is not part of the core business of asset management banks. These are generally limited to the securities-backed Lombard loan business. But since mid-2021, demand for Lombard loans has declined sharply. Against the background of the gloomy investment climate, even the wealthy clientele in Asia are less interested in debt-financed stock market bets.

The fact that the environment has motivated asset management banks to accept greater credit risks is merely a theory. But this seems all the more plausible as the regulatory leeway for Julius Baer and all Swiss asset managers in cross-border business has been narrowing for years. The international tax transparency that became a reality in the aftermath of the financial crisis is just as effective as the sanctions policy in a more conflict-prone world. With their sharp reaction to the bad news from Julius Baer, ​​investors show that the banks cannot credibly promise a sustained increase in their profitability in this increasingly difficult environment without partially betraying their innocence as safe and conservative companies.