After a sustained period during which UBS has established itself as the behemoth of global wealth management, compatriot Credit Suisse is at last showing signs that it may be getting its show back on the road.

After a sustained period during which UBS has established itself as the behemoth of global wealth management, compatriot Credit Suisse is at last showing signs that it may be getting its show back on the road. And the extensive reengineering necessitated by its “one bank” initiative may now be delivering the performance levels required to move it forward again.

As of 1 January 2006, Credit Suisse realigned its organisational structure to form a fully integrated model, with three segments: Investment Banking, Private Banking and Asset Management. The creation of an integrated bank, reinforced by the sale of its Winterthur insurance business last December, was intended to provide strategic focus and allow it to concentrate capital and resources on its banking business and global expansion. So how has it performed?

Credit Suisse’s Wealth Management business, which together with the Swiss Corporate and Retail Banking divisions now constitute the bank’s Private Banking segment, reported pre-tax profits of SFr3.237 billion for the full year 2006, a 22 per cent improvement on 2005. At the same time the bank managed to keep costs in check with total operating expenses rising by 12 per cent, against net revenue gains of 15 per cent, to peg its cost/income ratio back from 62.3 per cent to 60.7 per cent.

Wealth Management’s assets under management rose by SFr90.9 billion or 13 per cent to stand at SFr784.2 billion at year-end 2006, with net new assets contributing SFr50.5 billion, or 7.3 per cent, particularly from the US and Europe.

UBS restructured a year earlier by combining its US, Swiss and international wealth management businesses, along with its Swiss corporate and retail banking unit, into a single business grouping called Global Wealth Management and Business Banking. The same year it also sold off its independent label private banks and specialist asset manager GAM to Julius Baer.

One year on, pre-tax profit at UBS’s International and Swiss wealth management business (UBS International) was a hefty SFr5.203 billion, a 25 per cent hike on its 2005 take. At the same time operating expenses rose by 15 per cent, against net revenue gains of 20 per cent, to bring the cost/income ratio further down from an already laudable 53.7 per cent to 51.7 per cent. According to Scorpio Partnership’s 2006 Private Banking Benchmark, the median cost-income ratio was 67.1 per cent.

Credit Suisse, though, questions the validity of this comparison as the UBS figures do not include their US business which, Credit Suisse says, would have a negative impact. It also points out the the two banks use different accounting standards which further distorts the figures.

UBS International’s assets under management meanwhile rose by SFr156 billion or 16 per cent to stand at SFr1,138 billion at year-end 2006, with net new assets contributing a record SFr97.6 billion, or 10 per cent. This result reflected increases in all geographical regions throughout the year, particularly in Asia Pacific and Europe.

At this level, the two businesses are broadly comparable. Credit Suisse’s Wealth Management business is still extremely profitable, but this has been achieved to a large extent by tightly controlling the cost basis, while revenue gains have been more modest. UBS International, on the other hand, has been able to maintain an even more favourable cost/income ratio, despite rapidly rising costs, because its income and asset base is almost double that of its rival.

The US is where the comparison breaks down. Here, UBS is pursuing an almost entirely different business model and one that is continuing to have a seriously negative impact upon the overall profitability of its Global Wealth Management business.

Total operating income for 2006 at UBS Wealth Management US was up 14 per cent to SFr5.86 billion, approximately half that of UBS International, while total operating expenses rose 9 per cent to SFr5.28 billion in the US – almost on a par with the SFr5.59 billion spent by UBS International.

The figures may be moving in the right direction, but at these levels they can do little to rectify staggering US cost/income ratio, which retreated only slightly from 93.9 per cent to 90.1 per cent – almost double the ratio of UBS International.

Assets under management in the US meanwhile rose by just 10 per cent during 2006, from SFr752 billion to SFr824 billion, of which only SFr15.7 billion was attributable to net new money, a 42 per cent drop from the SFr26.9 billion of new assets recorded in 2005.

Closer examination of the US business shows just how far out of kilter it is with standard UBS parameters. Although accounting for over 38 per cent of the total staff and operating expenses across the entire UBS Global Wealth Management and Business Banking grouping, the US contributes only 7 per cent of pre-tax profits.

Still broadly based on the PaineWebber business that UBS acquired in 2000, Wealth Management US regards its major competitors as the broker-dealers- – Citigroup’s Smith Barney, and the private clients businesses of Morgan Stanley, Merrill Lynch and Wachovia.

This is fundamentally different from the international business, which competes both with the global wealth management operations of Credit Suisse, HSBC or Citigroup and, in their respective domestic markets, with private banks such as Pictet and Julius Baer in Switzerland, Coutts in the UK, Deutsche Bank and Sal Oppenheim in Germany, and Unicredito in Italy.

This chasm is graphically reflected in the client profiles of the two segments. UBS International attributes only 13 per cent of its SFr1,138 billion assets under management to clients with less than SFr1 million, and 49 per cent to clients with more than SFr10 million. In the US, these portions are practically reversed with 20 per cent of the SFr824 billion total attributable to clients with over SFr10 million, and 43 per cent to those with under SFr1 million.

More critical to the bottom line is the fact that UBS’s gross margin on invested assets in the US in 2006 was just 76 basis points, while the gross margin in UBS International was 103 basis points. By way of contrast, the gross margin for Credit Suisse’s Wealth Management business in 2006 was 111.6 basis points.

Olivier Lachambre, research associate at Scorpio Partnership, said: “The critical difference is that UBS is now integrated in name but has not yet sorted through its business model in the US. It is not so much a private bank in the US, but a broker-dealer. This is affecting its profitability. UBS states that its focus is on providing wealth management services to private clients, but it is missing its targets for client size in the US. There is more competition and the standard of business is not as sophisticated. This is a legacy of PaineWebber and it is a real muddle. The key for UBS is to integrate the US.”

That process may already be underway. UBS believes that with 38 per cent of the world’s wealth located in the US, the growth prospects are substantial. In 2006, it acquired the private client branch network of Piper Jaffray and more recently it added McDonald Investment’s branch network. Perhaps more significantly, the US-based branches of UBS became part of Wealth Management US last June, signalling integration and move upmarket for its US clients.

If the difficulty for UBS is the US, for Credit Suisse it is growing assets in new areas, says Mr Lachambre. “Credit Suisse may lack the onshore brand and leadership of UBS but it is certainly profitable. The issue is growth. Where is it going? It is question of dynamics. Sometimes it is not enough just to be good. It may be better to be less profitable but moving forward in a positive direction.

“For this reason, I think, there are concerns about the management. It is less impressive to control costs than to grow revenues. Credit Suisse has historically been stifled by a lack of vision. Its cost/income ratio may be moving in a positive direction but where is the impetus coming from?”

This is certainly a view that Credit Suisse strongly disagrees with. "We feel that Credit Suisse has demonstrated over the last two years that it was able to make substantial progress based on a clear vision and strategy," a spokesperson told WealthBriefing.

UBS, on the other hand, has been highly successful at onshoring its business, particularly in Europe. It has built successful operations in the domestic markets of France, the UK, Spain, Italy and Germany. UBS has SFr53 billion of invested assets in the UK, SFr40 billion in Germany and a further SFr24 billion in Italy.

But, according to Credit Suisse, its onshore business has very strong momentum, despite its smaller franchise in these markets and reached break even in 2006, a year ahead of plan.

“The most impressive aspect is that UBS has so quickly gained the status of a local player in these markets,” says Mr Lachambre. “This has been a significant achievement and it is now attempting to do the same in the Asia Pacific region. The biggest problem here is that there are plenty of clients but not enough staff to service them. This is having a big impact on growth and costs for all the banks. UBS has reacted positively by setting up a regional training centre in Singapore and this could prove critical to its success in the region.”

Credit Suisse has had operations in both Hong Kong and Singapore (where it too, has a business school) for many years and is a well-established player in the Asian market, but it is also now looking to strengthen its position in strategic growth markets. It has recently announced the launch of new onshore operations in Brazil – backed by the purchase of a majority interest in Brazilian wealth manager Hedging-Griffo – Russia, Australia, Qatar, Lebanon and California. It was also the first bank to be granted a licence in the Dubai International Financial Centre. But, says Mr Lachambre, the bank still has more of a defensive, offshore mentality than its counterpart. “Maybe they’re simply more Swiss,” he added.

UBS points out that it has had a footprint in these markets for a similar period, looks after around a half of all billionaires in Asia, and has recently opened a wealth management campus in Singapore.

But perhaps the fairest test of the two banks’ relative performance since their respective restructurings is to examine the litmus paper of investor sentiment. A look at their group share prices between 1 January 2006 and 31 March 2007 gives Credit Suisse a clear advantage – showing a 38 per cent gain, almost double the 20 per cent improvement for UBS over the same period. And analysts are beginning to lose patience with the latter.

The UBS share price, they say, is trading at some 10 per cent below its competitors, such that the market valuation is now trailing behind the sum-of-parts valuation. And they are urging UBS to either fix the less profitable segments of its private bank or dispose of them. Of particular concern, naturally, is the US wealth management operation and, analysts warn, investors are starting to become frustrated.