EFG set to emerge from BSI scandal as 5th-largest Swiss bank

Singapore

THE dust appears to have settled with one final piece left to go by year-end for Swiss-listed private bank EFG International to complete the union with troubled - and now defunct - rival BSI to create Switzerland's fifth largest bank.

That is no small feat considering that in May last year, three months after Zurich-based EFG disclosed the buyout of BSI from Brazil's BTG Pactual, things flared up when regulators in Singapore and Switzerland sanctioned BSI for its involvement in the 1Malaysia Development Berhad (1MDB) scandal.

The year's largest deal in the Swiss private banking space that was touted as transformative turned hellish mid-sale. "There was panic. We were in the boardroom of BSI in Singapore, and everybody seemed lost. It was the quickest we have ever organised a townhall to comfort everybody," recalled EFG Bank's Asia head Albert Chiu in an interview with The Business Times.

"The phones started ringing. Clients were calling, and we were on the phone till midnight. It wasn't easy.

"We can't say that the action (in Singapore) came as a massive surprise, given the issues. (But) we have no regrets (about the deal)."

EFG's buyout plan was already deemed bold then as more banks were exiting the wealth management space amid slipping profits as the industry grappled with tougher rules, low interest rates and increased international competition. But the regulators' smackdown on BSI brought the challenge of closing the deal to a whole different level.

There was one upside. "We obviously got more publicity out of this. It has piqued interest . . . put us on the map," said John Williamson, EFG International chairman.

EFG then, at least in this part of the world, was relatively less heard of than its giant rivals UBS or Credit Suisse. Similarly, the smaller wealth banks such as BSI and Falcon were less known until they found themselves swept up in the massive money laundering case involving 1MDB.

The Monetary Authority of Singapore's decision to withdraw BSI's licence for serious lapses and failings had placed intense pressure on EFG to wrap up the merger here by end-2016 which was "very, very challenging".

Singapore also charged and convicted several private bankers from BSI for their involvement in the 1MDB scandal. As a result, it was the Singapore operations that blazed the merger trail for the Swiss bank.

"They (Singapore) were the first to get things stabilised. We learnt a lot from them because they went first and through all the pain," recalled Mr Williamson.

The deal had its fair share of fallouts - clients pulled a total of 5.5 billion Swiss francs (S$7.6 billion) from the bank in the first half ended June 2017. The bleeding however lessened between July to October to 1.5 billion Swiss francs. Some BSI private bankers have also left the bank.

"We hope the client attrition has more or less stopped. There may still be some, and there are also some assets that we don't want to keep as well. We think that's come to an end," said Mr Williamson.

"So, obviously we have been through a big process, and we are coming out at the other end and are very focused on the growth curve and recruiting."

One big change has unfolded at the very top with EFG chief financial officer and deputy CEO Giorgio Pradelli taking over as chief executive at the start of 2018. The move was announced in October, and had surprised market watchers as the bank has yet to fully digest its rival.

But with most of the key milestones in the merger achieved except for one, the deal's upsides are already flowing in.

EFG's assets under management have almost doubled from 80.6 billion Swiss francs to 148 billion as at end October 2017, making it a "major player", in Mr Williamson's own words.

The wealth manager was founded in 1995 by two banking veterans from Citibank and Coutts. Ten years later, it listed on the Swiss stock exchange, already reaping the fruits of cost synergies. By 2019, it aims to save a total of 240 million Swiss francs - with more than half of this to come from information technology (IT) integration, given that BSI had "massively outsourced" the platform.

It would appear that the fundamental points that make BSI a nice fit trumped the earlier misgivings - if any - over swallowing a scandal-hit target.

"Of course, everyone was focused on the regulatory issues (with BSI) but it had some nice qualities which was highly complementary to what we do," Mr Williamson said. "It's a step change. BSI has given us important critical mass that would have otherwise taken us years to do."

Critical mass is pivotal, and could cushion falling margins in an environment of rising compliance cost and interest rates at barely above zero. It also enables banks to operate more efficiently and with that, the Greek-owned private bank is targeting to bring cost-to-income ratio to below 70 per cent from over 80 per cent currently.

Prior to the BSI deal, EFG's focus in Asia was largely centred on North Asia. Now, it has booming South-east Asia (SEA) under its belt. "The deal has strengthened our position in SEA considerably. Prior to the acquisition, North Asia accounted for a bulk or up to 80 per cent of AUM (assets under management) in the region. Now, it is some 55 per cent North Asia and 45 per cent SEA," said Mr Chiu.

Fresh from launching a renewed brand in April this year, EFG now has a foot in the flourishing segment of external asset managers - another upside from the BSI deal - which it plans to kick off in Singapore. The bank is also on a hiring spree.

All that is left to do is the IT migration in BSI's former headquarters in Lugano - which is on track to being completed by year-end. There was undeniable relief in Mr Williamson's optimism: "Everything that has happened is exactly on time."