Swiss authorities eye another potential banking problem

Julius Baer’s woes echo those of Credit Suisse. Management says it can avoid that fate

A year ago, as UBS Group AG was dissecting the remains of Credit Suisse after its emergency takeover of the troubled lender, the executive team at another top Swiss private bank jumped to reassure clients of its stability. Philipp Rickenbacher, then the chief executive officer of Julius Baer Group Ltd., told his wealthy customers that the 133-yearold institution had “a laser focus” on getting through an historic upheaval for Swiss finance. The bank’s balance sheet was “rock solid” and adhered “to the highest risk-management standards,” he wrote in a letter to clients.

Rickenbacher’s comforting words soon rang hollow. As he penned his missive, Baer was sitting on some $700 million in exposure to a single, soon-to-be-bankrupt client: Austrian real estate tycoon Rene Benko. When Benko’s empire of luxury department stores and posh hotels crumbled last year, so did Rickenbacher’s credibility. The bank announced his departure on Feb. 1.

A year after Credit Suisse’s demise— precipitated by a reckless approach to risk that spurred clients to pull out tens of billions of dollars over just a few months—Swiss financial authorities are confronting another problem bank. The litany of concerns uncovered by the Benko debacle is long, but the gist is that Baer simply allowed the pursuit of profit to outweigh prudence. And while no one is predicting the bank will follow Credit Suisse into the financial graveyard, there are echoes of the missteps that toppled that giant.

The question for Baer and the Swiss financial system is how to repair the damage as regulators work on multiple probes at the lender. For the bank, which declined to comment on the probes, much remains unclear—from its future strategy to reforming its risk culture to the prospect of a landmark acquisition—as either buyer or even as seller. “I can assure you, we have extensively reviewed the quality of our credit risks,” Evie Kostakis, Baer’s chief financial officer, said on a Feb. 1 call with stock analysts. “We are vigorously ramping up even further our recovery efforts.”

Baer’s headquarters sits just a stone’s throw from UBS’s along Bahnhofstrasse, a stretch of high-end boutiques, cafes and financial firms that runs from Zurich’s neo-Renaissance central station to its sparkling lakefront. The bank was founded in 1890 as a money-changing house serving the newly mobile businesspeople brought in by the railway. A decade later, co-founder Julius Baer renamed the bank after himself.

In its early years, Baer had fortunes that followed those of Switzerland as rapid industrialization made the nation one of Europe’s richest.

When World War II broke out, Baer set up a branch in New York to help customers fleeing the turmoil in Europe protect their wealth—its first step toward international expansion.

In 1980, Baer went public with a listing in Zurich. It soon began a series of acquisitions, and in 2013 it bought Merrill Lynch’s wealth-management operations outside the US and Japan, assuring a solid presence in Asia and the Middle East. Today, the bank oversees 430 billion Swiss francs ($483 billion) in client assets, but the business of managing rich people’s fortunes is deeply fragmented. UBS, the global leader in wealth management outside the US, looks after almost $4 trillion in client funds, but that accounts for less than 1% of total global private wealth. The ultrarich value a discreet, personal touch, so growth usually requires buying another outfit or luring bankers and their contact books away from a rival.

That can propel managers into risky deals to expand. After a push into Latin America in the aughts under a previous CEO, Boris Collardi, Baer ran into trouble over insufficient money laundering controls related to alleged corruption in Venezuela. Financial watchdog Finma imposed a temporary ban on large-scale acquisitions and slapped Collardi with a personal reprimand for his lax oversight—a tough punishment in Switzerland. Baer, along with several other banks including remnants of Credit Suisse, is also under investigation in Singapore over the handling of funds linked to suspected criminals, though it’s unclear whether that will lead to charges.

Then there’s Benko. The business with the free-wheeling Austrian arrived with a banker named Gilles Stuck, who brought the account when he quit Credit Suisse and in 2018 crossed the street to work for Baer. Other banks had been unenthusiastic about requests for more loans, but Benko got a warm welcome at Baer. Rickenbacher wanted to add new sources of income, and one area of focus was “private debt,” effectively lending to entrepreneurs who are rich on paper but lack liquid funds. As Baer shoveled out credit, Benko grew to be the biggest customer of that unit.

Even as Baer piled up massive exposure to this single client, the handling of the Benko account was waved through by the lender’s riskassessment staff. The implosion revealed a conflict of interest at Baer’s core: Teams that managed credit risk reported to the same person as bankers responsible for loans to private clients such as Benko—in this case, the chief financial officer. At most banks, the risk staff would typically report to a chief risk officer. In short, Baer’s structure

blinded managers to the possibility of the Benko loans going sour, leaving them to focus on the potential profits from the account. In the end, the Benko affair cost Baer half its 2023 profit.

Baer’s travails have only intensified the nagging suspicion in Zurich that something is awry in Swiss finance, leaving regulators wondering what else they might be missing. As Finma undergoes something of a revamp after the Credit Suisse meltdown, it’s stationed staff at Baer’s Bahnhofstrasse offices, according to people familiar with the matter. Multiple investigations are underway: into risk processes, client monitoring and the bank’s activities in Russia.

To bolster its credibility, Finma has hired Stefan Walter, a veteran of the European Central Bank with a decade of experience overseeing the likes of Deutsche Bank AG, as its next CEO. And the government is working through proposals that will finally give Finma the power to fine banks that step out of line.

Senior executives, speaking on condition of anonymity to discuss private matters, say that since clients didn’t lose any money there’s little risk of the kind of nosedive in confidence that sank Credit Suisse. Inflows of client funds to Baer have improved since the Benko affair was revealed, managers say. Yet investors appear less than fully convinced. Baer’s share price dropped more than 20% after the Benko news in November, and it’s only partially recovered even as the benchmark Swiss market index has climbed about 8%.

Finding a new leader will be key to regaining the market’s confidence. Nic Dreckmann, a two-decade Baer veteran, has been serving as interim CEO since February. Although the board initially didn’t see him as a long-term choice, he’s indicated he’d like to stay on in the job, according to people familiar with the matter. But the board is still looking for an external candidate and is considering top bankers from across Europe.

The bank’s leaders are getting strategy advice from Goldman Sachs Group Inc. as executives look at possible acquisition targets to boost assets under management. But given the flagging confidence in Baer, it could also be acquired by a rival—though the bank’s high valuation makes that unlikely. “Julius Baer is in a psychologically vulnerable position,” says Ray Soudah, a privatebanking veteran and founder of mergers and acquisitions boutique Millenium Associates. “They may become a target, and I wouldn’t be surprised if some institutions may consider a bid.”

An immediate route to more solid growth is to recruit staff from elsewhere—even though that’s how Benko’s business was brought on board. Last year, Baer expanded its staff of wealth bankers by more than 8%, to about 1,300. Although hiring comes with headaches, such as compliance worries and higher costs, incoming bankers usually bring business with them. “Once the new people settle down, the hope is that they are going to start producing more meaningfully this year,” says Andreas Venditti, an analyst at Bank Vontobel AG.

In public and in private, Baer’s senior executives stress that they’ve learned important lessons from what went wrong. Top leaders are forgoing bonuses, the bank is reworking its risk-control structures, and the private debt business at the heart of the Benko losses is being shut down. With Rickenbacher out, attention is focused on expanding Baer’s traditional business of wealth management. “We had the private debt issue, which was an isolated case, but the underlying strategy and the measures that we have put in place will help us to meet our targets,” says Baer Chairman Romeo Lacher. “The decisive measures that we’ve taken give a clear message to our clients and to the market that we take their concerns seriously.”

Myriam Balezou and Jan-Henrik Foerster

“I can assure you, we have extensively reviewed the quality of our credit risks”

THE BOTTOM LINE A year after Credit Suisse’s demise, Switzerland is confronting similar missteps at Baer, which must fix its problems while plotting a new course and reining in risk.