Shaking up Swiss Bank Corp.

The 122-year-old bank is going through the biggest changes in its history. A shift in international strategy is boosting opportunities for profit and risks.

BASEL -- These are turbulent times for Swiss Bank Corp.

Hard hit by a series of bad credit mistakes in the 1980's, the $156 billion-asset bank has embarked on the biggest change in its 122-year history.

The goal, says Georges Blum, SBC's group chief executive, is to separate Swiss retail operations from an international wholesale business and centralize management by product lines rather than geography.

Just as far reaching and much more controversial, say analysts and other bankers, is Swiss Bank's shift in international operations toward risk-oriented trading and investment banking, and away from a conservative, lending-oriented strategy.

"Returns on assets in the domestic market are unacceptably low, so they have to look for ways of leveraging their substantial equity base," says Robert Mocatta, a banking analyst in London with Barclays de Zoete Wedd.

More Risk, More Return

"The returns they can get from fast-growing, slightly riskier businesses are much greater than what they can get from retail."

Results so far show that the bank is heading in the right direction.

Net earnings rose nearly 36% last year to $975 million. Much of the improvement came from worldwide trading revenues, which nearly doubled to $2.1 billion from $1.1 billion in 1992.

Mr. Blum declines to predict whether the bank will be able to repeat the performance in 1994, but suggests that income may decline because of a downturn in the securities markets this year and lower demand in interest-rate products.

Trying to Reduce Costs

Offsetting this, Swiss Bank hopes to boost profits further through cost cutting in its domestic retail branch network and a further reduction in the high provisions it has had to make over the last few years against bad loans.

Analysts are convinced that the bank is unlikely to match its 1993 results.

But they also expect further profits as costs are trimmed and provisions fall.

"Clearly, they're not going to match last year's record but they have stated that domestic bad debts have improved to a greater extent than they anticipated," says Bryan Crossley, an analyst with Hoare Govett in London.

CEO Wins Praise

"Of SBC's major priorities, improving asset quality is perhaps the furthest advanced," observes John D. Leonard, banking analyst in New York with Salomon Brothers.

Analysts credit much of the drive to reposition Swiss Bank Corp. to the personality of Mr. Blum, 59, who rose through the ranks to become chief executive in April 1993.

"He's got a lot of credibility and he's very much in charge," remarks Mr. Mocatta. "He comes across very well."

Proof that styles have changed and that Mr. Blum intends to hold people accountable came only last month when the bank abruptly fired three middle-ranking executives and three senior managers.

These executives, in the Zurich foreign exchange and correspondent banking units, were charged with making unauthorized trades that could wind up costing the bank $70 million.

Observers note that under previous policies, the bank would have likely tightened controls over the traders while keeping them in place.

"It's the flip side of the new culture introduced that rewards people for performance," says Ricardo Kleinbaum, a bank analyst in New York with Fitch Investors Service.

Worldwide Shake-Up

The corporate reorganization is being applied to business both at home and abroad.

"We don't have regional profit centers any more," says Mr. Blum. "We're organized along functional lines.

The restructuring comes as the bank is working out its remaining problems with hundreds of millions of dollars in loans both inside and outside Switzerland.

Mr. Blum declines to specify the extent of the bank's remaining problem credits but says that outside Switzerland, big corporate borrowings, real estate-related loans, and highly leveraged transactions have been or are close to being resolved.

Different Story at Home

In Switzerland, Swiss Bank is still in the process of working out its portfolio, he adds.

"It's over," Mr. Blum declares. "The problem loans of the 80s internationally and in a great part in Switzerland have been solved."

In part, the bad lending prompted a thorough review of the bank and a decision to tighten credit controls and intensify risk management.

"There's a much tighter lending culture," Mr. Mocatta observes.

But analysts speculate that bad credit control may not be the only reason behind the shake-up. Equally probable, Mr. Mocatta says, is that the bank decided to take a calculated gamble that "there are chances of trading losses, but the higher returns on turnover will more than compensate any individual losses."

"Over a 10-year cycle, they'll also get substantially more out of that business than out of lending."

O'Connor Makes a Difference

Bankers and analysts concur that much of the risk-management culture that dominates Swiss Bank has been supplied by O'Connor Associates, the Chicago-based derivatives trading company that Swiss Bank acquired two years ago.

"We not only bought good people, we bought technology including risk management," Mr. Blum says.

In fact, SBC has virtually turned over risk management in its capital markets field to Robert Gumerlock, managing director, a former O'Connor partner who now supervises risk control for the bank from Zurich.

Mr. Blum acknowledges that the acquisition of O'Connor has proved particularly lucrative for SBC, which is using the firm's derivatives expertise to structure complex transactions. It is also extending risk management technology to international institutional asset management.

Innovation in London

"It gave us a breakthrough in corporate finance in London, where we were able to obtain certain important mandates because we could offer innovative solutions," Mr. Blum says.

"It permitted us to offer totally new solutions and compete in niche fields with local banks."

Heading both the domestic and international divisions is the corporate center run by chief financial officer Peter Wuffli and Alberto Togni, chief credit officer.

Much of the reorganization in Switzerland is aimed at centralizing back office operations and reducing operating expenses that came from having largely autonomous regional banking units in Switzerland.

Coals Abroad

Outside Switzerland, Mr. Blum says, the goal "is to identify opportunities with the help of products centers," which will help handle transactions around the world.

This, he points out, has two advantages: It permits the bank to identify which products make the most money and it is more flexible, allowing faster deployment of resources and expertise for particular transactions.

The reorganization caps a decade-long expansion. Like other Swiss hanks, SBC had been developing operations abroad with the aim of becoming a global financial institution centered on the Northern Hemisphere. The expansion is far from over.

In Asia, the bank has moved its foreign exchange trading to Singapore and its equity-related operations to Hong Kong.

Changing Priorities in U.S.

In the United States, where Swiss Bank has $17 billion in assets and holds both investment and commercial banking powers, the bank is shifting away from its commercial banking heritage, and is developing wholesale finance and capital markets operations instead.

In a move to gain greater flexibility under U.S. banking laws, the bank has applied to the Federal Reserve Board for Section 20 underwriting powers for corporate debt and equity.

The application has two purposes, Mr. Blum says. First, it will facilitate the absorption of O'Connor's equity-related operations which U.S. regulators had barred the bank from integrating into its other operations.

Second, it will enable SBC to pursue capital market operations without running afoul of U.S. legal constraints.

Sources do not exclude the possibility that Swiss Bank may give up the U.S. investment banking powers it holds under the 1978 International Banking Act. This may help the hank develop capital markets-related operations in the United States.

Mr. Blum declines to comment on this question but does point out, "If we have to choose between giving up our investment banking powers and getting Section 20 approval, we would choose Section 20."

Market sources say the hank is also considering moving its wading staff out of 222 Broadway in Manhattan to Stamford, Conn., and hiring hundreds of additional traders over the next few years.

Mr. Blum declined to comment on plans to expand U.S. staff but confirmed that he is "is evaluating the possibility of moving (trading) operations to Connecticut or other locations" while maintaining a corporate center in Manhattan.

More Losses Ahead?

Could the more risk-oriented culture set the stage for a new round of losses at Swiss Bank?

Analysts are prepared to give it the benefit of the doubt. But they also acknowledge the danger does exist.

"The problem with the O'Connor derivatives and hedging area is that it's like a fallout shelter," says Mr. Crossley.

"You never know whether they'll work until you need them and by that time it may be too late."

Counters Mr. Blum: "There's been a big change, but it's been a controlled change."

"We know which aims we intend to achieve and we have quite clear objectives for the future."Like ClockworkThe reorganization of SwissBancorp, following advice formMcKinsey & Co.* Private banking, for accounts with more than $230,000* Retail banking* Banking for enterprises and institutions* Logistics, containing human resources, information technology, custodial business, and payment systems Internationally, SBC divided operations into three areas*:* Capital markets and treasury* Corporate finance* Logistics * Internaitonal operations are also subdivided along geographic lines: Europe, Asia, and Latin AmericaSource: Swiss Bancorp

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