Union Bank of Switzerland and Swiss Bank Corp. expect through their merger to expand investment banking, institutional asset management, and private banking in the United States and worldwide.
Speaking at a conference in London on Monday, the day of their $25 billion merger announcement, senior executives from both institutions said the merged bank, the second-largest in the world, would offer a strong "platform" for growth in those three key sectors.
They also said they want to improve return on equity to 20% from the current 13%-15% range over the next five years.
"We want to strengthen our core franchises" and in the process gain a "huge competitive advantage," said Mathis Cabiallavetta, chief executive officer of UBS, the largest bank based in Switzerland
The combined bank-it would be known as United Bank of Switzerland as of Oct. 1 next year-would have about $60 billion of market capitalization. Its assets of about $600 billion would trail only those of Bank of Tokyo- Mitsubishi Ltd.
"This is a landmark transaction in the consolidation of financial services worldwide," said Richard Goldberg, managing director and head of the financial services practice at Wasserstein Perella, which advised Swiss Bank Corp., the country's No. 2.
The merger partners have roughly $40 billion of U.S. banking assets and have been steadily building up investment and private banking and institutional asset management.
UBS runs both commercial and investment banking operations from New York that were authorized under the International Banking Act of 1978. SBC recently relinquished a grandfathered investment banking unit to acquire the brokerage firm of Dillon Read. It now operates in investment banking under section 20 of the Bank Holding Company Act.
Mr. Cabiallavetta acknowledged that the two banks "still have a ways to go when it comes to investment banking" in the United States. Marcel Ospel, CEO of SBC, said the two banks plan to merge investment banking operations within two years under SBC Warburg Dillon Read Inc. and will focus on mergers and advisory services, privatizations, and underwriting debt and equity.
Mr. Ospel added that there are no immediate plans to make any investment banking acquisitions in the United States but did not rule out that possibility in the future.
"We have plans to increase our presence in the U.S., but from today's perspective we want to build on an integrated platform and will see where that gets us," he said.
Worldwide, the group would have 960 billion Swiss francs ($685 billion) in private banking assets under management and 490 billion francs ($350 billion) in institutional funds. It would be the fifth-largest institutional asset manager in the world.
Mr. Cabiallavetta and Mr. Ospel said a major goal of the merger is to expand "on-shore private banking," but they did not elaborate. Analysts said that given their size, both banks are still underrepresented in U.S. private banking and asset management.
"They must come to the U.S.," said Michael P. Kostoff, managing director of Advisory Board, a private banking consulting firm in Washington. To penetrate this market, he said, the Swiss bankers need to achieve strong investment management returns to get past their image as conservative wealth preservationists.
Mr. Kostoff also said it is no surprise that they are looking to asset management as an underpinning of profitability.
"That is the right strategy from a global perspective," he said. "Asset management, particularly equities, is a huge growth market on both the institutional and private wealth side. That will drive financial services profit for some time."
Both UBS and SBC run their U.S. private banking operations and institutional asset management through branches in major U.S. cities.
As in U.S. bank megamergers, the principals are expecting a cost- reduction benefit: 3.5 billion Swiss francs ($2.5 billion) annually after the integration.
The merger is expected to cut approximately 13,000 jobs from a combined payroll of 56,000. Of the 56,000, 38,000 are in Switzerland, where about 7,000 will be cut over the next three to four years. The 6,000 outside Switzerland are to go by the end of next year.
Most of SBC's 3,000 U.S. employees are based in New York and Stamford, Conn., where investment banking is its biggest business. It has other offices in Atlanta, Boston, and Chicago. The institutional asset management business is based in Chicago, where about 500 people work. Besides New York and San Francisco, private bankers are in Houston, Los Angeles, and Miami.
UBS did not disclose U.S. personnel details but said it employs 2,575 in New York, Chicago, Houston, Los Angeles, San Francisco, and other locations in the Americas.
The banks will set aside a combined 2.7 billion francs ($1.9 billion) to cover the "redundancies," which will result in a loss for this year and a reduced profit next year. They anticipate significant earnings gains in 1999 as efficiencies and technology savings take hold.
Overall, the executives said the merger should help boost earnings by 10% to 12% annually over the next several years. By 2002, Mr. Ospel said, net earnings will be 11 billion Swiss francs ($7.8 billion)-including 4.5 billion ($3.2 billion) from private banking, 670 million ($478 million) from institutional asset management, and three billion ($2.1 billion) from investment banking.
Industry observers said the merger combines UBS' strong capital with SBC's more innovative management and will create a formidable competitor in financial services.
"The two companies are bigger, better capitalized, and-if there is a good strategic fit-presumably have a more interesting platform from which to do strategic initiatives," said Bradford I. Hearsh, an investment banker in PaineWebber Inc.'s financial institutions group.
Mr. Hearsh said United Bank will be very able to acquire a money management company, but this would not be immediately necessary for growth, given the size of the merged entity.
Mr. Cabiallavetta will be chairman of the merged institutions and Mr. Ospel chief executive officer. Another top SBC officer, Rodolfo Bogni, will run global private banking and Gary P. Brinson will head global institutions asset management from Chicago.
"Size and scale are important," said Mr. Cabiallavetta. "This will make it easier for us to weather storms in financial markets."
Both banks have come under scrutiny for financial transactions with Germany during World War II. On Sunday, the New York State Banking Department issued an enforcement action against SBC for failing to speedily disclose records of wartime accounts. UBS, SBC, and two other Swiss banks- Bank Julius Baer and Credit Suisse-opened their first U.S. offices in 1939 and 1940.
