Six months ago, Julius Baer’s chief executive, Philipp Rickenbacher, was riding high on the bank’s new status as the second-biggest wealth manager in Switzerland.
The recent collapse of Credit Suisse, following a decade of scandals, and its takeover by UBS presented Julius Baer with a once-in-a-generation opportunity to pick off advisers and clients from its much bigger domestic competitor.
In the four months following UBS’s March rescue of Credit Suisse, Julius Baer pulled in SFr9.2bn ($10.6bn) of new money, boosting its assets under management to SFr441bn, and poached scores of relationship managers from its rivals.
“There’s no reason that should slow down, [notwithstanding] unexpected adverse market events,” Rickenbacher told the Financial Times in July. “On the contrary.”
But on Thursday morning, Rickenbacher quit after Julius Baer wrote off SFr606mn of loans it had extended to Austrian luxury property developer Signa Group, halving its annual profits.
The stark reversal of fortunes for the 134-year-old wealth manager fits a well-rehearsed narrative of a bank wading into a new profitable business line without fully understanding the risks involved.
“We will learn from our mistakes,” Julius Baer chair Romeo Lacher told the Financial Times this week. “The oversight of risk management . . . will be intensified.”
The problems can be traced back to 2019, soon after Rickenbacher became chief executive, when the bank opened a new unit that lent money to unlisted companies.
The private debt business was set up in response to requests from the bank’s ultra-rich clients who wanted to borrow money for their businesses. The division would report to Dieter Enkelmann, Julius Baer’s long-standing chief financial officer who was the driving force behind the division.
For those inside the bank, it seemed like a natural progression from its more traditional forms of credit, such as mortgages and Lombard lending, where wealthy clients offer up liquid assets such as stock for collateral.
According to people with knowledge of its dealings, one of the early pieces of business the division wrote was a bridge loan to help property group Signa and its owner René Benko buy a 50 per cent stake in Swiss luxury department store Globus in 2020. A year later, the debt was refinanced by Credit Suisse.
Internally, the deal was viewed as a big success: the bank earned more money and was paid back faster than anticipated. It was used by Enkelmann as a vindication of the decision to move into private debt, the people added. Signa and Benko, it appeared, were worth staying close to.
Over the next couple of years, Julius Baer continued to lend more money to Signa, including a €364mn loan to help Benko buy the Selfridges Group, the company behind the upmarket London shop, and credit to finance the purchase of KaDeWe, Germany’s most famous department store.
But by 2022, cracks were beginning to appear in Benko’s €27bn property empire. In October, Benko was named by prosecutors as a suspect in a long-running corruption investigation in Austria that has ensnared prominent businessmen and politicians. The probe had led to the resignation of the country’s chancellor Sebastian Kurz, a key ally of Benko, the previous year.
Benko’s involvement in the case became public after police raided Signa’s headquarters in Innsbruck, but no charges were made against Signa Group or Benko.
Soon afterwards, Deutsche Bank ended its relationship with the Austrian developer over concerns about his involvement in the scandal. But Julius Baer stayed with Signa, which by now accounted for more than a third of its private lending book.
By November 2023, Signa was struggling under the weight of rising interest rates, declining consumer spending and a large debt pile. Benko was forced out by shareholders in the group and a restructuring specialist drafted in.
“After the success early on . . . it became clear that there had been a major error in judgment,” said one person involved.
Following weeks of speculation about its exposure, Julius Baer announced that it had lent SFr606mn to a single client — reported at the time as Signa — and that it was taking provisions of SFr70mn against losses due to “valuation adjustments” in its loan book. It also said it would review the private debt business.
The bank’s shares began to tumble, falling more than 20 per cent in a week. When Lacher met shareholders in early December, they expressed alarm about the size of the exposure.
“The reaction was surprise that we were in the private debt business . . . [and at the] size of that single exposure,” he recalled this week. “The shareholders expected from the board, but also from me as chair, action.”
The bank’s shareholders were also concerned about comments made by Rickenbacher at the FT’s Global Banking Summit in late November that they felt lacked judgment and showed he was not taking the situation seriously enough.
“I believe Julius Baer will be able to continue its risk appetite and risk capacity as we have on average in the past few years,” Rickenbacher had said.
Meanwhile, Finma — the Swiss financial regulator, which has come under intense scrutiny over its handling of Credit Suisse — began investigating Julius Baer’s relationship with Signa and its internal risk management controls.
Finma had previously banned Julius Baer from undertaking large acquisitions and ordered the bank to improve its controls following its involvement in money-laundering scandals involving Fifa, world football’s governing body, and a Venezuelan oil company.
In the run-up to Julius Baer publishing its annual results this week, the board realised that they needed to respond to investor calls for action and an increasingly assertive regulator.
They decided to write off the bank’s entire exposure to Signa and agreed with Rickenbacher that he should step down, along with David Nicol, a non-executive director who was in charge of the board’s governance and risk committee.
The board judged that the bank’s chief financial officer, Evie Kostakis, who started in 2022, had little to do with the Signa relationship, which had been established under her predecessor.
Julius Baer also brought in a third party to assess its private debt business — which it has since decided to wind down — and its internal control systems.
There remains hope that some of the losses can be recovered over time and the bank is weighing up taking legal action against what remains of its client.
“Signa has really high-quality assets. Unique, prestigious real estate, unlike equities, will never fall to zero value,” a person involved said.
However, Julius Baer’s entanglement with Benko is yet another embarrassing blow to Switzerland’s reputation as a sound financial centre, less than a year after Credit Suisse imploded.
“In hindsight, it is clear that the evolution of the private debt business outpaced the adjustment of its framework,” said Lacher.
“We misjudged the risk.”
