The majestic Matterhorn is one of those iconic images of the alps that we all identify with Switzerland. The mountain signifies strength, security, and longevity. It’s not surprising then that images of the Matterhorn are often used in marketing material from Switzerland’s largest private banks. Perhaps it would be easier for these institutions to show their similarities with the Matterhorn by providing an image of their stock prices.
We have many personal friends that work in Swiss banking that work tirelessly to serve their clients. Our job at Dorr Asset Management is to give our clients, as well as our friends at those Swiss financial institutions, a different perspective so that they can evaluate risk transparently and make informed decisions.
The challenge facing Swiss financial institutions in our opinion are as follows:
- Negative yields in Switzerland and throughout Europe are destroying net interest margins (NIM). Banks traditionally make money by borrowing at one rate and lending at the other, the difference between is the NIM. In a negative rate environment, this becomes nearly impossible.
- Exposure to other European financial institutions with weak balance sheets and loads of non-performing loans is high. Everyone has watched Deutsche Bank steadily deteriorate and its financial implosion is far from over. The reverberation will hit Swiss banks as well as banks around the world.
- Since the Swiss signed the reporting agreements under FATCA with the U.S. and CRS with the world they have effectively killed privacy, their premium priced product. In a world where full disclosure is now the norm, Swiss banks have to compete on global prices for financial services. In this area the competition is stiff and the U.S. and U.K. financial institutions are far more competitive.
- Structured products are a big source of profits for Swiss banks and as high net worth clients become savvier they are realizing these products benefit the banks first and foremost rather than the clients. Furthermore, most structured products introduce an element of credit risk because the bank is typically the issuer of the structured note. Most high net worth clients weren’t exposed to Lehman Brothers during the 2008-2009 great financial crisis but had they been they would have learned that “100% principal protection” depends on your bank still existing. Check out this link for consumers that were impacted by Lehman Brothers to get an idea of what can go wrong.
So what can clients do? Our advice is to stay nimble. No bank can last as long as the Matterhorn. Global banks have become enormous as they mix investment banking, commercial banking, and private banking altogether. If there is a risk in one part of the banks’ operations it can potentially lead to problems in other areas and as we’ve seen over and over large banks seem to be perpetually exposed to conflicts of interest. For us, we prefer to have a clean and direct relationship with our financial institution. We have used Interactive Brokers for over 20 years personally and for nearly a decade since we started Dorr Asset Management. We chose Interactive Brokers because of the following features:
- No conflicts of interest. Interactive Brokers operates on an agency basis only. That means they execute trades. They don’t take the other side of trades with a prop desk as most banks have done for decades. They don’t risk their balance sheet trading. They don’t have any investment banking activities, commercial banking activities, nor private banking activities. They are pure brokerage and have been that way for over 40 years.
- Their trading costs are the lowest in the business. It’s shocking to see the difference. To give an example we once executed an investment position for two clients at the same time, one in Interactive Brokers and the other at their Swiss Bank. The trade at Interactive Brokers cost about $18.00 in total and the trade at the Swiss Bank over $5,000. That’s robbery plain and simple.
- It’s not easy to find a broker that makes good trading technology. Interactive Brokers has been a leader in technology for trading since their very beginning. It’s part of their DNA and it makes our life much easier using the best and most secure technology on the market.
- Interactive Broker’s global access is second to almost none. We have access to over 120 different global markets and are able to invest in multiple asset classes for clients effortlessly with one broker instead of ten. As a firm dedicated to global macro investing global access is paramount to what we do.
In summary, keep an eye on European and Swiss banks this week and throughout the rest of the year. We think you’ll be hearing a lot more about their financial troubles throughout the summer. One of our top short positions in Q4, and favorite again this year is short the Euro Stoxx Bank Index which comprises over 26 European banks. And in case you thought our image of the Matterhorn was reserved just for our Swiss friends at UBS and Credit Suisse, think again. Below is the Euro Stoxx Bank Index. The Matterhorn will last, many of these banks won’t. Make sure your money outlasts the banks.