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Julius Baer may sell custody arm - Merrill

SWITZERLAND – Julius Baer may sell its custody business, according to a Merrill Lynch research report following the changes announced last week at the Swiss bank.

Potential purchasers for the business could be the Bank of New York and HSBC, observers say.

Last week Julius Baer said it would buy four wealth management firms from UBS in a broad move that would see also see new management – and job losses - at the firm.

“We note that the custody business may be scaled down significantly (or discontinued completely),” said Merrill in a research note. Julius Baer declined to comment.

Any acquisition would come as mid-tier players are seen as struggling between larger businesses and niche operators.

“Julius Baer may decide that their custody business is not economically viable, and perhaps it makes more sense to get rid of it,” said custody industry consultant Richard Hogsflesh.

Hogsflesh suggested that Julius Baer – with a custody business volume of CHF43bn (€39bn) - would be likely to sell it to non-competitors in the Swiss industry or to businesses trying to gain a foothold in the Swiss market.

“HSBC could be a potential acquirer or the Bank of New York,” he told IPE.

“We have seen a growing trend in Europe over the past five years where pressure is driving consolidation. Custody is also a volume business and this invariably favours the larger institutions and pressures the smaller ones,” said HSBC spokesperson Richard Lindsay. The Bank of New York declined to comment.

The Merrill Lynch report upgraded Julius Baer to “buy” status despite fears of cost-cutting, downsizing and management wrangling. It says it’s an “attractive restructuring story”.

“With its recent management change and merger, we think Julius Baer is one of the few banks in Europe that offers potential upside via restructuring,” Merrill said.

Earlier this month IPE reported that approximately 350 jobs were on the line following Julius Baer’s CHF5.6bn (€3.6bn) acquisition of four wealth management firms from UBS.

Merrill Lynch argues that restructuring is on the cards following the acquisition. New head of asset management David Solo – who replaced Roman von Ah - has been pinned as key in this regard.

“Admittedly the restructuring process could hit some bumps along the way, but we believe the upside potential outweighs the risks,” said Merrill Lynch.

The report expects positive flows into the fund to stabilise following exceptionally good growth in the first half of 2005.

The firm also called Baer’s asset management “the hardest division to forecast” with the “biggest opportunity for cost cutting”.

While the report expressed confidence in the abilities of Solo, and his colleagues Alex Widmer (formally at Credit Suisse) and Hans de Geir (from GAM), it warned of “a potential for discord”.

“These three individuals have never worked together. Furthermore, Mr Widmer originally accepted the job of CEO at Julius Baer only to be demoted to head of private banking when the merger happened.”

“While any acquisition has execution risks, we think these risks are somewhat limited in this deal given the lack of overlapping clients,” said the report.

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