The global banking industry has hogged the financial news headlines over the past month more frequently than usual. Right after the run on Silicon Valley Bank (SVB), the industry was further gripped by the “forced marriage” of two of the biggest names in private banking: UBS and Credit Suisse, so that the latter could be rescued and a wider crisis in the industry could be prevented.
For Frédéric Rochat, managing partner of Swiss private bank Lombard Odier since 2012, these changes — while headline-grabbing — is a known pattern that follows cycles of heightened inflation and interest rates, which translate to significant volatility across bonds and equities.
The difference this time, he tells The Edge Singapore in an interview, is that this scenario has occurred after an extended period of exceptionally low or negative rates followed by an exceptionally fast-paced rate increase.
Because of this, the market is starting to realise several fragilities in the system, which is making investors question the solidity of certain players in the banking industry, says Rochat. “When the rates were low, many banks used cheap deposits to fund long-term loans or make long-term investments in bonds. When the cheap deposits suddenly become very expensive, the banks get a bit of a squeeze. This can be seen in SVB and other European examples.”
Amid this operating environment, Lombard Odier’s current focus is to highlight its status as a solid banking partner that can offer its clients “high levels of quality of sleep”, says Rochat. He explains that the firm’s business model is built in a way that helps it pass through storms and crises, similar to the current industry landscape.
The seventh-generation firm is an independently-owned private business that can trace its founding to 1796, managing client assets of some CHF300 billion ($435.7 billion). This means that the notion of responsibility is very important — the firm has to go a long way to ensure that it does not have to bear monetary losses from unnecessary mistakes, says Rochat. Additionally, being primarily an investment firm, Lombard Odier has not ventured into risky business lines such as proprietary trading and the provision of commercial loans despite calls from the industry to do so.
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Rochat says that the privately-held Lombard Odier’s balance sheet is extremely liquid, with a substantial portion invested in liquid Swiss franc with the Swiss National Bank. “While it wasn’t earning a lot when Switzerland was experiencing negative rates, it was done for the safety and comfort of our clients to eliminate risk,” he says, adding that the firm has a 30% core equity Tier 1 ratio, which is 2½ times the minimum required. The firm also has a AA– rating from Fitch, which Rochat says is the best possible rating it could have for a bank its size.
In its pursuit of prudence, Rochat acknowledges that Lombard Odier may have missed out on many business opportunities chased by the competition with higher risk appetites. However, he reiterates that the firm has no regrets, as its business model shows strength in stress. “Our focus is always to defend this very differentiated business model that is essentially first and foremost based on solidity, stability and continuity,” says Rochat.
Focus on sustainability and private assets
Despite the post-pandemic recovery and countries opening up their borders, investors have quickly gone past the initial euphoria, as they are confronted by central banks prioritising the fight against inflation by aggressive tightening, raising concerns that major advanced economies that the restrictive stance could tip the economy into a recession.
Against this backdrop, it is very easy to become pessimistic, says Rochat. Lombard Odier, however, adopts a more optimistic stance, focusing on finding attractive long-term investment opportunities in areas such as sustainability, which the bank claims it is approaching quite differently from the competition, given the complex nature of sustainability investing where a multitude of factors and metrics are to be used. Rochat agrees that investing based on environmental, social and governance (ESG) metrics is interesting and has some advantages — it is simple, intuitive and relatively easy to understand.
However, traditional ESG metrics focus heavily on a company’s past performance instead of its future sustainability trajectory. While Lombard Odier does consider a company’s past performance, the firm also focuses on its sustainability trajectory and assesses its exposure to controversies and the possibility of it emerging as a leader in climate transition in its sustainability investing decisions.
“We think the sustainability revolution — like the tech revolution over the last 40 years — will ultimately impact almost every economic sector and affect our personal lives. So we think we need to understand the nature of that transition and try to anticipate the big system changes across economic sectors that will unfold. We try to understand where companies are investing today and where tomorrow’s profits will be generated. This, in turn, helps us identify the potential leaders and those who would suffer from earnings impact,” says Rochat.
In the current economic cycle, it is also important for Lombard Odier’s clients to diversify away from liquid-only investments. This is why the firm had worked on developing expertise in private assets such as private equity, venture capital, real estate, infrastructure and private debt.
Rochat says the firm first developed its private assets expertise to satisfy its Swiss pension fund clients 16 years ago in 2007, following Switzerland’s prolonged low-interest rate environment. Over the years, the firm started to offer private asset investments on a much larger scale to its private clients, whereby the private assets are systematically represented in each portfolio.
One asset class that has proven popular among Lombard Odier’s clients is private debt — specifically senior secured debt. This financing arrangement represents the highest claim on the borrower with the lowest downside risk to the lender, making it less risky than other private debts, such as subordinated debt. Additionally, unlike fixed coupon debts, senior secured debt is less impacted by the vagaries of interest rate developments, says Rochat.
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Capturing wealth growth in Asia
Anticipating strong economic growth boosting wealth creation in Asia, Lombard Odier has actively bolstered its commitment and presence in Asia. Rochat says the firm is optimistic about the region’s prospects, expecting Asia to benefit from a strong rebound following China’s reopening.
He points to several stereotypes regarding wealth management clients in Asia. Clients in Asia are said to be more transaction-driven, which may have been true in the past. However, Rochat highlights that he is seeing the emergence of a new breed of sophisticated, savvy clients in the region looking for providers with holistic investment solutions and differentiated value propositions, which Lombard Odier is trying to serve.
Recognising the shift of wealth from other parts of Asia to Singapore that has taken place, especially over the past year, Rochat commends Singapore’s development as a financial centre. In the current volatile and uncertain world, Singapore offers investors a solid base of regulatory certainty, an effective economy, and political stability, which international investors value, he adds.
The latest data from the Monetary Authority of Singapore shows that the city-state’s asset management industry registered a 16% growth y-o-y in AUM to $5.4 trillion in 2021. Serving as a global gateway for asset managers and investors in the region, 78% of the AUM originated from outside of Singapore.
Rochat says: “We have always seen solid growth for Singapore as a financial centre, and we expect a very positive dynamic unfolding over the next few years. This is why within our firm, we have an ambitious growth strategy for developing our operations in Asia, especially from Singapore. It is a strong base for us, and we look forward to capturing the emerging opportunities.”
