Independent M&A Advisers to the Global Financial Services Industry

More or Less Foreign Banks For Switzerland

33rd General Assembly

Association of Foreign Banks in Switzerland

Lugano, 17 June 2005

2

Table of Contents

A Structural and Economic View

Valuation of Private Banking Franchises

Conclusion

3

A Structural and Economic View

• Foreign Banks in Switzerland and Private Banking

• Private Banking Market Overview

• Strategic Options for Market Players

4

Foreign Banks in Switzerland - Developments

Foreign banks in Switzerland

100

110

120

130

140

150

160

1997 1998 1999 2000 2001 2002 2003 2004

[# o

f ban

ks]

0

5'000

10'000

15'000

20'000

25'000

empl

oyee

s [F

TE]

#of banksemployees

Although slightly decreasing in numbers the relative significance of Foreign Banks has increased in Switzerland over the past decade Fewer, but bigger players

Source: Association of Foreign Banks in Switzerland

Foreign banks in Switzerland - Banking income

5'000

6'000

7'000

8'000

9'000

10'000

11'000

1997 1998 1999 2000 2001 2002 2003 2004

inco

me

[m C

HF]

5

Foreign Banks in Switzerland and Private Banking, 2004

Foreign banks in Switzerland means Private Banking to a large extent.

Over 80% of foreign banks in Switzerland are active in Private Banking, the majority more or less exclusively so.

Retail and commercial banking activities of foreign banks are limited in importance.

Area of activity# of

Institutes

Net Income from Banking

Operations

Private Banking c. 60% slightly >60%

Mixed PB and other bus. c. 20% slightly <20%

Other business c. 20% slightly <20%

6

Foreign Banks in Switzerland – “Reason of Existence”

Owners view [# of banks]

Strategic54%

Non strategic46%

Owners view [size]

Strategic67%

Non strategic33%

Owners main motivation [# of banks]

36%

30%

83%

52%

20%

17%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Important to parent'snetwork

Important group-widefunctions

Important to owner'sexisting clients

Significant new clientssource

Major financial goals

Switzerland as "safetynet"

“Stable / sustainable” raison d’être exists for 70-80% of the AuM and for 50 - 60% of the number of Foreign Banks in Switzerland.

Source: Millenium Associates AG analysis

Owner's main motivations [size]

59%

44%

83%

78%

45%

8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Important to parent'snetwork

Important group-widefunctions

Important to owner'sexisting clients

Significant new clientssource

Major financial goals

Switzerland as "safetynet"

Source: Analysis of Millenium Associaties

7

Private Banking – Market Overview I

The Swiss wealth management market is highly fragmented.

After the relatively harsh years 2001 and 2002, the situation atmost private banks has stabilized in the years 2003 and 2004 where a number of banks have posted better financial results mainly as a consequence of restructuring and refocusing and lately rising markets and exchange rates.

In 2004, the average wealth management firm posted:

Profit margin of c. 104 bps

Cost/Income ratio of c. 67%

Return on Equity of c. 14%

8

Private Banking – Market Overview II

The legal and regulatory framework for banks is tightening and thus related costs are constantly increasing.

Despite the wide-spread belief in the existence of economies of scale in the banking industry, there are examples of smaller institutions which are generating margins well above the average financial results.

The crucial issue for success in Private Banking is not size, but focus, management skills, cost control, and the right business model.

9

Private Banking - Standstill is No Option

Many Private Banks experience stagnation in their AuM growth and this phenomenon is believed to intensify after the relatively good results of most players for 2004. Main reasons:

Demographics: Aging/dying clients have to be replaced. Average PB client is over 70 years old.

Compliance/Regulation: Continued trend for tighter controls in all relevant functions

Competition: More international centers compete for the same AuM; London, Singapore, Hong Kong, etc.

Brand erosion: The appeal of many Private Banking brands has suffered. Consequently, new money from Asia is predominantly and nearly automatically going to some few banks only.

Where to find future growth is the major problem for most private banks.

10

Private Banking – Growing Organically

Many Private Banks experience stagnation in their AuM growth and this phenomenon is believed to intensify.

Keeping current AuM level is already a challenge

Based on best practice in the market, two “organic”strategies offer an alternative to stagnation:

1. Aggressively poach teams of competitors: This requires timely inside information on whom to approach when with which proposition.

2. Align management incentives: Best growing/performing Private Banks have significant and direct management ownership.

However, organic growth strategies have limited reach and do not resolve the over-capacity problem in the PB market.

11

Private Banking – Drivers for Corporate Action

Restructuring pressures still exist however most has been done, thus a desperation for growth exists feeding a sustained interest in M&A transactions.

Since most banks have over-capacity platforms, winning additional clients has a direct impact on the bottom line and therefore is the driver at the core of most M&A activity.

M&A activity will affect Private Banks of all sizes, but middle-sized ones that have diversified too much in the past will be particularly affected.

A straight sale/acquisition is not always the only option; innovative approaches can also be pursued and also may lead to the same desired final result for both acquirer and seller.

12

Key Drivers of Corporate Actions in Private Banking

BuyersSellers

Lack of growth

- Size

- Margins

Over-Capacity- Back office- Management- Capital

Strategic Hedge

- Clients / Products

Combined Private

Banking Business

Lack of growth

- Size

- Margins

Internal Issues- Regulatory problems- Management/Succession- Profitability/Losses

Strategic disposal

Size of arrow proportional to significance of reason

Relevant for Foreign Banks in Switzerland

13

Acquisition opportunities are rare

Very limited availability of willing targets

Quality issues in many available targets

Relative size problem

Current pricing levels clearly make a sale attractive again as a way to maximize shareholder value - but many don’t consider shareholder value as main driver.

Mergers among similar partners to be considered as an alternative

Many private banks are too small to live well but too big to die from exhaustion.

Cost pressures not strong enough (not yet?) to force private banks to sell or close and short term profitability gives confidence not to sell, not yet at least.

Private Banking – Buy, Sell, or Merge ?

14

Scale and synergies can be reaped in a merger while safe-guarding the reputation and pride of the merger partners.

Sharing of control and management responsibilities may however create a problem of governance at newly merged entity.

Leadership by one strong partner as an advantage.

Routes to prepare a strong position for a future merger:

enhance cost and revenue management

optimise operations, including outsourcing of non-core activities

streamline organisation and processes to prepare for efficient integration of a potential merger partner

Accepting a minority stake in a newly merged entity may also be a way for owners to pull out totally in the mid-term whilst gaining their fair share of synergies created.

Mergers among Similar Partners - a Real Alternative

15

Valuation of Private Banking Franchises

16

Valuation of Private Banks

After two harsh years in 2001 and 2002, prices in Private Banking franchises started to recover in second half of 2003. This trend has continued through 2004 and into 2005.

Today valuations are approaching the highs last seen in 1999 and 2000.

We currently observe the market has turned from a buyers to a sellers market and expect again premiums being paid to listed multiples, rather than discounts as in 2001/2002.

Thus, a strategic buyer is likely to offer a price in line or even above (offering control premiums) relative to the valuation of listed comparable entities.

17

Valuation of Private Banks (contd.)

Currently there is more demand than supply in situations where entities are being offered for sale, which is responsible for the above turnaround in pricing.

However, prices will decline again within six to eighteen months as buyers are still specific and choosy and the market realises no growth in net AUM is the reality for most firms.

Quality of the business is of importance, although winning new clients is at the core of most M&A activity.

18

Comparable Company Valuation (excl. Control Premium)

There is a selection of listed Asset Gathering franchises that are stock market listed, but none of these are pure Private Banking.None-the-less for P/E and P/Revenue multiples these could still provide a good indication.

Based on the analysis of these listed franchises, the following multiples could be applied to pure high quality private banking businesses:

P/E 2004A of 16-20x, 15-19x for 2005E, and 13-17x for 2006E (focussing on analysis from next page)P/Net Revenues of 3.0-4.0xGoodwill/AuM of 1.5-2.5% (depending on the gross margin the AuM are achieving)P/Book depending on the sustainable ROE levelThe resulting price range should imply a P/Employee of between CHF 2.0-3.0 MM (taking revenues/employee into consideration)

19

Comparable Company Valuation (excl. Premium, cont’d )

The fair stand-alone value of a “pure” private banking business is derived from equity research consensus values for UBS and Credit Suisse Private Banking as well as separately valuing Julius Baer Private Banking and Vontobel Private Banking.

Based on the analysis of these listed franchises, the following multiples could be applied to a pure play private bank:

P/AuM of 3.0-4.0% (including equity, depending on the achieved gross margin on AuM, applying a slight discount to the average since these banks receive a premium for being the market leaders)

The resulting price range should imply a P/Employee of around CHF 2.0-3.0 million (taking revenues/employee into consideration)

20

Valuations in Concrete Transactions (incl. control premium)

Looking at prices paid in transactions in late 2003 and 2004, the following multiples are justifiable at present for a reasonably pure private banking businesses including a control premium/share of the to be expected synergies:

P/E (on previous year’s net profit) of 18-25x

P/operating profit (on previous year’s operating profit) of 10-15x

P/Net revenues (on previous year’s net revenues) of 3.0-4.5x

Goodwill/AuM of 2.5%-3.5%

P/employee of CHF 1.0 -2.0 million (depending on the profitability per staff)

21

Prices for Private Banks are Peaking Again

18.4x

21.4x 22.0x

29.2x

12.5x

15.6x

28.6x

18.7x

29.4x30.2x

n/m

2.1%

5.0%

4.5%

3.7%

1.9%

0.6%

1.8%

2.4%2.7%

1.8%

3.4%

0%

1%

2%

3%

4%

5%

6%Ju

l-9

8:

BS

I/ G

ener

ali

Mar

-99

: G

ott

ard

o/

Sw

iss

Life

Jan

-01

: W

estL

B C

H/

Bd

G*

Mar

-02

: B

ank

Sa

rasi

n/

Rab

o*

Jun

-02

: D

isco

un

t B

ank

&T

rust

/ U

BP*

Feb

-03

: R

üd

Bla

ss/

DB

*

May

-03

: S

TG

/ LG

T

May

03

: E

do

uar

dC

on

stan

t /

EFG

*

Oct

03

: B

ank

von

Ern

st/

Co

utt

s

Feb

04

: Le

op

old

Jose

ph

/Bu

tter

fiel

d

Feb

04

: La

ing

&C

ruic

ksh

ank/

UB

S

0x

5x

10x

15x

20x

25x

30x

35xP/E

Goodwill/AuM

* Price estimated by MilleniumAssociates

Historical Prices Paid for Private Banking Businesses

current price level

22

Prices for Private Banks are Peaking Again

Relative valuations are not quite back at 2000 levels, but considering the more sober outlook on the industry and higher costs created by stricter legislation (money laundering rules, KYC regulations, tax legislation, etc), we think that multiples are unlikely to rise much higher and have stabilised.

The two key valuation multiples are the goodwill (purchase price minus shareholders’ equity)/assets under management multiple as well as the price/earnings ratio.

One might even want to go a step further and could say that now might be a good time to sell private banking businesses considering the challenges the sector will be facing in the future, as well as the impact a downwards correction of the stock market could have. Lack of growth will cause listed pricesto fall steadily in the next months ahead.

23

Conclusion

24

Conclusions

Lack of growth as the main reason for the eventual accelerated consolidation in the Private Banking industry; favourable exchange rates and firm asset prices are only a delaying factor.

Standstill is no option – be pro-active

Prices for Private Banking have risen substantially and stopped rising but – it is still a seller’s market for the moment especially for Geneva and Zurich, but prices are eventually going to decline and growing banks will command a premium over others.

Size and distribution matters, specifically for Foreign Banks inSwitzerland

There will be fewer Foreign Banks in Switzerland, BUT…

…the absolute and relative size of the PB sector will increase.