Swiss bank giants boldly merge

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THE OVERCROWDED Swiss banking sector took its boldest step in an overdue process of rationalisation yesterday, as CS Holding, the parent company of Credit Suisse, confirmed its takeover of Swiss Volksbank, the country's fifth-largest.

The two banks are to continue to exist side by side, with Volksbank concentrating on its retail activities. But analysts expect them to attempt to improve costs by joining forces in 100 to 150 branches, in a market that has long suffered from gross overcapacity. The Swiss banking network is extremely dense, with about one branch for 67 people, nearly double the Western European average.

Falling profit margins for retail banking, and heavy losses in property investments, had badly weakened Volksbank, making it a clear takeover candidate. The deal price, in the form of a share swap, is estimated to be around Sfr1.7bn ( pounds 785m). Hans Kaufmann of Bank Julius Baer in Zurich said the move made sense for CS, which needed to strengthen its grip on the home market. In leaving Volksbank to continue operating under its own name, CS is pursuing the same strategy adopted after taking over Bank Leu, which was left to concentrate on private banking, and First Boston, which focuses on investment banking.

But other analysts, such as Michael Drepper of Deutsche Bank in Frankfurt, remain concerned that the failure to fuse in a still overcrowded market will limit the potential synergy benefits. 'I expect that at some later stage it will go in this direction, for the concentration trend is far from over,' he said. With Volksbank, however, the last of the big potential victims has disappeared.

CS said the aim of the 'new collaborative arrangement' was to enhance the earning power and competitiveness of Credit Suisse and Volksbank. CS will focus on international activities, securities underwriting and managing corporate and institutional clients, while Volksbank will stick to small and medium- sized companies and private clients. The chairman of Volksbank, Walter Ruegg, said he would step down in March.

A recent study by McKinsey, the international consultancy, said the Swiss retail banking sector needed to cut costs by Sfr3.5bn through innovation, rationalisation and cutting 2,500 jobs.