Sly Synergies Push Creative Cost Savings
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the biggest and best private banks in the U.S. is JPMorgan’s (NYSE: JPM) asset management unit. The unit has won numerous awards from an array of publishers proclaiming its competence, professionalism, and creative wherewithal.
Another major part of the bank’s strength is that it evokes a powerful emotion from its customers: trust. The clients, who often have assets exceeding $25 million, are shown products from banks across Wall Street, not just those of JPMorgan. The trustworthy service has earned the bank herds of new prospects.
Like JPMorgan, Goldman Sachs (NYSE: GS) has been building its private bank. The Wall Street titan hopes to bolster loans to the ultra-wealthy from $50 billion to $100 billion, providing funding for items like yachts, planes, and extra luxury homes. The plan, stemming from top management, comes at a time when trading and investment banking revenues are below past highs.
As a result of the Volcker Rule, which places limits on firms’ proprietary trading, these banks have taken an increased interest in promoting their private banks. And as the wealth management units begin to bulge, the banks have found another way to bolster profitability: cost synergies.
Revamping Asset Management
The bank’s strategy is this – it will reduce costs by eradicating overlapping back-office jobs. For example, why have 60 accountants to track asset management and another 60 to watch over wealth management when just 75 could track both? Credit Suisse, which manages $360 billion, has already begun moving its staff to the cheapest locales to consolidate head count, and it will soon merge the two groups to save even more.
The firm’s private bank already sells a large chunk of its asset management products like mutual funds, hedge funds, private equity, and partnerships. The move makes perfect sense for Credit Suisse, which sells to both institutional and private clients.
Yet another way that firms have sliced their costs is by banding together for joint ventures. Morgan Stanley (NYSE: MS) and Citigroup (NYSE: C) pulled together for a joint venture to get Morgan Stanley Smith Barney up to speed. The two firms hoped to reduce their risk by limiting their initial investments as they cooperated to craft a brokerage powerhouse.
However, the deal has failed to meet its financial expectations, in part due to outdated technology and brokers’ dissatisfaction with certain policies at the firm. The strife led Citigroup to pull out of the venture, and it plans to claim a $4.7 billion charge in the third quarter.
Initially the venture was valued near $9.5 billion by Morgan Stanley and around $22.5 billion by Citigroup, but the two firms were able to strike an agreeable valuation at a price of $13.5 billion. Though the partnership didn’t last, both firms were able to minimize their initial risk when building and scaling the venture.
In today’s tough economic and regulatory environment, banks are looking for ways to cut their costs in order to hit profitability targets. Depressed costs can come from joint ventures, or they can come from cost synergies. JPMorgan and Goldman, for example, both have a strong reputation, and their asset management and private wealth units are already collaborating together to harbor synergies.
Now, Credit Suisse hopes to save more than $100 million through 2013 by gluing its two units together. Credit Suisse may not have made this type of move just yet, but it certainly has strong role models to gauge its progress.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.