Born into a family which has spent a couple of centuries in the relationship-centric banking business, it is no surprise how Patrick Odier begins the interview with a bit of diplomatic finesse. “I like the days in Singapore. They are very efficient. It’s like in Switzerland. You know why you’re here,” Mr Odier tells The Business Times. “But at the same time they have a dynamic that we don’t necessarily have anywhere else, this sense of things moving. It’s really motivating.” The Swiss banker, aged 62, is in a good mood. Lombard Odier, the mid-sized Swiss bank which bears his family name, is flying high on the back of a boom in financial markets. Asian assets under management still form a relatively small proportion for the bank, whose clientele is a third Swiss and a third European.
But the bank has been minting money here, growing Singapore earnings at a double-digit pace. It is expanding in South-east Asia through partnerships with local, family-owned private banks. It is also financially strong: Its common equity Tier 1 ratio, or capital relative to risk-weighted assets, at 28.7 per cent as of end-June 2017, is double some of its competitors. And as private banks here try to nudge Asian clients to higher-margin discretionary portfolio management products and not treat their banks as merely brokers, Lombard Odier, like some of its European peers, occupies an enviable position.
Some 45 to 50 per cent of assets under management (AUM) are in discretionary mandates, while another 10 to 15 per cent are in advisory ones. By contrast, some banks here will be happy with merely 10 per cent of their AUM in discretionary portfolios. “If we can demonstrate returns in a systematic way, which I think we have done over the years on average, I think we will preserve our franchise as discretionary managers,” Mr Odier says, when asked how the bank keeps its business going.
The bank was also forced by necessity to take decisions that paid off over time, be it in adopting a nimbler technology setup or focusing on discretionary management. “That’s how we differentiate ourselves. We didn’t go into the transactional type of clientele needs willingly. We said we couldn’t compete with the bigger network banks that do offer their balance sheet for transactions.”
Given how his family invested into the bank in 1830 and is still around today, the question begs to be asked: What has made Lombard Odier survive for so long?
(RELATED: Challenges faced by private banks)
Not concentrating power in the hands of a single decision-maker seems to be part of the answer.
Lombard Odier today is owned and run by seven managing partners, and owned by other limited partners.
The managing partners include Christophe Hentsch, whose ancestor Henri Hentsch founded the bank six generations ago in 1796.
In 1798, Mr Hentsch teamed up with Jean Gedeon Lombard, whose name still adorns the bank.
A few years ago, the Lombard family made headlines in Switzerland by retiring and subsequently being associated with another venerable Swiss bank, Landolt & Cie.
(Of this, Mr Odier will only say that while the retirement of Thierry Lombard in 2014 at the age of 66 did not result in a new Lombard family member joining, Lombard Odier remains owned and managed “in a spirit of a deeply rooted family tradition and name that has existed for the last seven generations”.)
Today, Mr Odier is senior managing partner at Lombard Odier – but not necessarily senior in terms of shareholding or rank, he says.
“At the managing partner level, the idea is that partners are equal. I’m the senior partner in terms of seniority in the partnership, my role is to manage the partnership, put things on the agenda, make sure we have agreement on key issues and represent the firm to authorities and outside in a correct way,” he says.
“But from a purely capitalistic point of view, the idea is to have every partner equal, as fast as possible. (Of course) you cannot have this at the beginning when partners join, especially when it’s a young partner.”
Meanwhile, children of managing partners might work for the bank but they still need to climb the career ladder based on their own abilities – as Mr Odier puts it, on competence and personality. “There is no automatic right for the next generation to be in the business,” he says.
“My children will never be appointed partners because I say so. If they are interested, they are appointed because other partners think (they) will be the best fit for the job.”
The succession structure also means partners cannot sell their shares for more than what the bank’s net assets are worth.
“A partner comes into the firm with his own competence, personality, and then capital. Once he gets out of the firm, he gets his (competence), personality and capital out again without added value, without goodwill on the capital,” he says.
“If you came with capital of one, and you’ve built your capital to two during your career, you just get it at book value. Our incentive is geared towards transmitting the firm to a better shape, to the next generation. Book value will grow, but there will not be a market valuation,” he says.
From the business point of view, avoiding conflicts of interest and staying independent has also helped Lombard Odier survive, he said.
“When it comes to business, we always had the view that we were serving other people’s interests,” Mr Odier says.
Avoiding conflicts of interest means that the bank cannot, say, benefit from an investment before suddenly passing it on to clients. It also means disclosing any payments to third parties whose products the bank purchases.
Being an independent wealth manager, meanwhile, has helped avoid wrong decisions being made, he argues.
“We’re not forced by anyone to decide in which business, in which region of the world, with what kind of clients we want to do business with. We’re not forced by anyone to accept an idea. We’re not forced to buy an investment vehicle, we’re not asked by a general assembly of shareholders to perform better for the next quarter.”
As of mid-2017, Lombard Odier has 242 billion Swiss francs (S$332 billion) of total client assets at mid-2017.
The private bank, which serves wealthy entrepreneurs and families, comprises just over half of total client assets, or 125 billion francs.
A separate asset management arm serving institutions such as central banks and sovereign wealth funds manages about a fifth of total client assets, or 46 billion francs.
Unusually among private banks, Lombard Odier has a technological services segment. This offers front to back-end services for independent asset managers and other private banks.
Some 71 billion francs is managed in the segment. Being in the technology services provision business allows the bank to stay on top of industry needs, and helps it choose the right technology for its own clients, Mr Odier says.
Making strategic decisions around technology began more than 30 years ago, when he was already with the firm. At that time, mainstream financial institutions were investing in large, centralised computing centres powered by expensive mainframe computers.
“We said, nope, we didn’t want to do that, because we want to be very agile and nimble. So we wanted another technology, emerging at that time, that allows us to be scalable,” he tells BT.
Choosing the smaller, cheaper solution, a decision founded on common sense, eventually allowed the firm develop its tech platform services business, he points out.
Currently, the firm is investing in technologies to automate processes such as disbursing collateralised loans, in analysing and managing the risk of client portfolios, and in providing better information to clients in a quicker way.
Technology can help mitigate the biggest challenge in its business: Eroding profitability. Some aspects of wealth management are getting commoditised, while regulatory and infrastructure costs are increasing.
Banks consolidate because they are too diversified and cannot justify the costs, he says.
A focus on fixed income risks
Asked about risks, Mr Odier says that it is unlikely that equities will be hurt by a lack of growth or a lack of trade.
“Trade is now starting to show really robust trends again, we are seeing growth as being probably better ensured than it was two to three years ago,” he says.
With growth sustained in the years ahead, there is upside for equities. Though valuations are fair, the alternatives are sufficiently limited that the trend can continue, he says.
Valuation risk can be mitigated by redeploying assets to other regions, he says. He sees the US approaching the end of its cycle, but he expects strong growth in Europe. “You go to the main harbours in Europe, look at the piling up of containers, I am really impressed by the robustness of the rebound of growth,” he says.
Asia, too, is part of a rebound in emerging markets that he thinks is in its early stages.
For Mr Odier, risks appear to be more significant in fixed income markets, though he emphasises that returns in fixed income can still be made through safe bets.
“Of course, we’re worried about the fractured infrastructure, we’re particularly concerned about the decrease in liquidity, low rates and inability to diversify portfolios,” he says.
Lombard Odier has had to rethink its fixed income strategies given these concerns around client portfolios, he reveals.
For example, it came up with its own fixed income benchmarks based on fundamental metrics, such as the ability to repay debt.
Bond fund managers have long noticed how existing index benchmarks favour large debt issuers, who are not necessarily of the lowest risk.
Lombard Odier also started avoiding sovereign bonds, citing liquidity risk, or the risk that clients cannot get their money back fast without having to suffer capital losses.
“Most of the big sovereigns have been bought by central banks,” he points out. “So is this segment of the fixed income market as liquid as it was? Certainly not. If there’s a shock due to sharp interest rate rises, we will suffer probably more than we think.”
Investing heavily in credit analytics allows the bank to show clients that there can be interesting non-rated, creditworthy companies.
Finally, it needs to make sure clients are not forced to sell at the wrong time, so it develops buy-and-hold strategies.
Growing up, Mr Odier did not expect to one day be the most senior person in Lombard Odier.
Fascinated by international relations, he initially wanted to be a diplomat. He realised the dream somewhat by being the chairman of the Swiss Bankers Association from 2009 to 2016 – through a number of financial crises.
“I had such an interesting time, as chairman, I got to know governments, regulatory bodies all around the world, and we discussed things that also had to do with diplomacy,” he says.
Mr Odier says he is energised by working with entrepreneurs who are full of ideas and passions with different businesses around the world.
“Every conversation is a new idea… It can lead me to go see someone because I think what he’s doing is highly interesting, I can perhaps contribute by putting him in touch with somebody else,” he says.
Ultimately, there are too many interesting things to do and he has not thought of retiring yet, he says.
For his own children and potential succession, he says he does not make it a stressful issue, and tries to make it as smooth as possible.
With a number of founding families in the group, succession does not have to happen in a linear fashion.
“Sometimes the families are there, sometimes they will join at the next generation.”
Senior managing partner, Lombard Odier Group and chairman of the board of directors, Bank Lombard Odier & Co Ltd
Married with three children and three step-children aged 23 to 40
Interests: Education, migrants
1955: Born in Geneva, Switzerland
1977: Graduated from Geneva University with a degree in economics
1982: MBA in Finance at the University of Chicago
1982: Joins Lombard Odier Group
1986: Managing partner, Lombard Odier Group
2008 – present: senior managing partner, Lombard Odier Group
2014 – present: Chairman of the board of directors, Bank Lombard Odier & Co Ltd
2009 – 2016: Chairman of the Swiss Bankers Association
This story first appeared in The Business Times.