The more the leadership at Julius Baer Group looked at their exposure to Rene Benko’s collapsed property empire, the worse the outlook for chief executive officer Philipp Rickenbacher became.

In November, the Swiss bank put a modest amount of money – 70 million Swiss francs (S$108.5 million) – aside for eventual losses against loans to the Signa group. Rickenbacher subsequently proclaimed the bank wouldn’t be changing its appetite for risk.

Fast forward to Thursday (Feb 1), with the bankruptcy of the Austrian property magnate’s firms proceeding, and Julius Baer had written off the entire US$700 million amount, sacked the CEO, and announced it was getting out of the private credit business entirely. 

What tipped the balance was the realisation of just how badly the bank had handled its foray into private debt, an opaque but lucrative area of lending against illiquid assets to wealthy clients. 

A probe launched since the initial revelation in November showed that risk managers didn’t have a handle on the complex nature of the Benko loans, people familiar with the matter said. For example, credit exposures to the different Signa companies were treated separately, instead of to essentially the same borrower, one of the people said, asking not to be identified discussing the matter. 

Chairman Romeo Lacher said as much in a call with analysts on Thursday. 

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“In hindsight, it is clear that the evolution of the private debt business outpaced the adjustment of its framework,” he said. “While there have been no breaches of internal or external rules and regulations related to this position, we misjudged the risk.”

Julius Baer shares rose about 1 per cent in Zurich on Thursday after the announcements, helping erase some of the slump since November. 

For Finma, it was the latest Swiss financial drama in a sector once known for its stability. The regulator opened an investigation into the matter last year, people familiar have previously said. The regulator had zoomed in on unconventional reporting lines that took responsibility away from risk managers. 

Late last year, turnaround specialist AlixPartners was hired as an independent investigator to advise on Baer’s private debt assets and the exit from them.

A spokesperson for AlixPartners declined to comment. Finma didn’t return requests for comment. 

In recent weeks, the bank’s executives came to the conclusion that all of the exposure would need to be written off – and not just the 400 million euro (S$581 million) amount that analysts estimated in December. 

Julius Baer’s exposure to the Signa group includes a 150 million euro loan linked to a Munich-based department store owned by Signa Prime Selection. The loan was an instance of riskier real estate financing, secured with a share pledge rather than the underlying assets of the building, according to people familiar with the matter.

The bank had been looking to sell the loan, but paused the process before the property company that owned the Oberpollinger, part of the luxury KaDeWe department store chain, filed for insolvency recently, according to one of the people, who asked not to be identified discussing private matters.

Baer’s annual profit for 2023 plunged more than 50 per cent as a consequence of the writedown on the Benko exposures. The build-out of that business correlates with Rickenbacher’s time as CEO. The 52-year-old has spent about two decades with Julius Baer, and took it into new business areas, including crypto. 

Yet his mandate was also framed around bringing stability to the bank, after it had been hit by a money-laundering scandal and a formal regulator reprimand for former CEO Boris Collardi. When the time came to reckon with the Benko affair, that disconnect had become glaring. 

But as Thursday’s results approached, the mood shifted decisively against allowing Rickenbacher to keep his job, one of the people said. 

Lacher praised Rickenbacher for his role in strengthening the bank’s global standing. But for the second time in less than a year, the chairman of a Swiss bank has had to apologise to his shareholders and clients for losing their money and their trust. 

In April last year Axel Lehmann, chairman of Credit Suisse, offered a mea culpa to investors for the collapse of his firm that forced it into the arms of UBS. Ten months later, the chairman of Julius Baer was doing the same. 

This time it’s for a much more limited blow-up, but similar set of failings: poor risk control. Baer said on Thursday that it was reworking its risk control structures. 

A central challenge for Baer now will be achieving growth while simultaneously winding down a hard-to-sell business. The bank has signalled that it’s looking for an external CEO candidate – narrowing the pool at a time when the firm is struggling with reputational issues. 

“We agreed with the majority of strategic steps Baer took under Mr Rickenbacher’s leadership,” Citigroup analysts wrote in a note. “But ultimately the large loss on the Signa exposure and the even greater loss of market cap and franchise impact meant this feels somewhat inevitable.” BLOOMBERG