Banks optimistic despite gathering clouds

Green light? Swiss bankers believe growth in emerging markets will offset losses in Europe and the US Keystone

The Swiss banking community is confident that it can shrug off mounting pressures to boost earnings by more than SFr10 billion ($11 billion) by 2015.

The Swiss Bankers Association (SBA) believes that growth in emerging markets will offset losses in Europe and the United States. A study has also highlighted opportunities in niche areas that are currently under-represented.

Despite coming though the financial crisis relatively unscathed, the Swiss financial centre has since been buffeted by the dilution of banking secrecy and the end of untaxed offshore assets – at least from Europe and the US.

At the same time, Switzerland’s largest banks – UBS and Credit Suisse – are braced to absorb potentially tougher new banking regulations than international rivals.

Swiss banks – along with all other countries – are also grappling with the impending Foreign Account Tax Compliance Act (Fatca) that would compel them to report all securities trades made on behalf of US citizens.

However, a study carried out by the Boston Consulting Group (BCG) on behalf of the SBA, entitled Banking in Transition, paints an altogether rosier picture for the Swiss financial centre.

Middle East magnet

The report claims that gross revenues are set to increase by 1.8 per cent per year until 2015, swelling coffers from SFr58.6 billion in 2010 to SFr64 billion.

In addition, the removal of stamp duties on transactions, growth in commodities financing and the hedge fund industry, and better representation in emerging markets such as Asia could add another SFr4.8 billion to revenues.

The potential for more offshore assets arriving in Swiss banks from the emerging markets of Asia, the Middle East and South America could make up for the weakening of the European and US offshore markets, according to BCG’s Peter Damisch.

“The Middle East has a relatively underdeveloped banking system so Switzerland will continue to attract offshore wealth from this region,” Damisch said. “We estimate that around 50 per cent of wealth will migrate abroad with half of that coming to Switzerland.”

At present some SFr464 billion of the SFr1.9 trillion in global offshore wealth managed by banks in Switzerland derives from the Middle East. This figure is dwarfed by the SFr981 billion from Europe, but these assets are expected to diminish.

By contrast, the SBA expect Asia to add to the SFr232 billion assets currently under management in Switzerland, with the same expectation for the SFr227 from Latin America.

Ambition diluted

The Banking in Transition report, released in Zurich earlier this week, is a watered down version of the 2007 Masterplan that envisioned Switzerland as a top three financial sector by 2015, but emerged months before the financial crisis.

The current calculations are less ambitious but nevertheless assume that the ongoing tax evasion rows and the European debt crisis do not take a significant turn for the worse. The study also makes the assumption that interest rates will rise to around 1.5 per cent and the franc-euro exchange rate will settle at around SFr1.40 to the European currency.

Martin Naville, chief executive of the Swiss-American Chamber of Commerce, does not believe that emerging markets could make up for potential lost revenues in the US.

“Asia is an important growth market, but it is still pales in comparison to the US,” he told swissinfo.ch. “Even if Asian financial markets double in size it wouldn’t even move the needle.”

Swiss banks currently have SFr380 billion in assets parked in the US and SFr350 billion in Britain compared to SFr41 billion in Hong Kong, SFr23 billion in Singapore, SFr10 billion in China, SFr3.4 billion in Saudi Arabia and SFr5 billion in Brazil.

Whither the US?

Naville believes that Swiss banks and other financial institutions will just have to wear the impending raft of new US regulations and their associated costs.

UBS and Credit Suisse have continually rebuffed speculation that they will wind down US-based businesses. UBS has even gone so far as to suggest that investment banking could be spun off and relocated to the US as a separate entity if Swiss regulations prove too harsh.

SBA chief executive Claude Alain-Margelisch also emphasised the need for Swiss banks to stay in the US and European markets.

“The US and Europe will still remain very important for the Swiss financial sector because a large share of our assets under management derive from these markets,” he told swissinfo.ch.

“The first priority in the US is to find solutions to existing issues that are global and within the Swiss law, and we are very confident that we can find a solution with the American authorities. It is then important to see what happens with future regulations.”

But for the time being, most optimism in the Swiss banking scene is focused on the less troublesome emerging markets.

Banking in numbers

Swiss banks generated gross revenues of SFr58.6 billion ($66 billion) in Switzerland in 2010 against a national gross domestic product (GDP) of SFr546 billion ($616 billion).

Private banking contributed the lion’s share of these revenues – SFr25.4 billion.

Retail banking revenues totalled SFr17.6 billion with corporate client business contributing SFr8 billion, asset management SFr6 billion, and investment banking (limited activities in Switzerland) SFr1.6 billion.

Banks paid SFr11 billion in taxes to the Swiss state last year, an average of SFr79,000 per employee in the sector.

Private banking operations in Switzerland managed SFr2.65 trillion of wealth by the end of 2010.

Zurich is the eighth most important financial centre in the world, according to the Global Financial Centres Index.

Geneva is ranked in ninth place, but both centres have lost ground in recent years due to a combination of tax compliance pressures and the emergence of new centres of importance.

In 2009, Zurich was ranked in fifth place and Geneva sixth. Shanghai was 35th on the 2009 list but occupies sixth place this year.