The changing landscape of global wealth management will force Swiss private banks to change the way they operate in order to compete, experts agree.
The consensus is that banks will have to attract new clients with onshore operations abroad as the flow of assets into Switzerland shrinks. And smaller operations would need to find smart solutions to the problem.
Swiss private banking has been hit with the double whammy of the financial crisis and a global crackdown on tax evasion. Legal action by the United States against UBS followed by a concerted worldwide crusade against tax havens and a series of tax amnesties have acted as a sharp brake against funds entering Switzerland.
St Gallen University, along with tax consultancy firm KPMG, recently produced a report that estimated 20-25 per cent of all assets in Swiss private banks might belong to Europeans who have not declared taxes.
The success of European and US tax amnesties, coupled with the lost incentive for new clients to bring undeclared assets to Switzerland, will intensify competition in the Swiss market, the report forecasts.
Is size an issue?
The only way out of this impasse appears to be setting up onshore operations in other countries, particularly Asia, the Middle East and those European countries that are repatriating assets from Switzerland.
The large players, such as UBS, Credit Suisse and Julius Bär, already have an established network of overseas offices. Smaller banks and boutiques face the unappetising problem of setting up from scratch with more limited capital.
However, not all is lost, according to Bank Wegelin boss and Swiss Private Bankers Association president Konrad Hummler. He argues that the skill, tradition and reliability of Swiss bankers will still attract large sums of money to Switzerland.
And he disagreed with the findings of the St Gallen University survey that players with less than SFr10 billion ($10 billion) of assets under management stood no chance of diversifying beyond Swiss borders. Some observers even believe SFr50 billion is needed to succeed.
"We will have to work in a new way, but in my experience this would not be a problem whatsoever. It has nothing to do with the size of the bank, it's more a question of how you are organised and how expensive it is to finance the particular operations abroad ," he told swissinfo.ch.
"There have been predictions about small banks having problems, but which ones have been affected in the past few years? It was not the small banks but the large banks, with enormously high cost structures, that have had all the problems."
In recent weeks several small and medium-sized players have announced plans to set up new offices overseas.
Having recently pulled out of the US, Wegelin – Switzerland's oldest bank – has not opened any far-flung offices. But Banque Heritage recently unveiled a Singapore operation along with boutique wealth manager Reyl & Cie, while Banque Cantonale de Genève now has a representative office in Hong Kong.
Roland Knecht, head of private banking at Banque Heritage, said smaller operators had to box clever to reach overseas clients in competition with larger, more established players in foreign markets.
"It is beyond the capacity of some banks to set up a major undertaking. It is much more manageable in terms of risk and cost to set up a management company and use your headquarters or local banks as custodians," he told swissinfo.ch.
Many European clients are reluctant to repatriate their assets to their home countries because local banks lack the "capacity, capabilities and sophistication" of the Swiss financial centre – particularly to service very wealthy customers.
Opening a small representative office would allow Swiss banks to maintain relationships without the problems associated with setting up full onshore operations.
"This could lead to a dilution of our services because we would have to hire people who lacked the tradition and knowledge of Swiss banking," Knecht said.
Meanwhile, the spectre of consolidation appears to be looming over the Swiss private banking sector, with many of the bigger players licking their lips at the prospect of swallowing smaller rivals.
Consolidation has been mooted before without any subsequent action, and recent activity has flirted around the fringes of foreign banks ditching their Swiss subsidiaries. But with so many small operations in difficulty and the price of takeovers falling, it may now be a case of re-learning to swim or being consumed.
Matthew Allen, swissinfo.ch
Swiss private banking landscape
According to the KPMG database of 112 Swiss private banking operations, the industry managed SFr4.7 trillion of assets at the end of 2008.
Half of these assets were taken care of by the two big banks, UBS and Credit Suisse.
Some 11 other large banks each held assets of at least SFr50 billion (27% market share).
Moving further down the scale, 26 banks each managed at least SFr15 billion (16% market share).
A further 73 banks each held less than SFr15 billion of client assets (7% market share).
Swiss private banking survey
A recent survey of 30 private banking and wealth management firms in Switzerland and Liechtenstein by St Gallen University and KPMG produced the following findings.
Some 57% saw the industry growing outside Switzerland, while only 29% believed the Swiss market would grow in the next three years.
A quarter of respondents strongly agreed that there would be consolidation of the Swiss market (54% agreed and 18% disagreed). Some 68% thought prices for takeovers were now attractive.
Some 88% believed competition would increase within Switzerland.
Just over two-thirds believed that traditional offshore banking activity would decrease within the next three years.
More than half (54%) of those surveyed agreed it would be important to expand into overseas markets.
All but 4% thought clients would demand greater transparency and simpler products.