The latest survey of Swiss private banks has repeated earlier warnings that smaller players may face extinction as costs rise and the flow of new assets dries up.
The Swiss wealth management industry is being squeezed by the global crusade against tax evasion, the growing cost of regulatory compliance and shrinking profits as investors exercise more caution.
Swiss banks suffered the same as competitors around the world during the financial crisis, with the pool of assets under management shrinking by nearly a fifth in 2008 before picking up by 8.4 per cent last year as conditions improved slightly.
But Switzerland also suffered from its distinction of managing the vast majority of offshore wealth in the world. A coordinated global assault against tax evasion and a series of tax amnesties saw the withdrawal of vast sums of assets from Europe and the United States.
Net new money flowing into Swiss banks increased less than one per cent in 2009 from the previous year. The vast majority of new wealth arrived from the emerging markets of Asia and South America and a growing proportion from expensive onshore operations.
The PricewaterhouseCoopers (PwC) survey of 111 private banks paints a relatively bleak picture for smaller boutiques (assets of up to SFr2 billion or $2.07 billion), and even mid-sized institutions (SFr2-10 billion), that have less room to adopt cost cutting measures or to set up onshore operations abroad.
PwC has estimated the extra cost of complying with new banking and tax regulations as being between 10 and 30 per cent higher than before. The expense of hiring staff and setting up infrastructure abroad for onshore enterprises is also prohibitively expensive for all but the biggest banks.
Deals being sought?
However, Switzerland remains an attractive venue for private banking thanks to its long tradition of managing wealth. PwC expects to see investors from eastern Europe, the Middle East, Asia and Latin America snap up struggling Swiss players in the near future.
“We expect to see increasing consolidation among small and medium- sized banks in the coming years,” the report states. “Small private banks in particular that have focused in the past on cross-border asset management, face challenges in the changing environment.”
This is an expectation that has been aired before. A survey by KPMG and the Swiss Banking Institute at the University of St Gallen a year ago drew the same conclusions.
But the forecast cherry picking of smaller private banks has yet to materialise, with the majority of takeovers involving Swiss banks grabbing wealth management units divested by foreign counterparts.
Some observers believe this is because potential buyers are biding their time to get better deals as problems mount and asking prices dip. Many Swiss private banks, however, dismiss such consolidation claims, arguing that smaller players are more nimble and better able to innovate and adapt.
German tax treaty
Some banks are already carving out niches in fields such as sustainable asset management and targeting the “new” money of sports and entertainment stars.
In addition, the Swiss Finance Ministry is currently mulling over a plan – submitted by the banking sector – to implement a withholding tax on foreign assets to weed out tax evaders without compromising banking secrecy.
It has been estimated by the Helvea brokerage that some 80 per cent of the SFr836 billion of European assets held by Swiss banks has not been declared to the relevant tax authorities.
A tax deal is currently on the table between Switzerland and Germany and is expected to be sealed by the end of the month. German clients have been withdrawing assets from Swiss banks ever since stolen Swiss bank client data was handed over to their tax authorities.
Switzerland is proposing to skim a withholding tax from the assets of German clients and hand this over to Germany’s tax authorities in future.
Flight to safety
Such a deal could help to restore European tax-compliant, offshore banking to Switzerland, particularly if more such deals are also struck with other countries, according to PwC head of private banking business consulting Matthias Memminger.
“If assets lose the shadow of tax evasion, it could help shift the old offshore model to a clean private banking model,” Memminger told swissinfo.ch.
But he warned this might not be enough to win a reprieve for smaller banks from the problems they are currently facing. Rather than return to smaller boutiques, European customers might be more inclined to place their money in larger, more diversified banks that offer greater security, Memminger added.
“In the last two years we have witnessed a flight to safety to big banks that appear more stable,” he said.
That may not be applicable for UBS that continues to lose assets outside of Asia, but many other larger Swiss banks have been reporting net inflows.
Banking secrecy was enshrined in Swiss law in 1934. For the past 18 months Switzerland has been under continuous attack for helping foreign tax evaders hide their assets.
The OECD placed Switzerland on a “grey list” of uncooperative tax havens in April 2009. The Swiss were removed in September after renegotiating more than 12 double taxation treaties, but they have refused to automatically transfer information to tax investigators without proof of crimes.
Several countries, including Italy, France, Britain and the US, launched tax amnesties last year in an effort to repatriate assets from tax cheats.
Switzerland was particularly annoyed at the aggressive Italian amnesty that saw surveillance and tailing of cross border suspects entering Switzerland.
The most damaging tax evasion case involved the activities of UBS bank in the US. In February 2009, UBS was fined $780 million after admitting helping US citizens dodge taxes. It also handed over data of 285 account holders.
In September, the Swiss government agreed to transfer the details of 4,450 UBS clients to the US – in effect violating Swiss banking secrecy to prevent a ruinous court case for UBS.
Also last year, a former employee of the HSBC private bank in Geneva ran away with client data that he handed over to the French authorities.
Several CDs of stolen Swiss banking data have been bought by the German authorities.
A deal between Germany and Switzerland to impose a withholding tax on the assets of German clients deposited in Swiss banks is expected to be signed by the end of October.