Private Banks Leave Switzerland as End of Secrecy Hurts

For European lenders with private-banking aspirations, a presence in Switzerland used to be a must. Now, with bank secrecy eroding and rising compliance costs chipping away at profits, more are saying adieu.

The number of foreign-owned Swiss banks fell to 129 by the end of May from 145 at the start of 2012, according to data from the Association of Foreign Banks in Switzerland. Assets under management slid by a quarter to 870.7 billion Swiss francs ($921 billion) in the five years through 2012 as clients withdrew money or paid taxes on undeclared accounts, the data show.

A crackdown on bank secrecy and increased regulatory scrutiny may unlock a wave of mergers and acquisitions in the next 12 to 18 months, according to bankers, consultants and analysts interviewed by Bloomberg News. While Switzerland remains the biggest center for global offshore wealth with $2.2 trillion, or about 26 percent of the market, according to Boston Consulting Group, departures may further chip away at the Alpine republic’s status.

“There will be a bit of a shakeout among private banks,” said Felix Wenger, a Zurich-based director and co-head of the private-banking practice at consulting firm McKinsey & Co. “Specifically for Switzerland, some foreign players might conclude that an exit is a better option.”

Some already have. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, sold its international private-banking business in May to Swiss wealth manager Union Bancaire Privee, which also bought part of the offshore business in Geneva from Spain’s Banco Santander SA a year ago. In 2009, Commerzbank AG sold its Swiss units and ING Groep NV disposed of its private bank in Switzerland.

HSBC, Generali

More deals may be imminent. HSBC Holdings Plc, the biggest foreign private bank in Switzerland by assets under management, may sell parts of the unit, Chief Executive Officer Stuart Gulliver signaled in May. The bank doesn’t plan to exit Swiss private banking altogether, he said.

Italian insurer Assicurazioni Generali SpA is trying to sell BSI Group, the 140-year-old Lugano-based private bank. More banks may also be reviewing their presence in Switzerland, said Christopher Wheeler, a London-based analyst at Mediobanca SpA.

A report last week by PricewaterhouseCoopers LLP showed that an increasing number of wealth-management firms worldwide see more mergers. More than a third of those surveyed expect “significant consolidation” over the next two years, compared with 7 percent in the last two years, PwC said in the report.

Reviewing ‘Footprints’

The shake-up in Europe is leading to a widening gap between top performers and “also rans,” McKinsey said in an industry survey last month. Almost a third of private banks in the region had outflows of funds in 2012, while about one bank in six recorded a loss, according to the report, based on an analysis of more than 160 private banks globally.

“As a result, many players are reviewing their geographical footprint, especially in offshore markets, leading to renewed M&A activity,” the McKinsey report said.

An eastward shift in riches is nibbling away at Switzerland’s lead over rival centers of cross-border wealth. Its market share slipped to 26 percent from 27 percent in 2011, and by 2017 may decline to 25 percent, according to Boston Consulting’s Global Wealth report in May. Singapore is likely to grow to 12 percent from 10 percent, according to the forecasts.

Secrecy Crackdown

The U.S. has been investigating Swiss banks and units of foreign banks in the country, including that of London-based HSBC, after UBS AG in 2009 avoided prosecution by admitting it fostered tax evasion and delivering data on about 4,700 accounts of Americans. France and Germany have been searching for tax dodgers using data stolen from Swiss banks and also sharing some of the information with authorities in other European countries.

Agreements with the U.K. and Austria to collect taxes on behalf of those countries on accounts held in Switzerland have been in force since January, and Switzerland is in talks with other European countries on taxing secret accounts. The country will join the international push against tax dodgers and help develop global standards allowing banks to share customers’ details to combat tax evasion, Finance Minister Eveline Widmer-Schlumpf said in June.

“A combination of government actions from the U.S. and the EU and increased regulatory pressure is likely to trigger further changes in Swiss private banking because it will make it more costly to do business,” said Francois-Xavier de Mallmann, head of investment-banking services in Europe for Goldman Sachs Group Inc. “We expect consolidation to continue in private banking and to likely accelerate as the uncertainty weighing on the sector decreases.”

Margins Squeezed

St. Galler Kantonalbank AG agreed last week to sell parts of its Hyposwiss private bank, citing lower margins and rising costs. Julius Baer Group Ltd. purchased Bank of America Corp.’s Merrill Lynch wealth management units outside the U.S. last year. Safra Group, founded in the Syrian city of Aleppo in the 19th century, agreed to acquire the Rabobank Groep’s controlling stake in Bank Sarasin & Cie. in November 2011.

“We’re going to see more of that,” Mediobanca’s Wheeler said. “It’s a question of whether you can afford it, whether it’s making the returns or whether it’s there to facilitate something else within the group.”

The pretax margin for the group of foreign banks in Switzerland fell to 20 basis points in 2012 from 38 basis points in 2007, calculations based on data from the association show. That includes some revenue from non-private-banking activities. A basis point is a hundredth of a percentage point.

‘Critical Mass’

A contraction in profitability in recent years has been more pronounced for offshore private banks than for onshore banks, according to the McKinsey report. That meant that the threshold for keeping attractive returns on assets booked in a particular country is moving toward 10 billion euros ($13.1 billion) from 5 billion euros, it said.

“Smaller players will either be forced to close or merge with larger banks as the compliance and regulatory costs become unbearable for banks which don’t have a critical mass,” said Eleni Papoula, a London-based analyst at Berenberg Bank, citing firms with less than 10 billion francs in assets under management. Information technology and compliance expenses are expected to increase given tighter regulation and greater scrutiny by the financial and tax authorities, she said.

Only about 20 of the foreign banks in Switzerland, including HSBC and Societe Generale SA, have close to or more than 10 billion francs in assets under management, data from the association show. The private-banking business sold by Lloyds in May had 7.2 billion pounds ($11 billion) of assets under management.

Reason to Exist

Some of the smaller ones are very focused on a particular market and are profitable, while others grew before the financial crisis by hiring relationship managers who brought in clients from all over the world, said Martin Maurer, secretary general of the Association of Foreign Banks in Switzerland.

“Now they don’t really have a good idea about why they should exist,” Maurer said. “They’re not focused on any particular markets or countries, don’t have a long tradition, and in those cases shareholders may not be interested in supporting businesses that make losses or very small returns on capital here and be exposed to risks.”

Banks in Switzerland will also need to develop new products and services to attract foreign clients now that banking secrecy is no longer an argument, said Ray Soudah, the founder and chairman of MilleniumAssociates AG, a Zurich-based independent M&A adviser focusing on the financial industry.

“Every country has its own tax rules and reporting, so banks have to have products and reporting for each country, and that’s a huge cost,” Soudah said.

As Switzerland tries to transform itself from a haven for undeclared funds, the private-banking landscape is likely to undergo a further makeover.

“Historically most international banks considered their Swiss private-banking presence as an important -- and often strategic -- part of their footprint,” said Goldman’s De Mallmann. “The question is how strategic will it be at the end of this period.”

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