BusinessDay 12 Dec 2017

Tuesday 12 December 2017
A4 BUSINESS DAY
C002D5556
FT
ANALYSIS
The decline of the Swiss private bank
A clampdown on tax evasion is forcing the closure of many institutions
Ralph Atkins and Laura Noonan
Laurent Gagnebin does not
fit the traditional image of
a Swiss private banker. Fifteen
years ago, he worked
as a manager at a luxury
hotel in Gstaad. Now he is putting his
hospitality skills to work as head of
Rothschild’s Swiss private bank.
“We had a Swiss client who needed
a lawyer in Tehran urgently. Within
an hour, we had enlisted the help of
a colleague in Dubai who was able
to recommend one he knew well,”
Mr Gagnebin recalls at Rothschild’s
sleek offices in a smart Zurich suburb.
“Being a Swiss banker, a lot of it is still
about soft factors.”
Mr Gagnebin’s career shift underlines
the pressures that the Swiss
banking sector is facing. Even a decade
ago, clients from all over the
world flocked to Switzerland to find
a discreet home for cash that they
wanted to hide from the taxman.
These customers did not worry
about the returns on their portfolios
and profits were easy. “Clients told
you ‘don’t call me, or anything’,” recalls
one banker.
Thanks to the US-led global clampdown
on tax evasion, however, the
days are long gone when Swiss bankers
could prosper by simply assisting
rich clients hide assets.
Swiss banks chart
Instead, they face a world where
tougher bank regulations, ultra-low
interest rates and low financial market
volatility have shrunk profit margins.
The fastest-growing client groups are
far from the affluent Alpine country
— in China and other emerging
market economies — and automation
threatens to reduce the need for human
interaction.
The result is that the industry is
dividing into two tiers. A small group
of the biggest banks have used the
Swiss reputation for service — such
as finding lawyers in obscure locations
— to successfully expand around the
world. However, there is also a long tail
of weaker domestic rivals that are facing
a much more uncertain outlook.
For many of those institutions, the
tough new environment raises the
question of whether the traditional
strengths of Swiss banking will continue
to give it a competitive edge — or
whether we will witness the slow death
of the distinctively Swiss private bank.
“They have a future, but the golden
times are certainly behind them,” says
Gábor Komáromi, senior manager at
Corecam, a Zurich-based company
which advises rich families on their
finances.
Patrick Odier, managing partner
at Lombard Odier, adds: “The pressure
on margins will squeeze out
very quickly the less efficient and less
competitive.”
Switzerland dominates the business
of safeguarding and investing
the wealth of the world’s richest, even
if the SFr6.7tn ($6.8tn) in assets under
management in the Swiss industry
remains lower than its 2007 peak.
Over the past three years, the level of
assets under management has been
flat despite strong gains in many global
markets. The country is also home to
two of Europe’s biggest banks — UBS
and Credit Suisse.
Swiss bank accounts are still attractive
for many of the world’s rich — a
large number of those caught up in
the corruption clampdown in Saudi
Arabia are thought to have money in
the Alpine country.
But at home, the industry is in
retreat. The number of Swiss private
banks has fallen from 179 in 2005
to 112, according to KPMG figures.
“Of the 60 or 70 poorly performing
[remaining] banks, at least a half will
disappear,” predicts Christian Hintermann,
head of KPMG’s financial
advisory unit in Zurich. Gross margins
in the industry have fallen 12 per cent
since 2010.
Banks in Switzerland last year
employed 121,000 people — about
15,000 fewer than a decade ago. Wellknown
foreign banks, including Merrill
Lynch, Morgan Stanley and Coutts,
have disposed of Swiss operations in
the past five years.
“The unique selling point of Switzerland
is being eroded,” says a senior
private banking executive at a non
Swiss firm. “Clients are just as happy
in the UK, or the Netherlands.”
The most direct cause of the industry’s
decline has been a clampdown
on tax evasion. The US moved first in
2008 by launching an investigation
into banks that had helped its citizens
to evade the Internal Revenue Service.
Since 2009, Swiss banks have paid
fines and compensation of more than
$5bn for their roles in helping US
clients dodge taxes. They were also
hit by a flurry of smaller fines in other
jurisdictions as the drive for transparency
spread worldwide.
Swiss banks chart
Fifty countries across the globe
have already embraced new rules
on transparency that call for the
automatic exchange of information
between banks and tax authorities.
For UBS and Credit Suisse that
translates into about SFr75bn of
client withdrawals between 2011
and 2015. The impact on the bottom
line was bruising: “Such mandates
typically carried lucrative margins,”
says Kinner Lakhani, analyst at
Deutsche Bank. “We estimate a
pre-tax earnings impact of at least,
SFr400-SFr500m for each of the
franchises.”
Even after this blow, private
banking remains more promising
than other areas of the big two Swiss
players’ businesses.
In 2008 UBS was forced into a
bailout as a result of its investment
banks’ exposure to US mortgage assets.
By 2012, chief executive Sergio
Ermotti realised that post-crisis
regulation would destroy much of its
investment bank’s profitability, and he
sharply cut its resources.
For the past five years, Credit
Suisse’s investment bank has been
under scrutiny from investors and is
now being drastically cut back under
Credit Suisse’s investment bank is being drastically cut back under a restructuring plan from
chief executive Tidjane Thiam © Bloomberg
a restructuring plan from chief executive
Tidjane Thiam.
When it comes to private banking,
Credit Suisse and UBS have the
advantage of size and global reach.
“Apart from those in niche markets,
only banks which can scale their offering
will ultimately thrive,” says Jürg
Zeltner, head of wealth management
at UBS. “We are in a winner-takes-all
environment,” he adds. “Swiss service
is a national ingredient — but something
that we are exporting globally.”
Smaller, yet still substantial, banks
such as Julius Baer in Zurich, Switzerland’s
third-biggest wealth manager,
and Geneva-based Pictet and Lombard
Odier have also successfully
expanded overseas. Even among this
group, there is fierce competition,
highlighted by the move late last
month by Pictet to poach Boris Collardi,
the high-profile chief executive
of Julius Baer.
Yet despite the pressures facing
the industry, the strategy of most
Swiss banks still revolves around the
belief — endorsed by some rivals —
that banking in the affluent nation is
somehow different.
The attractions are manifold, Swiss
private bankers argue. One is Switzerland’s
political and economic stability,
which contrasts with the capricious
governments of some of their clients.
Over the past century, the Swiss
franc has been consistently one of the
world’s strongest currencies — and
Swiss government bonds among the
best performing forms of sovereign
debt.
Switzerland also benefits from its
neutrality — and, in the view of some,
its position outside the EU.
“Many clients want to have a share
of their wealth in different jurisdictions
— you never know what is going
to happen in the world,” says Georg
Schubiger, head of private banking
at the Zurich-based bank Vontobel.
“You want a country which is safe, has
a strong economy, no social turmoil
and is not affiliated to one of the big
blocks — Europe, China and the US.”
Another banker adds: “There are
80m Germans. There will always be
at least 30,000 who think the eurozone
is doomed.”
Switzerland also has a pool of private
wealth specialists. “You should
not underestimate the ecosystem we
have here,” says Mr Gagnebin. “A big
choice of bankers, well trained client
advisers, specialists in taxes, good
lawyers, good IT systems experts.”
Mr Schubiger adds: “Few places have
such a long history of dealing with
multiple currencies, multiple jurisdictions,
multiple languages.”
But will these Swiss strengths be
enough? The pressure on margins in
recent years has been huge — much
more so than in other financial centres.
The juicy mark-ups possible when
money was held in Swiss accounts to
avoid tax have disappeared.
The Swiss Banking Association
boasts that 226 out of 261 banks in
Switzerland made a profit last year
— which means 35 racked up losses.
(The figures included all institutions,
not just private banks.)