The decline of the Swiss private bank
Thanks to the US-led global clampdown on tax evasion, the days are long gone when Swiss bankers could prosper simply by helping rich clients hide assets
Zurich — 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," Gagnebin recalls at Rothschild’s offices in Zurich. "Being a Swiss banker, a lot of it is still about soft factors."
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.
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 increasingly 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 who 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 that 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 Sf6.7-trillion 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 half will disappear," predicts Christian Hintermann, head of KPMG’s financial advisory unit in Zurich. Gross margins in the industry have fallen 12% since 2010.
Banks in Switzerland in 2016 employed 121,000 people — about 15,000 fewer than a decade ago. Well-known 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 nonSwiss 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 who 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 has spread worldwide.
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 Sf75bn 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, Sf400m-Sf500m 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, CEO Sergio Ermotti realised that postcrisis 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 a restructuring plan from CEO 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 in November by Pictet to poach Boris Collardi, the high-profile CEO 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 — Swiss government bonds among the best performing forms of government 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 Zurich-based Vontobel bank. "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 80-million 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 Gagnebin at Rothschilds. "A big choice of bankers, well trained client advisers, specialists in taxes, good lawyers, good IT systems experts." Schubiger at Vontobel adds: "Few places have such a long history of dealing with multiple currencies, multiple jurisdictions, multiple languages."
But will such 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 in 2016 — which means 35 racked up losses. (The figures included all institutions, not just private banks.)
The future could be even worse. The biggest threat, says Lakhani, is that fee rates "cannot defy gravity". An eventual cooling of global equity markets and continuing low interest rates will add to the pressure on profit margins for those providing investment advice.
The big US institutions are also leveraging their investment banks to expand their wealth management business, boasting of the broad range of services they can provide to ultra rich clients who might want to list their companies or buy part of another company.
In Europe, Switzerland’s refusal to join the EU has disadvantages for its banks — they rely largely on subsidiaries in the bloc to serve customers in big markets such as Germany and France. Cross-border business could be even harder if the UK’s exit from the EU encourages a tougher stance by Brussels on third country access.
To survive, some smaller banks have focused on a particular niche group of clients. Others have voluntarily ceased business. A few have been taken over. Among the most prominent takeovers was of Lugano-based BSI bank, which was acquired by Zurich-rival EFG International last year at a price eventually fixed at Sf971m.
BSI, however, also illustrated the danger of rapid overseas expansion. Shortly after EFG announced its bid, Swiss financial regulator Finma declared BSI had been in "serious breach" of money laundering rules after becoming embroiled in a scandal surrounding Malaysia’s 1MDB state investment fund. Finma said BSI should be legally dissolved once integrated into EFG.
The pressures on Swiss groups could increase as banking continues to be transformed by automation, reducing the need for human relationships. But Schubiger at Vontobel argues that will not diminish the basic attraction of working with a Swiss banker. "It is easy to manage a bond portfolio with an algorithm," he says, "but it is very difficult to manage the finances of entrepreneurial people."
Indeed, other Swiss bankers argue that in an age of digitalisation, their service skills will help ensure long-term survival. Lombard Odier, for instance, has developed a specialisation in technology — a quarter of its 2,300 staff work in IT, but Odier sees it as helping rather than replacing his advisers. "You are managing people’s aspirations," he says.
Gagnebin at Rothschild agrees. "A client who is a 75-year-old widow is very different from a 35-year-old entrepreneur. Sometimes clients don’t know about correlations, or value at risk …. The client adviser needs to be able to explain it in their terms."
The former hotel manager says Swiss banks "have to go back to what they were before Switzerland became a tax haven. We need to go back to basics — to focus on investment performance but also good service, good advice, knowing your clients, thinking about them all the time."
Wealth management booms in Asia
As their home market grew more challenging, and other parts of their businesses floundered, UBS, Credit Suisse and Julius Baer blazed a trail through Asia, which contains the fastest-growing wealth markets.
It has been fruitful — UBS is the biggest private bank in Asia (excluding mainland China), Credit Suisse is in third spot and Julius Baer fifth, according to Asian Private Banker, which ranks institutions by assets under management.
But competition is increasing. "[Local Asian banks] sit close to where the new growth is coming from — the new generation of millionaires and billionaires," says Christian Hintermann, head of KPMG’s financial advisory unit in Zurich.
Last year, Bank of Singapore grew its assets under management 44%, UOB Private Bank was up 23% and DBS rose 8.3%. UBS, by contrast, only saw a 4.5% increase in assets under management.
Several of the big American banks are also zoning in on Asia. Citi is the second biggest private bank in the region, and hopes to add another 80 people in 2018. Bankers on the ground in Singapore and Hong Kong say the shine has gone off the concept of "Swissness" and that the wealthy are no longer wooed by the mystique of having a Swiss private banker.
The Swiss have responded to local competitors by refining their target market. Historically, the big Swiss private banks were strong in the segment serving "high-net worth" clients with $1m to $30m of investable wealth, says Lakhani at Deutsche. Now, "the strategy of big Swiss banks has increasingly evolved to ultrahigh-net-worth customers [with at least $30m of investable assets], where they believe they have a competitive edge".
© The Financial Times 2017