Foreign gold rush puts Swiss at crossroads

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Swiss banks are increasingly looking to set up shop in other countries to secure a slice of foreign assets rather than wait for the wealthy to come to them.

This may change the face of private banking in Switzerland as institutions pull in different directions, says a new study. It predicts a possible loss of cohesion in the sector and increased takeover activity.

A recent global economic boom and the emergence of powerful new economies, such as China and India, have spawned billionaires across the world.

Banks have been forced to chase after new money as many wealthy people want to invest in their own countries rather than set up offshore accounts in Switzerland.

Swiss banking giants UBS and Credit Suisse already have a multinational presence, but many other mid-sized private banking institutions are now beating a path to Asia, Eastern Europe and the Middle East.

A study by St Gallen University and management consultants Solutions Providers found that Swiss banks are split on whether to set up international branches or not.

Two-thirds of the 95 banks that responded to the survey said it was important or very important to set up foreign operations. But only 41 per cent said they were planning to expand abroad, saying it involved many risks.

Fracturing sector

Some smaller banks also believe Switzerland’s reputation as a trustworthy and reliable financial centre, complete with strict client confidentiality laws, is enough to attract business.

This strategy split could lead to a fracturing of the Swiss private banking landscape, according to Winfried Ruigrok, professor of international management at St Gallen University.

“It is conceivable that the industry, that has traditionally been very homogeneous, becomes less so in the future as we see more layers forming. We could see more differentiation, but it is not necessarily a bad thing if banks in Switzerland have different strengths,” he told swissinfo.

“We could see a rise of mid-sized players that become larger with more international exposure. In theory, part of that growth could come from mergers and acquisitions both abroad and through consolidation in Switzerland.”

It could also become more difficult to find one-size-fits-all regulations and policies for the banking sector. For example, banks entering the less-regulated Singapore market may have different needs from purely domestic-based rivals.

Core values

“Increasing heterogeneity potentially reduces cohesion and will undermine the ability of the Swiss banking industry to represent its interests with one unified voice,” said the study.

However, Swiss banks with branches or subsidiaries abroad will still have to comply with Swiss regulations.

“Banks can’t use foreign-based subsidiaries to avoid Swiss banking laws that they don’t like,” Swiss Bankers Association spokesman James Nason told swissinfo.

And even banks with a strong foreign presence will still rely on Swiss values to attract wealthy clients, according to Ruigrok.

“There is a core message that the Swiss brand will remain strong in the future. The foundation of success is that banks are based in Switzerland,” he told swissinfo.

swissinfo, Matthew Allen in Zurich

Key facts

The Internationalisation of the Swiss Private Banking Industry survey asked 337 banks in Switzerland and Liechtenstein about their foreign strategy. Of these, 95 institutions completed the survey.
Two-thirds were either optimistic or very optimistic about the future of the Swiss financial marketplace.
The same number said international activity is important, compared with 20% that said it was unimportant.
Most banks with an international presence based their activities in neighbouring countries, but Eastern Europe, the Middle East and Asia were identified as important markets. The United States was seen as a lesser priority.

In brief

Along with UBS and Credit Suisse, a number of mid-sized Swiss private banks started or expanded international operations – or announced an intention to do so – in the past few months.

Last December Bank Sarasin said it would open a subsidiary in the Middle East state of Bahrain.

EFG was particularly busy last year, snapping up British hedge fund manager Marble Bar Asset Management and Indian asset management business Stratcap Securities among other acquisitions.

Julius Bär announced an ambitious global expansion strategy, including new offices in Milan and Abu Dhabi plus an upgrade of its Singapore business. It has also been linked with moves in Japan and Colombia.

Lombard Odier Darier Hentsch started private banking operations in Prague to add to its branches in Western Europe. Pictet said it would increase its onshore private banking operations in Germany.

Swiss banks managed SFr6.9 trillion ($6.3 trillion) of the world’s wealthiest people’s assets in 2005, according to latest Swiss Bankers Association figures.