Switzerland remains offshore wealth magnet

Taking off: Asian financial centres such as Hong Kong are growing at a faster rate than Switzerland Keystone

The world’s wealthy still consider Switzerland the best place to park their riches despite tax evasion scandals ending banking secrecy. Swiss banks held $2 trillion (CHF1.87 trillion) of offshore wealth last year, according to financial consulting firm Deloitte.

This confirms Switzerland as being ahead of Britain ($1.7 trillion) and the United States ($1.4 trillion) as the world’s leading destination of cross-border wealth management. However, smaller Asian centres, such as Hong Kong and Singapore, continue to grow at a faster rate than Switzerland despite remaining some distance away in terms of absolute size of assets under management (AUM).

“Switzerland remains the world’s largest centre, but other locations are catching up rapidly – especially Hong Kong [142% AUM growth], the US [28%] and Singapore [25%],” Daniel Kobler, Deloitte Switzerland’s head of Banking Strategy Consulting, said in the report.

Kobler’s comments echoed those being made by various observers – most notably WealthInsight in 2013 – in the past two years that warned of Asian competitors catching up with, and overtaking, Switzerland in the next few years.

Behind Switzerland’s headline AUM statistic lurks further problems for the Swiss private banking sector. The majority of the 14% AUM growth in Switzerland since 2008 has been realised by rebounding markets swelling the size of assets that took such a hit during the financial crisis.

This masks the fact that Switzerland lost 7% of its AUM in the same period as a result of clients withdrawing their money in the face of a growing global crackdown on tax evasion. This has put a serious dampener on overall growth of the Swiss wealth management business.

Declining profitability

The Deloitte study, however, reveals that Switzerland was a long way from being the worst affected jurisdiction in this respect. Only Hong Kong and Singapore saw more wealth deposits than withdrawals between 2008 and 2014.

While Switzerland lost $135 million through this process, Britain saw $300 million disappear (-21% of total AUM) while a staggering $1.3 trillion of offshore wealth drained away from Panama and the Caribbean (a loss of three-quarters of cross-border AUM).

The latter group of jurisdictions suffered so badly due to their close proximity to the US, while the British government has made some efforts to clean up the image of its numerous tax havens, such as Jersey and more far flung protectorates.

Another serious issue facing Swiss banks is their declining profitability. Deloitte calculates that profit margins in Switzerland have shrunk from 40 basis points in 2008 to 24 bps last year. 

This decline has been largely caused by tax evasion legal costs, implementing new regulations and other expenses, such as new technology to keep up with the industry’s digitisation drive. Income has also taken a hit as clients eschew risk and demand more for the fees that banks charge them.

“Swiss providers face some challenges on both revenue realisation and sustainable cost management,” said Kobler.

Higher costs, lower revenues

The effects of higher costs and lower revenues has not been lost on the sector. The past few years have been punctuated by several reports highlighting the problem, particularly for smaller banks that lack the financial clout to redirect their resources to other locations.

The larger banks have been busy shutting down operations in less profitable countries and expanding in growth regions. This includes Asia (where UBS is the largest wealth manager) and also mainland Europe where some Swiss banks have been building up offices to capture some of the offshore wealth that is leaving Switzerland.

A handful of traditional private banks, such as Pictet and Lombard Odier, have abandoned their unlimited liability models to find an extra source of funding as stock-listed banks.

But the much-hyped wave of consolidation in the Swiss private banking sector has so far only really materialised in the dwindling number of foreign banks in Switzerland. The predicted fall of many smaller local banks has not yet come to pass.

The industry is also bracing itself for the negative effects of the strong franc that soared 20% against the euro when the Swiss National Bank abandoned its euro peg on January 15.  Julius Baer announced on Monday that it needed to save CHF100 million by shedding some 200 jobs as a result of the strong franc pressures on margins.