GENEVA — Swiss banks must lure affluent clients from emerging markets or face a “slow death” as the pursuit of tax dodgers by U.S. and European authorities results in outflows of assets.
Western Europeans may pull as much as $139 billion, or 15 percent of their holdings, from Swiss banks, said Herbert Hensle of Cap Gemini. Bank Sarasin & Cie. AG reported last week that private clients withdrew 3 billion francs from Swiss locations in the year through June.
Switzerland built the world’s biggest offshore wealth center during an era of “black money” that ended when the U.S. sued UBS AG three years ago. Many of the highest fee-generating European and American customers are withdrawing funds as the hunt for tax evaders widens. As many as 100 Swiss banks will vanish, according to Vontobel Holding Chief Executive Officer Zeno Staub.
“It will not be a big bang, but an erosion as amnesty programs are put together and as clients declare themselves and come clean,” said Francois Reyl, chief executive officer of Geneva-based Reyl Group, which manages 5.5 billion francs of assets. “Those banks which don’t adapt will die a slow death.”
Some banks are already under pressure. EFG International, the Swiss bank controlled by billionaire Spiro Latsis, last month reported outflows from continental Europe in the first half, while net new money from private clients at Vontobel fell 86 percent to 100 million francs from a year earlier.
Switzerland passed bank secrecy laws in 1934 after bankers of Basler Handelsbank were arrested in Paris two years earlier for aiding tax evasion by wealthy French clients. Swiss banks amassed one-third of the world’s offshore wealth over the next 75 years, before the U.S. government sued UBS on Feb. 19, 2009, to force the disclosure of 52,000 American customers who allegedly hid undeclared assets in Swiss accounts.
Five days after the U.S. filed the UBS lawsuit, Ivan Pictet, then managing partner of Geneva’s biggest wealth manager Pictet & Cie., told Le Temps newspaper that Switzerland’s banking industry may shrink by half if the country abandons secrecy.
Three years on, Raymond Baer, honorary chairman of Julius Baer Group, said “banking secrecy, as we know it, is history.”
“Swiss institutions are preparing to tackle an outflow of assets and are developing white-money strategies,” said Zurich- based Hensle of Cap Gemini, with Europeans repatriating funds to their home countries. “The number of banks will decrease.”
Almost one in three banks will disappear or merge with other firms over the next five years as fees fail to compensate for rising regulatory costs and difficult market conditions, Vontobel’s Staub told Handelszeitung this month.
The number of overseas banks in Switzerland fell to 145 from 154 last year, according to the Association of Foreign Banks in Switzerland. There were 312 banks in Switzerland at the end of 2011, according to the Swiss Bankers Association.
Onshore deposits by individuals in Europe are failing to compensate for Swiss outflows in the last 12 months, Sarasin said July 30, when the Basel-based bank reported a 27 percent decline in first-half profit. Sarasin, which has six offices in Germany, is implementing a strategy to ensure all clients are tax-compliant by the end of 2012.
“Sometime in 2013 or 2014 we will have a drop in assets under management of something like 25 percent of the undeclared money,” Bernard Droux, a managing partner at Lombard Odier & Cie., Geneva’s oldest bank, said June 29, adding that it’s difficult to give precise estimates of undeclared money.
As much of one-third of the $3 trillion of private wealth managed in Switzerland may be undeclared and at risk from foreign tax collectors, said Benedict Hentsch, chairman of Geneva-based Banque Benedict Hentsch & Cie.
That figure is probably too high, according to Droux, who said that a maximum 15 percent of client money at Lombard Odier and other private banks is undeclared.
UBS said in November that as much as 30 billion francs of assets may be at risk amid changes in tax rules for European clients living outside Switzerland. Switzerland has ratified a withholding tax accord with the U.K. on Britons with bank accounts in the Alpine country, while Germany and Austria have also signed agreements.
Julius Baer, Sarasin and other Swiss banks are investing in onshore branch networks to retain European clients repatriating money. Compliance and regulatory costs, plus competition from local banks, mean the profit margins on those customers are lower.
Margins on onshore assets in Germany may be less than half the 120 to 150 basis points earned on non-resident funds in Switzerland, according to Booz & Co., a consultancy. A basis point is one one-hundredth of a percentage point.
“Non-declared offshore assets were traditionally the most profitable assets,” said Andreas Lenzhofer, of Booz & Co. in Zurich. “There was very little client interaction, very little cost of compliance and the clients weren’t sensitive to prices. Now offshore clients are becoming the most expensive, challenging the profit model of the banks tremendously.”
Swiss banks’ hopes that they can counter outflows from traditional offshore markets by building networks across Asia, the Middle East and Latin America may be optimistic, said Beat Bernet, a professor of banking at the University of St. Gallen.
“It’s wishful thinking to assume the industry can compensate outflows by targeting emerging markets,” said Bernet. “Banks ought to face up to the situation that profitability will shrink and adapt their business models accordingly to cope with lower margins.”