Swiss private banking is getting increasingly desperate to find growth opportunities, but these are getting scarce even in boom markets, an analysis by finews.asia shows.
Swiss private banking is doomed to grow. Every institute needs fresh capital from customers, not least because existing clients currently tend to remain passive amid turbulence in the markets.
The difficulties of private banks to remain profitable are getting increasingly evident in the publicly accessible accounts of the institutes: margins are down, while money needs to be invested in IT, digital solutions and compliance.
Remains the option to grow at all cost to achieve the economies of scale. Growth opportunities however are getting all the more difficult. And developments in the various markets aren’t helping the private banks much either – quite to the contrary.
1. Switzerland: Treading Water
Switzerland is being treated as a growth market by almost all Swiss private banks, as the institutes are getting to grips with the new realities of post-offshore-banking. The reality however is that there is no real growth with new moneys. Banks are forced to increase their market share by taking over competitors.
Not easy: Notenstein private bank for instance is struggling to grow organically despite its concentration on the Swiss market. Competition is stiff, not least because of the two banking hegemons, UBS and Credit Suisse.
Companies such as Notenstein also have to compete with regional banks, such as the cantonal banks, which are good at wealth management. Growth through acquisitions is difficult to achieve in the absence of suitable takeover candidates. First, you need institutes that want to sell, second are structure of customers stock and market region generally not congruent with the strategy of the buyer, making it necessary to sell on unwanted assets.
This is one of the reasons why the consolidation in Swiss private banking is taking so much time, why growth opportunities are scarce and why they remain hotly fought over.
2. Asia Pacific: Cracks on the Surface of Banking Paradise
The promise of double-digit growth rates encouraged scores of Swiss wealth managers to accept the high costs of establishing a presence in Singapore, the hub for the Asia-Pacific region.
Advisers such as McKinsey believe that the region still carries greater promise than most other regions for private banks, which is why the Swiss private-banking industry is still investing heavily.
But the recent quarters showed that growth has its limits even in this region. With persistent and increasing turbulence on the markets, Asian customers have become significantly less active and more risk averse, affecting the profits of private banks.
In addition, there are several situations developing in the region with the potential to boost compliance and risk-management costs. First and foremost the scandal focusing on Malaysia’s state fund 1MDB, which has rattled nerves at banking headquarters in Singapore and Zurich alike.
Several Asian countries are negotiating deals regarding the exchange of tax information with Switzerland. India and Malaysia being the most active, and Sri Lanka, Pakistan and the Philippines following not far behind.
An offshore center Singapore won’t get Swiss banking that much further.
3. Europe: Seeds on Scorched Earth
Having a penny or two on a Swiss bank account used to be the done thing in Europe in the 1970s. The taxman often enough wasn’t kept informed about this. Europe thus was the most important market for Swiss private banks, until the tax dispute ended Swiss banking secrecy and tax avoidance business.
Money has been flowing out of Switzerland ever since. Swiss banks have been and still are being put under pressure by foreign authorities to hand over data about tax dodgers.
But Europe isn’t scorched earth for Swiss banking. The assets of rich Europeans have grown 4 percent faster than the region’s economy in 2015, McKinsey has said. The best growth rates have been reported from the U.K., Germany and Scandinavia – as well as Switzerland.
The switch to white-money from black-money banking and to onshore from offshore is slowing paying off. The asset management business of UBS Germany last year was close to being profitable. Julius Baer and Vontobel also improved their business in the region.
An effort to gain a better market access and projects such as UBS Europe show that Swiss banking hasn’t given up on Europe. The continent won’t be a growth market as it used to be for quite some time. But there’s a promise of stable profits free from liabilities.
4. Eastern Europe: Ice Age in the Boom Market
Hans Vontobel still travelled to Kazakhstan at a ripe old age – booming Eastern European markets were clearly worth the effort for one of Zurich’s banking masters. After the outbreak of the conflict in the Ukraine and the ensuing sanctions against Russian politicians and oligarchs, Moscow has become a difficult market for Swiss banks. New tax transparency rules made doing business with rich Russians and their wealth more complicated. Add to that the crumbling of the oil price, which strongly hurt producers in the region.
The boom business, once a promise that drove up the bonuses of the relationship managers involved, remains nothing but the trace of a lovely dream.
Credit Suisse, traditionally the Swiss bank with the strongest business in Eastern Europe, is a good example for the development. The bank is engulfed in the scandal involving the disappearance of million of francs belonging to a Georgian oligarch. In July, CS surprisingly waved goodbye to onshore banking in Russia.
5. Latin America: a «Second Europe»
Latin America has been rather disappointing for Swiss private banks recently. The former growth engine Brazil has gone slow recently and the depreciation of the currency is weighing on assets under management. The introduction of so-called tax-regulation programs in Brazil, Argentina and Mexico has made matters worse.
These countries are offering citizens to repatriate untaxed assets, paying back taxes and a smaller fine. Julius Baer has seen an effect in the first half, with CEO Boris Collardi speaking of a «second Europe», in reference to the regulation that has taken place in Europe.
After the U.S. and Europe, Swiss private banking has had to take issue with the Latin American tax program.
6. Middle East: the Oil Price
The Middle East success story has fallen on its sword: the oil price. The oil-producing countries have seen the emergence of a seriously rich clientele in past decades, which has been on the radar of Swiss banks. But the fight for the clientele has gotten gradually tougher, with wealth managers slugging it out in financial centers such as Dubai.
But the biggest dampener of them all is the oil price, which more than halved within two years. Expectations are for a sudden improvement. The effects are evident, with clients in the Middle East retracting assets, with others deleveraging their portfolios.
7. U.S.: a Niche Market Only
Private banking in the U.S. is the biggest in the world and hotly contested. After a decade of fighting over the tax issues, the payment of billions in fines and a series of enforced closures of banks, the U.S. is scorched earth for Swiss private banks.
UBS remains the only Swiss bank with a sizeable representation in the country, but has been struggling to remain profitable. Credit Suisse exited the market but is now trying to reenter again to get a share of the ultra-high-net-worth-individuals market.
Smaller institutes, such as Vontobel, Reyl and Syz have onshore banking and hope to lure rich U.S. customers with the Swiss banking brand. Some 40 wealth managers have a registration in the country, which goes to show how small the business has become in the market, which remains hugely promising.
8. Africa: Swiss Banking Remains Absent
Africa – and in particular the sub-Saharan continent, is considered a potential growth market for the economy at large and for private banking also. But the development of the continent remains extremely fragmented in its political and economic development.
The potential for private banks remains relatively small. There are about 150,000 high-net-worth-individuals in Africa, with an aggregate $1.4 trillion in assets (according to Capgemini). By way of comparison: Latin America has 520,000 HNWI with $7.4 trillion, Asia Pacific has 5.1 million HNWI with $17.4 trillion.
Investec, the most successful of private banks in Africa, has about $24 billion in assets on the continent. Taken together, it becomes explicable why Swiss private banking hasn’t targeted Africa more. Only Falcon Private Bank has a notable African project, but the big impulses won’t be generated in Africa.
