After decades of much-vaunted banking secrecy that has made it the world’s largest center for overseas wealth, Switzerland’s banking sector is poised to finally open up. From this year onwards, account data must be exchanged with foreign tax authorities, putting an end to the privacy protections and tax avoidance that were once the hallmark of a Swiss bank account.
And the move is not the only factor that that will turn the screws on Swiss banks in 2018. Regulations are being tightened and, as if that weren't enough, customers are demanding fancy apps that will let them manage their assets at any time, which costs money. Some institutions are not up to the challenge, and the number of banks has been in decline for years.
With a $2.5 trillion (€2 trillion) share of global offshore assets, around a quarter of the global total, the Swiss banking sector appears in good shape. But not all institutions are benefiting from this huge volume to the same extent. The consultancy KPMG looked at 83 Swiss private banks last year and found that they achieved an average return on equity of just 4 percent. "Naturally there are many banks in Switzerland that are earning good money," said Christian Hintermann, a private banking specialist at KPMG. "But many institutions are still having problems finding a profitable business model, even 10 years after the financial crisis."
It is not the task of banks to treat everything as illegal that society regards as immoral. Yves Mirabaud, partner, Mirabaud private bank
While large banks such as Vontobel, Pictet and Julius Bär are coping, smaller banks in particular are struggling. One solution could be mergers, but these are rare; last year, the association of Swiss private banks counted just two takeovers. Mr. Hintermann said that this could not always be explained rationally. "Often, pride plays a part," he said.
Sometimes, mergers fail because the two sides are unable to agree on a name, or there are concerns about taking on legal risks from the past, he added. "That's why we're seeing a lot of asset deals," said the KPMG advisor. In this kind of deal, the new owner only takes over the customers and their savings, while the bank itself is left as a separate entity and wound up. The affected staff are paid off, said Denise Chervet from the Swiss bank employees' association.
Yves Mirabaud, a partner of the same-named private bank and president of the association of Swiss private banks, denies that the sector is doomed. "We have coped very well with the paradigm shift over the last 10 years," he told Handelsblatt.
He said Swiss banks were working hard to meet regulatory requirements and that they were keen to protect their reputations. "Naturally we still have work to do, but I think our industry is very important to the Swiss economy and to society as a whole," he said. Mr. Mirabaud added that consolidation was strengthening the industry, with banks mainly acquiring branches of foreign institutions.
However, another comment Mr. Mirabaud made on Thursday raised doubts about whether bankers have learned their lesson. Speaking about the revelations in the Paradise Papers relating to offshore investments, he said: "It is not the task of banks to treat everything as illegal that society regards as immoral," prompting objections from journalists.
Private banks are also calling on regulators to take a more "differentiated" view, complaining that regulatory expenses have more than doubled for Swiss banks, even though they did not cause the financial crisis. Some smaller institutions in particular are reported to be under a lot of cost pressure.
Mr. Hintermann estimates that around 30 private banks will be lost from the Swiss market by 2020. Following a boom period, he expects banking to become a normal industry again in which it is necessary to fight for market share. "And anyone who doesn’t manage that will disappear from the market," he warned.
Michael Brächer is a financial editor in Handelsblatt's investment team in Frankfurt. To contact the author: [email protected]