Tax Agreements Accelerate Consolidation in Swiss Private Banking

The new withholding tax agreements with Germany and the UK will see the Swiss financial sector losing around CHF 47 billion in assets and a total of CHF 1.1 billion in revenue. The implementation costs arising from the tax agreements coupled with the continuing difficult market environment will accelerate consolidation in Swiss Private Banking and result in irreversible structural change in the sector. However, long term the tax agreements offer a sound future basis for banks and asset managers operating in Switzerland, enabling them to continue to work successfully and profitably in their cross border business with high net worth clients. This will involve a focused strategy geared to quality and performance. The international strategy consultancy Booz & Company has conducted a study to examine the effects of the tax agreements negotiated with Germany and the UK on the Swiss financial sector. Conclusions drawn outline the necessary adjustments for private banks and asset managers operating in Switzerland.

Swiss Financial Sector Set to Lose CHF 47 Billion in Assets and CHF 1.1 Billion in Revenues

Given offshore assets under management by the Swiss financial sector totaling CHF 2,050 billion at the end of 2010, the assumption by Booz & Company is that there will be an outflow of around CHF 47 billion (2.3%) as a consequence of the two tax agreements. The direct consequence of this is a CHF 600 million drop in revenue. Furthermore, under the new tax regime the pressure on margins will also increase. Overall, this will result in a CHF 1.1 billion drop in revenue, around 4% of total Swiss Private Banking revenue. Similar tax agreements with other western European countries might result in a doubling of these figures. In addition to the structural drop in revenues significant implementation costs are expected. The one-off costs alone are estimated as running into the tens of millions, even for the smaller banks.
Carlos Ammann, managing partner of Booz & Company in Switzerland and head of its global Wealth Management Practice, said: “Given the continuing unfavorable market conditions in Switzerland, many private banks and asset management companies are already operating with cost-income ratios of well above 80%. The additional pressures on the income and cost side from the structural changes now taking place are set to make this ratio significantly worse once again. I am therefore convinced that the consolidation that has already started in Swiss Private Banking will continue at an accelerated pace.” 

Short-Term: Further Cost Reductions and More Focus Expected 

The structural loss of revenue pools and additional costs are forcing the banks and asset managers to make further cost reductions and to adapt their business models. The likelihood is that different providers will concentrate on individual parts of the value-adding process and will no longer do everything from advising customers to developing products and risk management through to transaction processing in-house. The further-increasing pressure will see them making greater use of services from external specialists, or looking for shared solutions in various areas.

Long-Term: Potential for Swiss Private Banking with New Service Quality 

The study also showed that other financial centers, such as Singapore, will not profit directly from the changes in Switzerland. The assumption by Booz & Company is that the Swiss financial sector will continue to play a leading part in cross border asset management in future. Client privacy, secured under the tax agreements, will continue to play a role, but not to the same extent as previously, and fundamentally different in nature from the bank secrecy extended to date. Swiss providers now need to establish themselves with very wealthy customers as full service providers, able to meet customers’ needs across various domiciles and in harmony with all relevant legal regulations. With the loss of the “automatic” tax advantage, service quality and performance in particular become very important. Andreas Lenzhofer, partner with Booz & Company and responsible for the study, comments that, “Swiss banks and asset managers must differentiate their offer clearly and focus on their strengths. To do this cost efficiently, most providers will need to focus on particular customer segments and markets. It is absolutely certain that this requires investment in advisory competence, so that real added value beyond the traditional asset protection function is created for the customer.”