Private banks slow to adapt to taxing times

Adapting to new regimes will not be easy Keystone

Only a third of Swiss private banks are actively mending their ways to conform with new regimes designed to stamp out cross border tax evasion.

This content was published on November 10, 2010 - 21:19

While a handful of banks see no reason to reform their procedures, most are waiting for the bigger banks to test the waters before embarking on their own measures, according to a study.

The Swiss banking sector has come under enormous pressure in the past two years to end the practice of sheltering non-declared assets of tax dodgers. Switzerland has been forced to strengthen its compliance with foreign tax authorities and will soon thrash out two groundbreaking treaties with Germany and Britain.

These deals propose imposing backdated and future taxes on undeclared accounts in exchange for keeping the holders’ identities secret.

The banking industry has been at pains to stress that it will no longer accept so-called “black money” from foreign clients. The cost of complying with new taxation treaties is set to eat into profit margins, particularly with smaller banks and asset managers.

But a study of the sector by tax consultants KPMG and St Gallen University has found that two-thirds of Swiss private banks have not yet set concrete measures in motion.

Close scrutiny

KPMG Switzerland’s head of financial services, Daniel Senn, told that it is the bigger banks, such as UBS and Credit Suisse, that have started the ball rolling or even completed their system overhaul.

“The big players cannot afford to wait until the regulators tell them what to do because they know they are under the closest scrutiny,” he said. “They do not want to run into the same trouble as UBS had in the United States [when the bank was caught red handed aiding tax evaders].”

“The smaller players are not so much on the radar and they do not have such large financial resources. In some cases they may feel that it would be more cost effective to see how the market reacts to the first movers.”

One fear within the industry is that wealthy clients would simply move their assets away to countries with less stringent compliance regimes. Nearly a third of small or medium sized banks fear that clients could move assets away, although this estimate narrows to 19 per cent for larger competitors.

Of the clients that would keep their assets where they are, some 60 per cent of banks thought they would do so only reluctantly.

Bankruptcy alarm

Several observers believe that smaller banks face great difficulties staying afloat as the supply of undeclared assets from Europe and the US dries up. A PricewaterhouseCoopers report last month predicted tough times ahead for banks that lacked the financial firepower to beef up compliance with new regulations or set up onshore operations abroad.

The smaller banks have repeatedly denied that size matters in the changing landscape, but former Julius Bär chief economist turned politician, Hans Kaufmann, recently added his voice to the doom mongers camp.

“Many of [the smaller banks and wealth managers] could become bankrupt,” the member of the parliamentary committee for economic affairs and taxation told the media this week.

Christoph Lechner, a professor at the Institute of Management at St Gallen University, believes this prophesy to be a little far-fetched.

He pointed out that three quarters of banks predicted a growth in client assets, fuelled by a decline in other currencies against the franc. But Lechner did warn that smaller institutions could start to feel the pinch as compliance costs increase.

Signs of optimism

“If you come to a point where it is not profitable to operate any more then you may have to look at alternative options, such as merging with other banks or transforming yourself into an independent asset manager,” he told

Lechner, a co-author of the “Defining the Future of Swiss Private Banking” report released on Wednesday, added that smaller banks are more likely to be swallowed by larger rivals than go under.

A consolidation of the Swiss private banking industry has been predicted for some time, but there has been little movement so far.

The report found that while three quarters of the 41 banks surveyed expected to see growth in the near future, some 78 per cent believed there will be a consolidation of the industry in Switzerland.

One of the main reasons for such limited activity is that potential acquirers fear they could be saddled with unforeseen legal problems connected to the undeclared client assets of their takeover target.

However, the report states that merger and takeover activity could pick up in the next two years.

Other key findings of the study

The joint KPMG and St Gallen University report surveyed 41 of the 171 private banks in Switzerland.

Some 75% were confident that the sector would attract net new money (NNM) in the near future, but predicted a growth of less than 10%.

This compares to only half of respondents predicting growth in the market in last year’s survey.

Some 66% in the 2010 survey believed the weakening of the euro and other currencies against the franc would be the main driver of NNM growth.

Unsurprisingly, given the recent troubles of UBS, only 2% plan expansion in the United States. Most (54%) plan to focus on central and Latin America, followed by Switzerland (51%), western Europe (49%), Asia (39%), the Middle East (37%) and Russia (32%).

Most of the banks surveyed expect a consolidation of the sector. The main reasons are: small banks lacking critical size to survive alone (80%), the burden of regulatory developments (78%) and a decline in profitability (77%).

Some 86% of respondents said they would adapt to comply with new cross border banking regulations. But only 76% of these feel they are in a position to make the necessary adjustments.

Only 33% of all banks are currently implementing changes or have done so. Just 3% of the smaller banks said they had no need to make any changes.

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