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Swiss banks
Swissness is not enough
Big and small must adapt to survive

Mar 29th 2014 | ZURICH | From the print edition

LIKE their country’s watchmakers, Swiss banks have enjoyed a reputation for quality, reliability and watertight discretion. But since 2008, spectacular coups by neighbouring countries’ tax authorities and investigations by America’s Department of Justice have torn at their reputation. 

Now they are trying to rebuild one as squeaky-clean money managers.

The deceptive calm of shoppers on the Bahnhofstrasse in Zurich belies the turmoil behind the doors of nearby financial institutions. 

Foreign banks are selling out. 

The biggest Swiss names are dogged by litigation and calls for more capital just as costs are rising and margins falling.

 On March 13th they lost a prominent client: Uli Hoeness, president of Bayern Munich football club, was jailed for three-and-a-half years by a Munich court for avoiding tax on money in a Swiss bank account.

It is now clear to even the most obstinate Swiss banker that he must change his game or face ruin. 

Four of the classic Swiss private banks, Pictet, Lombard Odier, Mirabaud and La Roche, have opted for limited liability, ending the owners’ total responsibility for the core bank—mainly because of the risk these days of picking the wrong clients. 

That leaves a shrinking number of private banks in Geneva, of the sort whose offerings go beyond providing financial advice into something more akin to a lifestyle concierge service. Some are surely too small to survive.

Swiss bank secrecy is no longer a protection. Between them the OECD, a rich-country club, and the EU are insisting on a voluntary exchange of information that makes banks declare each account automatically to the relevant tax authority.

 America has dished out hefty fines, too, and forced lenders to hand over names, a once-unthinkable breach of client trust.

To make things worse, in February a narrowly-won referendum calling for quotas on immigration has clouded negotiations on Switzerland’s continued access to EU markets. 

Swiss banks, though rapidly expanding their client base in Asia, still rely on Europe for around 35% of foreign client money. 

In an effort to keep up with EU regulation, a new draft Swiss financial-services law outlaws commissions linked to the sale of financial products. That is a severe blow to bankers and financial advisers who have lived off incentives to sell certain products and the churning of unwary clients’ portfolios.

Amid this turmoil, new patterns are emerging, and hopes of salvation. Size and reach matter more than ever. 

UBS and Credit Suisse, the big two, together added SFr100 billion ($108 billion) to their private-banking assets in 2013. 

Bank Julius Bär, the fourth-biggest, has gambled on Asia, buying the non-American operations of Merrill Lynch in 2012. Now Asia accounts for a quarter of its assets under management.

More broadly, Zurich hopes to reinvent itself as a handler of money for institutions rather than individuals. Such asset management is more transparent than private banking and less prone to attracting dodgy clients. 

Some banks are ahead of the curve. 

Vontobel is as much an asset manager as a private bank: two-thirds of its business is institutional. 

Raiffeisenbank last year started buying asset-management boutiques to diversify from its local mortgage-lending business.

 The core of the new operation, Notenstein, was the non-American business of Wegelin, which closed down after running afoul of American regulators in 2012.

Unless a private banker or asset manager stays very Swiss and very small he will need access to clients in the EU. 

It looks increasingly as though that will mean having a presence in Germany or London. 

Bär and Vontobel have licensed banks in Germany. Pictet and Lombard Odier have big operations in London. 

Credit Suisse, rather counter-intuitively, recently sold its private bank in Germany and a chunk of its asset-management operations. 

Many wonder if its high-rolling investment bank wouldn’t have been a more suitable unit to flog.

Boris Collardi, chief executive of Julius Bär, sees virtue in what he calls “pure-play” private banking. Bär spun off its asset-management division in 2009. 

He reckons that the Swiss are still recognised as the best in the world at private banking, in terms of service and knowledge of tax laws in many jurisdictions. 

Zeno Staub, his counterpart at Vontobel, sees service and performance as two pillars of private banking, with stability or Swissness as the third. But “Swissness is only an add-on,” he says, “it’s not the key any more.”

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