ZURICH (Reuters) - Switzerland’s allure as a place to stash cash has been badly damaged by a U.S.-led campaign against tax cheats, and the country’s roughly 140 private banks can no longer rely on a reputation for secrecy to attract wealthy customers.
To try and compensate for the hundreds of billions of Swiss francs withdrawn in the wake of the tax probes, banks that once relied on word-of-mouth referral have brushed up their sales pitches and hit the road to attract new clients, particularly in Asia, the world’s fastest production line for multi-millionaires and billionaires.
“The key paradigm shift is that, in the old days, Swiss private banking imported clients,” said Zeno Staub, the chief executive of Swiss bank Vontobel. “Now we export services.”
To compete across borders, banks either need scale, or a specialist niche. Industry experts expect a gradual wave of takeovers and closures to shrink the sector, possibly by up to a third, once long-running U.S tax investigations involving dozens of banks conclude. Some are expected to be wrapped up in the next 12 months, but others could drag on.
The tectonic shifts expected in an industry steeped in hundreds of years of tradition prompted speculation last week of a tie-up between Credit Suisse, the country’s second-biggest bank, and Julius Baer, its third-largest listed wealth manager.
Analysts questioned the logic of such a takeover for Credit Suisse, which only recently agreed to pay $2.6 billion to settle a tax probe with the United States, hollowing out its reserves for such a big deal.
Julius Baer is in the midst of its own U.S. criminal investigation for aiding tax evasion, and a source familiar with the matter said the case for a deal between the two banks was weak for now and that any possible merger would be at least two to five years away.
But the speculation of such a tie-up underlines the sense of change afoot in the wood-panelled private banks of Geneva and Zurich, from which rich clients withdrew a net 350 billion Swiss francs (232 billion pounds) between 2008 and 2014, according to an estimate from accounting firm PricewaterhouseCoopers.
Profits have been eroded by the outflows and clients’ preference for low-risk holdings, which generate weaker returns for banks. The number of loss-making banks rose by almost 50 percent in 2013 to 34 compared to a year ago, according to a study by auditor KPMG that looked at 94 Swiss private banks.
The KPMG study, which excluded some big banks like UBS and Credit Suisse, also showed private banks’ return on equity - a key measure of profitability - fell by more than 75 percent between 2006 and 2013.
Before the 2007-08 financial crisis and subsequent increase in regulatory vigilance, not much had fundamentally changed in the world of Switzerland’s often family-run private banks since the Napoleonic era. Customers came to Zurich and Geneva to park their money, and the bankers did not have to do much to keep it.
Once-a-year meetings with clients left plenty of time for long lunches and afternoon tipples.
Now, with the threat of hefty sanctions for tax evasion and customers anxious for returns in an era of record low interest rates, bankers have to bone up on investment trends and regulatory small print.
“We’re moving from what we would call an asset-gathering business to an advice and investment management business,” said Anthony Cerquone, the global head of human resources at UBS’s wealth management arm. “The asset gathering was much less active than our model today.”
UBS’s client advisors have to complete a wealth management diploma to sharpen up their advisory skills and their awareness of compliance, on top of having a chief investment officer who sets the bank’s ‘House View’ on investments.
At Geneva-based Lombard Odier the most popular internal training programmes are on client interaction, and risk and compliance, a bank spokesman said.
Lombard Odier and crosstown rival Pictet & Cie broke with more than two centuries of tradition last week when they published financial results for the first time.
The two banks, both still partially run by their founding families, had to make the disclosures after changing their structure to limited partnerships, which cap their partners’ exposure to potential fines from U.S. tax probes.
Rum tales of how Swiss banks helped clients evade taxes - such as smuggling a client’s diamonds into the United States in a toothpaste tube - have hurt their reputation in North America, but among China’s monied classes, they still have cachet.
“The Swiss name, Swiss banks still appeal to a lot of them. After 2008, a lot of them had bad experiences with big banks,” said Ang Eng Hieang, a veteran of Singapore’s private banking industry, who joined Swiss bank Bordier & Cie in 2012 as executive director.
Since 2009, when the veil of Swiss banking secrecy was first lifted after UBS agreed to pay $780 million in fines and pass on information about tax-evading U.S. citizens, the country’s big banks have been channelling resources into Asia.
UBS, the world’s largest private bank, has cut staff numbers by almost 11 percent in Switzerland, while growing numbers in Asia Pacific by 7.4 percent. Credit Suisse has cut the number of relationship managers in Switzerland by 15 percent since 2009, but bulked up its headcount in Asia Pacific by almost a third.
Bordier & Cie has spent the past two years trying to build up an Asian business from scratch, and around 15 percent of account holders are now from Asia.
The bank helps advise clients on a wide range of investment matters from bond yields and Tokyo property prices to pieces of art from China’s cultural revolution and charges a relationship fee and a transaction fee for its services.
”We seek to be transparent; we show our clients where our products are from, and we show them our mark-up,“ said Ang. “We want to be a trusted intermediary.”
Back in Switzerland, the industry is still coming to terms with the new open landscape.
“The industry is still digesting the legacy situation,” said Vontobel’s Staub. “As we all know, when we have eaten too much, digesting takes a bit of time.”
Additional reporting by Oliver Hirt in Zurich, Jed Horowitz in New York and Rachel Armstrong in Singapore; Editing by Carmel Crimmins and Will Waterman