Why Swiss Private Banks Still Face Taxing Times

European outflows from ‘regularization’ have peaked, but outflows from emerging markets have picked up

By Paul J. Davies

A branch of Credit Suisse in Zurich, Switzerland. Credit Suisse has forecast another 5 billion Swiss francs in outflows this year, mostly from emerging market clients, as a result of regularization across the sector. Photo: Reuters

In polite circles they call it “regularization.” More bluntly it is coming clean.

Wealthy people in Europe have been admitting for years to having money they should have declared to tax authorities. For Swiss banks, that has been money out the door as clients moved it home or withdrew funds to pay taxes.

But the trend is spreading to emerging markets. And starting next year, a global automatic exchange of information program will be adopted by about 50 countries. Under the program, countries will share with each other details of financial assets owned by nonresidents, lifting the lid on more hidden funds.

For the Swiss private banks, this will dampen growth, but is also likely to depress profitability because these cross-border assets have historically produced a higher gross margin.

Customers in Latin America have already begun sucking back funds from the industry due to tax amnesty programs in Argentina, Brazil, Chile and Mexico. Russia and South Africa too are causing outflows.

Credit Suisse, CS 0.51 % UBS and Julius Baer JBAXY -0.97 % all noted some effects of this in recent results.

Within Europe, the total amounts “regularized” between 2011 and the end of last year were huge, more than 40 billion Swiss francs ($41 billion) for Credit Suisse and another 30 billion francs for UBS.

A study by Deutsche Bank DB 3.18 % and Oliver Wyman estimated that these outflows cut pretax earnings by between 400 million and 500 million Swiss francs over the period for each of bank. Across Swiss banking, the study estimates that regularization and more focus on the superwealthy, who get lower fees on their big accounts, have cut margins by about 30% since 2010.

The peak of European outflows was in 2012 and they have declined steadily since, but outflows from emerging markets have picked up.

Credit Suisse has forecast another 5 billion Swiss francs will go this year, mostly from emerging markets clients.

This rate is less than half what it was in the heaviest years, but will still be a drag on growth for the whole industry. Swiss banks as a group expect tax-related outflows in 2016 and 2017 to continue at a similar rate as they did in 2015, according to Citigroup. C -1.30 % Julius Baer said it expects emerging market regularization outflows to drag on growth for two to three more years.

The big question is whether the trend will spread to Asia, where the best current and future growth lies. India and Indonesia have declared tax amnesties, but the effects aren’t yet noticeable.

The types of clients Swiss banks attract in Asia—the ultrarich—may present less of a tax risk because they haven’t avoided taxes in the same small, systematic way over decades that European clients did.

For the superrich of a country like China, the cash they have salted away across Asia may be more at risk if they fallout of favor politically, or if other policies change.

By the end of 2018, when information exchange has been in place for a while, the impact on Asia will be clearer.

For those banks with slowing or struggling investment banking businesses, the last thing they need is more difficulty making money in their most promising wealth markets.

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