A Hard Transformation For Swiss Banks

These are challenging times for Swiss private banks.

The latest U.S. crackdown on tax havens underlines the reality that the secretive Swiss bank model, which has existed for decades, is likely on its way out.

Clients who are forced to declare their assets want good returns, rather than being content with simply shielding holdings from tax authorities. For banks, this means an increased focus on investment advice, which requires heavy spending on information technology and personnel to adapt to a new environment. Such investments will stretch some banks financially, resulting in more mergers and acquisitions, where bigger banks snap up the small boutiques.

"The situation isn't very comfortable for Swiss banks currently," said Daniel Senn, head of financial services at consultancy KPMG. "Costs are rising and clients are unsettled because it is no longer clear what banking secrecy means as it increasingly looks like a Swiss cheese with holes in it."

The indictment by U.S. prosecutors this month of Wegelin & Co., Switzerland's oldest private bank, was the most recent fallout from a U.S. campaign to track down Americans with assets hidden overseas. Swiss banks are hoping for a deal between Switzerland and the U.S. in which no criminal charges against them or their employees are made.

The Swiss government has for months been trying to negotiate a sweeping settlement covering all Swiss banks that might have helped Americans evade taxes. So far, Bern and Washington have been wrangling over details such as the size of any fine and an agreement to hand over thousands of names of secret account holders.

In the absence of an agreement, U.S. authorities have started to target individual banks, investigating alleged assistance in helping Americans evade taxes at 11 Swiss banks, including Julius Baer Group AG, Switzerland's largest private bank, and Credit Suisse Group AG.

UBS AG reached a settlement with the U.S. over the tax matter in 2009, paying a fine of $780 million, handing over the names of nearly 4,500 clients and admitting to wrongdoing.

Julius Baer recently said it expects to pay a fine to resolve the matter, while Credit Suisse took a litigation provision of 295 million Swiss francs ($322 million) against last year's third-quarter earnings related to the matter.

Pressure on Swiss banks to track down tax cheaters is also rising within the European Union. Treaties negotiated with the U.K. and Germany call for Swiss banks to impose a withholding tax on assets of clients from those countries, and then transfer that money to tax authorities. But those treaties still have to be approved by the EU and by legislators in Britain and Germany, and they have come under widespread criticism in other EU member states. The critics say the treaties violate EU rules because client names would remain confidential.

Regardless of how talks with foreign governments turn out, two things are now clear: Swiss banks will have to make sure that taxes are paid on clients' assets, and this will require significant investment on the banks' part in personnel and IT. Ensuring this will cost some 500 million Swiss francs overall, according to the Swiss Bank Association.

For small, unlisted Swiss private banks, which are the majority, this will be difficult to stomach.

Industry experts expect the big, listed banks to come out as winners in the end. They have the financial muscle to pay for the IT investments, the wide product offerings to aid clients, and the global reach to service them in the countries of their residence.

A particular favorite to do well is Julius Baer, which held up better than Credit Suisse and UBS last year in terms of fund inflows and profitability. It isn't burdened with an unprofitable investment bank, focusing instead on private banking only.

Nomura analysts Jon Peace and Tathagat Kumar noted in a recent report that Julius Baer has the capacity to continue to see attractive inflows of new assets from clients. "It has a reasonably strong presence in emerging markets, notably in Asia, and to a lesser extent, Latin America, where the market for private banking is growing fast," they said.

Analysts prefer Julius Baer to bigger rivals UBS and Credit Suisse. Some 47% of analysts surveyed by Factset have a buy rating for Julius Baer, compared with 41% for UBS and 20% for Credit Suisse.

At Credit Suisse and UBS, inflows of new assets decelerated in the fourth quarter and profitability fell, while both indicators held up at Julius Baer in the second half of 2011.

Compared with its bigger rivals, "Julius Baer's stable margin and accelerating inflows in the second half now look even better... and [are] an outlier versus its Swiss peers," Deutsche Bank analyst Matt Spick said in a recent report.

-By Anita Greil, Dow Jones Newswires, +41 4 3443 8044;

anita.greil@dowjones.com

Julius Baer Gruppe (PK) (USOTC:JBARF)
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