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Business Analysis & Features

Swiss banking exodus: Going (HSBC), going (Generali), gone (Lloyds, ING, Santander)

Rising costs and increased scrutiny have led foreign banks to conclude exit is the best option

Lloyds has left, HSBC will probably be next, and others on the Continent are dusting off their passports with a view to quitting too. The once must-have accessory for the self- respecting bank – a private Swiss branch – is rapidly being seen as a relic from a previous age – a luxurious indulgence as unaffordable as a Patek Philippe watch.

Switzerland's once legendary secrecy, once such an attraction to wealthy international clients, is eroding fast and being replaced by rising compliance costs, chipping away at profits.

The number of foreign-owned Swiss banks fell to 129 by the end of May from 145 at the start of 2012, according to data from the Association of Foreign Banks in Switzerland. Assets under management slid by a quarter to Sfr870.7bn (£604.3bn) in the five years to 2012, the data shows, as clients withdrew money or paid taxes on undeclared accounts.

A crackdown on bank secrecy and increased regulatory scrutiny may unlock a wave of mergers and acquisitions in the next 12 to 18 months, according to bankers, consultants and analysts interviewed by Bloomberg News. While Switzerland remains the biggest centre for global offshore wealth with $2.2trn, or about 26 per cent of the market, according to Boston Consulting Group, departures may further chip away at the Alpine Republic's status.

"There will be a shake-out among private banks," said Felix Wenger, a Zurich-based director and co-head of the private-banking practice at consultants McKinsey & Co. "Specifically for Switzerland, foreign players might conclude that an exit is a better option."

Lloyds Banking Group sold its international private-banking business in May to the Swiss wealth manager Union Bancaire Privée, which also bought part of the offshore business in Geneva from Spain's Santander a year ago. In 2009, Commerzbank sold its Swiss units and ING disposed of its private bank in Switzerland.

HSBC, the biggest foreign private bank in Switzerland by assets under management, may sell parts of its Swiss operations, its chief executive, Stuart Gulliver, signalled in May. The Italian insurer Generali is trying to sell BSI Group, the 140-year-old Lugano-based private bank.

More banks may also be reviewing their presence in Switzerland, said Christopher Wheeler, a London-based analyst at Mediobanca. A recent report by PricewaterhouseCoopers showed more than a third of wealth managers expect "significant consolidation" over the next two years in what will be a shake-up led by the top performers.

Almost a third of Swiss private banks had outflows of funds – more money leaving than walking in – in 2012. About one bank in six made a loss. "As a result, many players are reviewing their geographical footprint, especially in offshore markets, leading to renewed merger and acquisitions activity," the McKinsey report said.

Switzerland's market share slipped to 26 per cent from 27 per cent in 2011, and by 2017 may decline to 25 per cent, according to Boston Consulting's Global Wealth report in May.

The United States has been investigating Swiss banks and units of foreign banks in the country, including that of HSBC, after UBS in 2009 avoided prosecution by admitting it fostered tax evasion and delivering data on about 4,700 accounts of Americans. France and Germany have been searching for tax dodgers using data stolen from Swiss banks and also sharing some of the information with authorities in other European countries.

Agreements with Britain and Austria to collect taxes on behalf of those countries on accounts held in Switzerland have been in force since January, and Switzerland is in talks with other European countries on taxing secret accounts. The country will join the international push against tax dodgers and help develop global standards, allowing banks to share customers' details, the Finance Minister Eveline Widmer- Schlumpf said in June.

"A combination of government actions from the US and the EU and increased regulatory pressure is likely to trigger further changes in Swiss private banking, because it will make it more costly to do business," Francois-Xavier de Mallmann, the head of investment-banking services in Europe for Goldman Sachs, said. "We expect consolidation to continue in private banking and to likely accelerate as the uncertainty weighing on the sector decreases."

Mediobanca's Mr Wheeler agrees: "It's a question of whether you can afford it, whether it's making the returns or whether it's there to facilitate something else within the group."

Margins have fallen dramatically in recent years as Switzerland toughens up its regulatory regime. "Smaller players will either be forced to close or merge with larger banks as the compliance and regulatory costs become unbearable for banks which don't have a critical mass," said Eleni Papoula, a London-based analyst at Berenberg Bank, citing firms with less than Sfr10bn in assets under management. Information technology and compliance expenses should increase given tighter regulation and greater scrutiny by the financial and tax authorities, she said.

Only about 20 of the foreign banks in Switzerland, including HSBC and Société Générale, have close to or more than Sfr10bn in assets under management, data from the association show. The private-banking business sold by Lloyds in May had £7.2bn of assets under management.

Some of the smaller ones are very focused on a particular market and are profitable, while others grew before the financial crisis by hiring relationship managers who brought in clients from all over the world, Martin Maurer, the secretary general of the Association of Foreign Banks in Switzerland, said.

"Now they don't really have a good idea about why they should exist," Mr Maurer said. "They're not focused on any particular markets or countries, don't have a long tradition, and in those cases shareholders may not be interested in supporting businesses that make losses or very small returns on capital here and be exposed to risks."

Banks in Switzerland will also need to develop new products and services to attract foreign clients now that banking secrecy is no longer an argument. They will doubtless push Switzerland's political neutrality and stability. But international banks will have to decide if this alone is enough to drive the customer growth needed to justify the expense of keeping the glamorous Swiss addresses going. Most will decide to pack their bags.