There are fewer Swiss-registered banks than a decade ago, showing how negative rates, the demise of secrecy laws, new competition and economic headwinds have taken a toll. The country remains, however, the world's largest for cross-border banking.

Volatile markets, negative interest rates and industry consolidation combined in 2018 to squeeze the number of banks registered in Switzerland by five to 248. The total has eroded over the past decade from more than 300 banks in the Alpine state.

Even so, Switzerland remains by far the world’s largest offshore financial centre – defying predictions of its demise and replacement by locations such as Singapore, or for that matter, the UK and US. Switzerland has 26.6 per cent of all the world’s cross-border business.

And shrinkage in the total volume of Swiss banks coincided last year with a 17.3 per cent year-on-year total profit to SFr11.5 billion ($11.63 billion). (However, the total rise masks that a considerable number of banks either broke even or lost money.)

Last year, banks in Switzerland managed about SFr3.7 billion of private assets, of which SFr2.3 billion stem from cross-border, aka offshore, business. That cross-border business volume has risen by SFr300 billion over the past five years.

The data comes from the Swiss Bankers Association in its annual Banking Barometer, setting out a raft of statistics on an industry that employs 90,660 people in the country (down by 1.3 per cent on a year before). Some 12.9 per cent of gross value creation is directly or indirectly driven by Swiss financial services, making it one of the most important sectors in the country. Or, to use another metric, it makes up 9.2 per cent of Swiss economic output. The banks’ aggregate operating net income rose by 4.6 per cent to SFr65.3 billion in 2018. Assets under management fell by 4.8 per cent to SFr6.943 billion.

“Even though the business environment continued to be characterised by uncertainties, the banks in Switzerland were able to prove their ability to deliver strong results. The number of domestic employees declined only slightly. According to our survey, three out of five banks expect the employment trend to remain stable in the second half of the year”, August Benz, Deputy CEO of the Swiss Bankers Association (SBA) and head Private Banking & Asset Management, said. 

The SBA report said “banks in Switzerland are operating in a challenging business environment”. Tight margins mean that the squeeze on numbers will continue, it said.

Some commentators have predicted that one of Switzerland’s largest banks is likely to merge with another in the next few years, although such forecasts have not yet borne fruit. Much of the M&A consolidation has tended to take place at the small-to-medium end of the spectrum.

One of the heaviest pressures is caused by Swiss official negative interest rates (-0.75 per cent on short-term deposits). These rates have prompted banks such as UBS and Credit Suisse, among others, to squeeze rates. A few weeks ago, for example, UBS said that from 1 November, private individuals holding large cash balances of SFr2.0 million with UBS Switzerland will be charged a deposit fee of 75 basis points, or 0.75 per cent. For clients holding large euro cash balances with UBS Switzerland AG, the threshold will be cut to €500,000 ($552,109) as of 1 November, from €1 million, which it said was “in line with competitors”. Holdings above the threshold will be charged a deposit fee of 0.60 per cent per annum. Julius Baer told this publication that negative interest rates for clients are “introduced on a case-by-case basis for certain currencies” (Swiss franc, euro, Danish Krone and Swedish krona). Clients with large cash holdings are affected. Credit Suisse said that it was introducing a -0.4 per cent rate for the first time on 1 September for its clients with balance of €1.0 million; it has not previously had a negative rate for private clients with euro accounts.

Another headwind has been the demise, at least internationally, of Swiss bank secrecy laws. The country’s financial sector has had to find new ways of appealing to international clients. One long-standing plus for Switzerland has been its political stability and safe-haven status – a fact magnified by recent political unrest in Hong Kong, for example. On the other hand, Switzerland has clashed recently with the European Union about a proposed framework agreement to replace over one hundred bilateral treaties affecting matters including financial market access. The dispute with the EU comes at the same time as the UK, with its major financial hub, is embroiled in its attempt to leave the European bloc.

Data
Domestic mortgage loan growth amounted to 3.6 per cent last year and was therefore higher than in the previous year (2017: 2.7 per cent). The fall in assets under management was mainly caused by share price developments.

According to a survey conducted by the SBA, the staff levels at the banks declined slightly in the first half of 2019. The majority of banks surveyed expect the employment situation at their institution to remain flat in the second half of 2019.

“The banks in Switzerland are facing numerous challenges: tense trade relations between the US and China, the discussions surrounding the relationship with the European Union, the end of the recognition of Swiss stock exchange equivalence by the EU, as well as a digital tax planned by the Organisation for Economic Co-Operation and Development (OECD) are all likely to have an impact in the coming months,” the SBA report said.

“In this period of low interest rates and because of the persistent margin pressure, the banks must focus on business segments that have growth potential, such as sustainable finance”, Martin Hess, chief economist at the SBA, said.

M&A consolidation
Among recent deals, Geneva-based Eric Sturdza Group sold its holding in Banque Pâris Bertrand Sturzda, handing control to a Swiss holding company owned by the PBS management team, and sold a 40 per cent minority interest to Investcorp Europe. The firm was renamed Banque Pâris Bertrand SA. In July, two Swiss private banks owned by unlimited liability partners, Gonet & Cie and Mourgue d'Algue & Cie, said they were merging. The Geneva-based duo said that the combined businesses were to be led by Nicolas Gonet. The two partners of Mourgue d’Algue & Cie, Pierre-André and Swana Mourgue d’Algue, joined the entity’s senior management and continue to serve clients. One of the world’s oldest banks, Berenberg, sold most of its stake in a Swiss private bank to a group of entrepreneurs and investors. Those shareholders include Swiss entrepreneurs Adrian and Andreas Keller, Michael Pieper, Dr Andreas Jacobs, as well as Claus-G Budelmann. The business formerly known as Berenberg Bank (Schweiz), is being renamed Bergos Berenberg AG.