Swiss banks are under foreign assault but it is not often discussed that almost identical bank secrecy laws are to be found in neighbouring Austria. This article looks at the country's banking sector.

Editor's note: As the summer holidays take hold, this publication is re-publishing some of the best-read and stimulating features that have been carried since January. This article looked at a jurisdiction that tends to be overshadowed by its Swiss neighbour.

The Swiss banking model is constantly under attack from abroad, but it is not often mentioned that almost identical secrecy laws are found in the neighbouring Alpine state of Austria. Because of tradition, an economy less dependent on financial services and membership of the eurozone, banking in Austria has attracted considerably less attention over the years. Another reason is that the country’s wealth management industry is dominated by domestic players that are practically non-existent outside the country’s borders.

Article 38 of the Austrian Federal Banking Act bans the divulging or exploiting of secrets “which are revealed or made accessible to them exclusively on the basis of business relations with customers”, except in a small number of cases, the most important ones being in criminal court proceedings or when forced by the tax authorities.

“Austrian private banking has always been in parallel with the Swiss private banking situation with the difference that the profile of the country is much lower than Switzerland’s,” Gordian Gudenus, partner of Bank Gutmann, told WealthBriefing. “This means that we have been spared the difficulties the Swiss have been going through recently.”

Gutmann is a privately-owned bank founded by the Gutmann family in the 1920s and sold to the Kahane family in the 1950s, which is still the majority shareholder. The bank, which has €14 billion ($18.6 billion) in assets under management, has a full banking licence but focuses on clients with at least €1 million in investible assets.

No place like home

Gudenus believes that Austria has managed to keep a low profile thanks to its more diversified economy where banks are less important. At the same time, Austrians have always defended themselves by saying that as long as the Swiss have a different model they want to have the same as their next-door neighbour.

Austria is also different from Switzerland in that very few Austrian banks have activities outside the country, and when they manage wealth for non-nationals, a key component of the industry, it is usually on an onshore basis.

“Formally, rules are basically the same [as in Switzerland],” says Gudenus. “But Austrian private banks do not have overseas branches or affiliates which could expose them to pressure from other countries. To my knowledge there has never been a case where banks have been forced to disclose information about their clients like what has happened in Switzerland.”

While they may be small in the outside world, private banking in Austria is dominated by the domestic players: “The well-known international banks, like Deutsche Bank, UBS and Credit Suisse are also here, but their market share is small compared to the national players,” Robert Zadrazil, head of private banking at Bank Austria, part of Unicredit, told this publication. “With all respect of what they are doing at global level, all of them have small businesses here.”

UHNW and HNW

Everyone who has read the latest global wealth report by Boston Consulting Group will have noticed Austria’s prominent position in the UHNW segment, which the research house defines as clients with more than $100 million. The Alpine state has the fourth highest proportion of UHNW households in the world, with eight such households per 100,000, equal to Kuwait and beaten only by Saudi Arabia, Switzerland and Hong Kong. However, Austria has a population of fewer than nine million people, and the UHNW client base is fairly small in absolute terms. According to Wealth-X, which defines UHNW as more than $30 million, there are 600 UHNW individuals in Austria, compared with 5,000 in Switzerland.

“UHNW individuals are less important in Austria compared with, for example, Germany and Poland,” Zadrazil says. “It is much more distributed; you will only see very few people with wealth over €1 billion.”

According to Zadrazil, the HNW market in Austria is worth €90 billion ($120 billion) in total financial assets. That is based on Bank Austria’s definition of HNW individuals, which is more than €500,000 in investible assets. In this segment, Bank Austria and its private bank subsidiary Schoellerbank are major players with a combined market share of nearly one fifth.

A gateway to Eastern Europe

Despite the absence of global players and the rarity of offshore banking, international clients are very important for wealth management in Austria. For example, international clients account for roughly 40 per cent of the business at Schoellerbank. Vienna’s historical ties to Central and Eastern Europe as well as to Russia, and the city’s cosmopolitan profile and central position on the European continent are key reasons why many foreigners are attracted to the country.

The link to Eastern Europe is especially important: “We have some clients from Ukraine and Russia who still have their business in their countries, but they are living with their family in Vienna because of security,” says Zadrazil. “In two hours, you are in Moscow and in one and half hour, you are in Kiev. It is really a domestic business with international clients.”

Michael Wodzicki, a member of the board of directors and head of international private banking at Kathrein Privatbank, describes Vienna as a gateway to Eastern Europe for Westerners, and vice versa. One third of client assets at Kathrein Privatebank come from international clients. The private bank has been part of Raiffeisen Banking Group, one of the country’s largest banks, since 1974.

“The private banking market in Austria has been stagnant since 2008,” Wodzicki told this publication. “Partly due to global economic problems there has also been a flight of rich people’s money to real assets such as real estate and gold. So there is not a lot of growth in the domestic business, but the international business is still growing. You have had a lot more turbulence in Hungary and some other countries in the region, where wealthy people look at Austria as a safe haven.”

A level playing field

In the past, Austria was not just attractive as a safe haven but also to some extent as a tax haven, as the jurisdiction offered attractive deals for foreigners, but that is long gone after a crackdown by the European Union. However, non-EU citizens still pay no tax on capital gains tax on deposits and bonds, whereas EU citizens pay the same rate as Austrians (35 per cent).

“The tax advantages that certain countries had have been removed and there is now no advantages that one country has versus another within the EU and Switzerland,” says Wodzicki. “It has been good for our business, because the tax competition has been removed so now it is just about business and doing good private banking and not tax-dodging. It is a level playing field; Switzerland used to target a lot of money that was tax avoidance.”

Wodzicki is not worried that Austria’s status as a safe haven has been damaged by the continued rough patch for the eurozone and the recent downgrade of the country’s credit rating. Austria boasts one of the healthiest economies in the eurozone and, for example, the unemployment rate of 4.1 per cent is way lower than the 10.4 per cent average in the eurozone.

“The downgrade was not tied to Austria’s growth or deficit, but has more to do with Italy and Hungary,” Wodzicki says. “Many here would see it as unfair, because we have a lower Government debt-to-GDP ratio than Germany.”

Zadrazil agrees: “I think the downgrade will have an impact on the overall banking business, but not on the private banking business,” he says. “International clients may be worried about the eurozone as a whole, but not about Austria."