World Economy

Switzerland Remains Offshore Wealth Magnet

Switzerland Remains  Offshore Wealth MagnetSwitzerland Remains  Offshore Wealth Magnet

The world’s wealthy still consider Switzerland the best place to park their riches despite tax evasion scandals ending banking secrecy. Swiss banks held $2 trillion (CHF1.87 trillion) of offshore wealth last year, according to financial consulting firm Deloitte.

This confirms Switzerland as being ahead of Britain ($1.7 trillion) and the United States ($1.4 trillion) as the world’s leading destination of cross-border wealth management. However, smaller Asian centers, such as Hong Kong and Singapore, continue to grow at a faster rate than Switzerland despite remaining some distance away in terms of absolute size of assets under management (AUM), Swissinfo reported.

“Switzerland remains the world’s largest center, but other locations are catching up rapidly – especially Hong Kong [142% AUM growth], the US [28%] and Singapore [25%],” Daniel Kobler, Deloitte Switzerland’s head of Banking Strategy Consulting, said in the report.

Asian Competitors

Kobler’s comments echoed those being made by various observers – most notably WealthInsight in 2013 – in the past two years that warned of Asian competitors catching up with, and overtaking, Switzerland in the next few years.

Behind Switzerland’s headline AUM statistic lurks further problems for the Swiss private banking sector. The majority of the 14% AUM growth in Switzerland since 2008 has been realized by rebounding markets swelling the size of assets that took such a hit during the financial crisis.

This masks the fact that Switzerland lost 7% of its AUM in the same period as a result of clients withdrawing their money in the face of a growing global crackdown on tax evasion. This has put a serious dampener on overall growth of the Swiss wealth management business.

Declining Profitability

The Deloitte study, however, reveals that Switzerland was a long way from being the worst affected jurisdiction in this respect. Only Hong Kong and Singapore saw more wealth deposits than withdrawals between 2008 and 2014.

While Switzerland lost $135 million through this process, Britain saw $300 million disappear (-21% of total AUM) while a staggering $1.3 trillion of offshore wealth drained away from Panama and the Caribbean (a loss of three-quarters of cross-border AUM).

The latter group of jurisdictions suffered so badly due to their close proximity to the US, while the British government has made some efforts to clean up the image of its numerous tax havens, such as Jersey and more far flung protectorates.

Another serious issue facing Swiss banks is their declining profitability. Deloitte calculates that profit margins in Switzerland have shrunk from 40 basis points in 2008 to 24 bps last year.

This decline has been largely caused by tax evasion legal costs, implementing new regulations and other expenses, such as new technology to keep up with the industry’s digitization drive. Income has also taken a hit as clients eschew risk and demand more for the fees that banks charge them.

Exports at Record High

Global demand for Swiss-made goods surged 3.5% last year as the value of exports reached CHF208.3 billion ($224 billion), beating the previous record set in 2008. The rise in exports was led by pharmaceuticals, chemicals and watches.

By contrast, imports into Switzerland stagnated in 2014 leading to a record annual trade surplus of CHF30 billion, according to the latest statistics from the Federal Customs Administration. The figures arrive with the Swiss export industry bracing itself for the negative impact of the soaring franc this year.

The trade in pharmaceutical and chemical products, which account for CHF85.3 billion or 41% of all Swiss exports, soared 5% last year while watches continued their inexorable rise in sales by 1.9%.

Well over half of all Swiss exports (CHF120.7 billion) went to Europe, recording a growth of 3% last year. Exports to Asia (CHF45.3 billion) showed the same growth.

Improving economic conditions in the United States saw exports to that market soar 10% in 2014 to a record high of CHF25.9 billion.