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November 22, 2010updated 04 Apr 2017 3:52pm

Swiss franc strength a double-edged sword

The soaring Swiss franc, up 9% against the US dollar in the past year, is proving to be a double-edged sword for Swiss private banking New money inflows flooding into the Swiss franc are being attracted by the safety of the Alpine currency

By PBI Editorial

The soaring Swiss franc, up 9% against the US dollar in the past year, is proving to be a double-edged sword for Swiss private banking. Client money is flowing into Switzerland as a safe haven destination and boosting bottom line figures, but it is raising banks’ operating costs.


New money inflows flooding into the Swiss franc are being attracted by the safety of the Alpine currency. The Swiss currency is proving, like gold, to be seen as a safe haven against the continued deep distrust by investors of conventional investments, say bankers.

Investors are turning to the trusted franc as doubts continue about the stability of highly-indebted countries like Greece and Ireland.

66% of Swiss private banking respondents to a new survey by consultants KPMG believe the euro crisis has helped them win new assets from clients, confirming the country’s “safe haven” role.

“We are the island of the happy,” says Janwillem Acket, chief economist at Bank Julius Baer in Zurich.

Acket says the bank has seen a lot of turmoil in the dollar and eurozones. Switzerland is being seen as a safe harbour among clients concerned about stability and the soundness of government debt in a number of countries, he says.


Cost base increasing: Cuoni

A veteran Swiss banker, Jean Pierre Cuoni, chairman of EFG International, Zurich, confirms that the strength of the franc is indeed helping to build client business. But that is coming at a cost.

At brokerage Helvea, analyst Peter Thorne is doubtful whether the benefits of the soaring franc outweigh the negative.

“A lot of currencies are depreciating against the franc, but not the cost base of the Swiss banks. And investors can buy the franc anywhere, not just Switzerland,” he says.

Cuoni agrees: “We are receiving dollars, euros, pounds and so on, but our cost base is in the very strong franc. We have to work hard to ensure our costs are kept under control.”

The strength of the Swiss franc against other currencies and erratic client activity was demonstrated by the way that UBS, although enjoying net new money flows again in third-quarter 2010, saw gross margins drop to 89 basis points in the third quarter, from 95 basis points in the second.


Credit Suisse gross margin falls to 118 bp

At Credit Suisse, the gross margin in wealth management fell to 118 basis points in the third quarter, down from 131 basis points for full year 2009.

Clients in Switzerland and elsewhere often prefer to keep their portfolio in cash because of uncertainties over equities and in the warnings over “bond bubbles,” cutting into margins.

According to informed Zurich sources, Credit Suisse has been enjoying the bulk of the currency-inspired Swiss inflows, perhaps taking as much as 50%, in recent months. Bank Julius Baer and Bank Sarasin have taken the lion’s share of the rest.

New research shows exactly how Credit Suisse has been flooded by client money at a time when its troubled rival, UBS, has seen a defection of business. It has received almost CHF125bn ($127bn) since the end of 2007, despite the foreign pressure on Switzerland for most of this period, Bloomberg data shows (see table below).


Swiss banks attract CHF50bn in aggregate funds

Overall, Swiss private banks attracted more than CHF50bn in aggregate in the past two-and-a-half years, a figure which would have been even higher but for the withdrawal by clients of CHF248bn from UBS.

According to the KPMG study, there was almost no net money outflow from the 100 Swiss private banks in its database, excluding UBS and Credit Suisse, on an aggregated basis in 2009. This is despite the efforts of various countries, mainly in Europe, to get assets by their citizens repatriated, KPMG notes.

The KPMG research finds Swiss private banks upbeat now that the worst of the pressure on Switzerland, such as the attack on banking secrecy, appears to be over; 75% of respondents expect the Swiss market to expand over the next three years.


UBS CFO calls for more wealth assets before sounding the all-clear

Levels of growth are expected to remain relatively modest though, with one-third of banks believing it will be up to 5%, 31% believing it will be between 6 to 10%, and only 11% predicting growth of between 11 to 25%, the study found.

Among individual banks, UBS is at least attracting net new money again, with CHF1.2bn of net inflows in the third quarter 2010, and attributable primarily to its growing wealth management operations with Asian and ultra-wealthy clients.

Analysts cautioned that a small number of very significant transactions helped swell the reversal of outflows in the quarter, even though these were the first net inflows for two-and-a-half years.

UBS chief financial officer John Cryan said he still wanted to see a number of consistent and sustainable quarters of net inflows to put the problems of the bank’s core wealth management business firmly behind it.


Switzerland tackles tax agreements

Meanwhile, Switzerland is starting negotiations to reach new tax and banking accords with Britain and Germany, and so defusing most of the remaining global pressure on the country and its banking secrecy laws.

“Tax-shy” offshore banking assets may now be only 15% of the total held in Switzerland, according to unofficial estimates in Zurich.

Switzerland started to make concessions from 2009 onwards to avoid being blacklisted as a haven by the Organisation for Economic Cooperation and Development. The Swiss hope to get agreement to gather taxes on behalf of foreign governments without divulging the names of the individuals involved – on similar lines to the existing withholding tax agreement with the European Union.

Konrad Hummler, head of the Swiss Private Bankers Association, said such agreements would ensure tax compliance without forcing Swiss banks to commit any “treachery” with their clients.


Table showing client assets managed by Swiss banks or Swiss-domiciled foreign institutions, in CHF bn


See Also:

Swiss private banking 2.0

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