Summit News

Tax scrutiny squeezes offshore private banking

GENEVA (Reuters) - International pressure on private banks only to hold assets declared to the tax man are squeezing margins on offshore accounts by removing a key attraction over holdings kept onshore.

Private banking margins narrowed from close to 100 basis points, or 1 percent, at the peak of the economic cycle to around 84 basis points in 2009, with offshore margins -- those earned from clients holding assets in foreign accounts -- falling slightly less than in onshore banking, a study of the sector by McKinsey showed.

Now the decline in offshore margins is set to accelerate and move closer to those for onshore accounts, compounding an overall fall in profitability, industry players told the Reuters Global Private Banking Summit.

"There will have to be some convergence there. As the onshores develop wealth management expertise, the client service differential will diminish. The pricing differential will vanish," said HSBC HSBA.L Private bank Chief Financial Officer Leigh Robertson.

Cash-strapped governments around the world took aim at undeclared funds held in offshore accounts during the crisis, forcing most of the world’s offshore banking centers to sign up to new international tax rules and relax bank secrecy.

The rich could still opt to put money in offshore accounts in countries like Switzerland to take advantage of political and regulatory stability as well as banking expertise, but offshore banking will still have to compete on a level playing field with onshore accounts because hiding money from tax authorities is no longer an option, bankers said.

Banks offering offshore services will in future have to provide foreign tax authorities with more proof that their clients’ accounts are compliant with tax laws, increasing costs and squeezing margins.

"There is high pressure on margins on the regulatory side, I think banks are going to suffer a lot," said Alberto Valenzuela, Deputy CEO of Societe Generale Private Banking (Suisse) SA SOGN.PA at the summit, held at the Reuters office in Geneva.

“Onshore markets are priced lower, as the models converge they are going to become very similar... We are going to see a convergence of the margins of onshore and offshore,” Valenzuela said.


Private bankers gave overall 2010 margin estimates ranging from 70 to 100 basis points.

A further blow to profitability is that wealthy clients stung by the financial crisis continue to sit on large amounts of cash waiting for market volatility to pass, executives said.

And with investors shying away from more costly higher risk products such as hedge funds, private bankers will have to cut costs to preserve margins compressed by preference for lower priced assets classes like government bonds, they said.

Cash is not an asset allocation as such, but a reaction to the crisis, said Andreas Woelfer, head of UniCredit's CRDI.MI private bank.

Adding to the problem, record low interest rates have reduced the spread between bank returns on cash and the returns passed on to clients to a sliver, further limiting profitability.

Additional reporting by Martin de Sa’Pinto; Editing by Andrew Callus