International tax provisions crush Swiss banks

Helen Avery
Published on:

Revenue boosts provides buffer; small banks worst hit.

Pictet, the medium-sized Swiss private bank, did something at the end of August that, in 209 years of managing wealthy clients’ money, it had never done before: it issued a report of its own financial performance.

Pictet's half-year reports
Source: Pictet
- Public report
- Financial statement

Details were scarce. But for the first half of 2014, the bank enjoyed operating income of SFr975 million on SFr404 billion of customer assets under management, generating a profit of SFr203 million on a SFr34.2 billion balance sheet. Despite a 75% cost-income ratio, and with a high Basel III common equity tier-1 ratio of 21.7% and a 5.4% leverage ratio, the bank claims to have achieved a 17.6% return on equity.

No comparisons with earlier periods were provided. The brief report is a statutory obligation since the managing partners decided in 2013 to incorporate the Swiss private bank as a limited liability company from the start of this year.

Lombard Odier took the same decision last year to turn its Swiss banking business into a corporate partnership in response to a fast-changing and hostile regulatory landscape and it, too, issued financials at the end of August, revealing a first half profit of SFr62.5 million generated from revenues of SFr527 million on client assets of SFr211 billion. The smaller Lombard Odier claims a fully loaded Basel III common equity tier-1 ratio of 23.8%, almost twice the 12% minimum set by Swiss regulator Finma, and for good measure it reports: "The group has no external debt."

Raised eyebrow

Bank analysts used to running their calculators overs hundreds of pages of numbers from publicly quoted banks, wouldn’t find much to keep them busy here, though they might have noted the 80% cost-income ratio and raised an eyebrow at the footnote that the brief figures are "unaudited". Lombard Odier’s SFr17.1 billion balance sheet and consolidated profit and loss were disclosed over just two pages.

These disclosures are a narrow window onto the world of Swiss private banks as some of the middle size players now edge into an era of enhanced disclosure while still trying to retain as much as they can of the confidentiality traditionally enjoyed by private partnerships. It’s hard to get a handle on how Swiss private banks themselves are doing, caught between the rising cost of regulatory compliance on the one hand and the benefit from swollen customer assets thanks to accommodative global monetary policy. But worrying insights come from a report released at the end of August by KPMG and the University of St Gallen, suggesting half of Switzerland’s private banks are in decline.

The two institutions assessed the 2013 results of 94 Swiss private banks (excluding Credit Suisse and UBS) totaling SFr1.4 billion in assets under management. Switzerland has 139 private banks in total – down from 182 in 2005.  Profitability at the majority of those surveyed is falling, say the report’s authors, largely due to US tax provisions.

Valuation adjustments, provisions and losses rose from 4.7% to 13.6% of gross profit in 2013. For one quarter of banks, this represented almost half of their gross profit. "This level of provisioning is attributable primarily to participation in the US and UK tax programs, in particular that of the US department of Justice," the report says. Increased costs relating to regulatory compliance have offset the benefits of banks’ reduction of other costs in recent years.

From 2006, the average return on equity among respondents had fallen from 13.9% to 3.3% last year. Large banks fared better than small banks with the former averaging 4.4% RoEs and smaller banks around 1.7%. Foreign-owned banks’ RoE was some 60% less than that of Swiss banks. The reports says that US tax provisions have been the largest contributor to the fall in RoE – reducing it by as much as a quarter.  There were 11 more banks posting losses in 2013 than in 2012 because of the tax programmes and nine of these banks had never posted losses before. Large banks with more than SFr25 billion in AuM in particular were the first to post losses. The situation looks likely to deteriorate. "As many banks provided for professional costs but not potential fines, results in future years may continue to be hit hard and may be substantially worse," the report warns, estimating the US fines last year to have been around SFr900 million.


Ray Soudah, founder and CEO of Millenium Associates says it is impossible to know the full impact of tax clawbacks on the Swiss private banks. "At the moment it is just speculation as to what the fines will be. The US and UK have programmes which makes it a little easier to forecast but other countries are working on a case by case basis. The largest fine may not be with regards to US clients, but actually concerning a bank’s German or French clients. It will take months to fully wash out and maybe not til the end of next year for all major bilateral negotiations to be completed."