Although a break-up of the eurozone was regarded by some as inevitable after last year's Brexit vote, that is no longer a real threat. On the contrary, recent elections in the Netherlands and particularly France – where Emmanuel Macron has from the outset been in favour of a stronger, united Europe – seem to have breathed new life into the European project. For the UK – which has been plunged into uncertainty by last week's parliamentary election – and by implication for Switzerland as well, the opportunities for bilateral talks that could have arisen from a break-up scenario will therefore no longer arise.
Eventually, Europe's new impetus could lead to stronger European governance and solidarity against the UK, but also Switzerland, when talks take place on future political and trade relationships. As a result, the prospect of banks established in Switzerland gaining access to the European market seems to be receding by the day, especially since discussions with Bern now appear to be lower on Brussels' to-do list. Rather than maintaining false hopes, Swiss banks are now taking a pragmatic approach.
European operational hubs
Banks are implementing several business models depending on their size and European strategy. The largest banks have opted to set up European operational hubs. They are located in Germany or Luxembourg and are intended to manage all the banks' European subsidiaries outside Switzerland. The main aim of these hubs is to take an "industrial" approach to optimising operations, and have no direct connection with EU talks.
Other banks have less ambitious plans, setting up European subsidiaries to develop branches that have strictly commercial operations. The aim is to benefit from European passporting through small units that have local competencies, with centralised booking generally based in Luxembourg.
Lastly, banks that do not have critical mass are taking a more conservative approach. Rather than developing European franchises they are promoting their booking capabilities in Switzerland, Monaco or London, offering clients a way of diversifying geopolitical and currency risk when managing their assets.
Europe more difficult than Asia
Whatever the approach adopted, the issue that all Swiss banks face is to remain competitive in a foreign market. For a bank to achieve penetration in a market other than its domestic market, it needs to develop financial products and services that suit specific local features and tax environments, and must have a firm grip on capital adequacy and tax reporting obligations. Having a "local" bank is helpful in meeting those requirements.
As a result, Europe has become a more hotly contested market, where it is a real challenge for foreign banks to combine a competitive product range with a competitive business mix that delivers sustained, profitable growth. Because entry barriers are higher today in Europe than they are in Asia.
European countries are also competing hard with each other to offer attractive tax arrangements. For example, Portugal is drawing in many new European and non-European residents with its long-term tax exemptions. Italy has also announced a plan to attract new tax residents. Following the Brexit vote, the UK has clearly signalled that it will also introduce favourable tax arrangements.
Clearly, banks need to be agile and clear-sighted when betting on which country will be the next Eldorado for wealth management. It is worth noting that the referendum vote against Switzerland's Corporate Tax Reform Act III in February could adversely affect Switzerland relative to countries seeking to attract residents and companies with new tax breaks.
More homogeneous offerings
In the current situation, Swiss banks' attempts to increase coverage in Europe are not certain to succeed. Despite cultural similarities and historical links with European client bases, Europe is no longer offering the growth prospects it used to. The opportunity set has shifted to countries seeking stability and diversification, such as those in the Middle East and more broadly in emerging-market countries.
In a new development, Swiss banks' settlement of their disputes with the US Department of Justice means that the US market once again holds a lot of potential for them. Banks that have the right legal and operational structures to handle US clients could have an advantage over the long run.
Turning back to Europe, the product ranges of European and Swiss banks are becoming more homogeneous and standardised. In the coming year, this process will speed up as MiFID II comes into force, requiring all European and Swiss banks to comply with identical rules regarding transparency and compliance in the way they manage client relationships. This is the main challenge Swiss banks face in developing a European client base over the long term.
Michel Longhini
CEO Private Banking