Tax Agreements Could Shrink Swiss Bank Client Assets By 10%

Earlier this week, the head of UBS (NYSE:UBS) wealth management Juerg Zeltner reiterated his outlook for the Swiss wealth management business in light of the series of tax agreements between Switzerland and various countries in the recent past. ^[1] Zeltner believes that the bank could see European clients withdraw assets worth up to CHF 30 billion ($32 billion) from its Switzerland-based offshore wealth management division over coming years. This grim forecast is largely in-line with a similar statement by officials at competitor Credit Suisse (NYSE:CS) who expect their European clients to pull out as much as $37 billion worth of assets under management. The need to make up for these huge outflows in their asset base is forcing the Swiss giants to expand geographically – a move which may put added pressure on their margins in the future.

We maintain a $14 price estimate for UBS’ stock and a $26 price estimate for Credit Suisse’s stock.

See our full analysis for UBS | Credit Suisse

The Swiss banking system has thrived for decades on the back of the secrecy it provides account holders, allowing it to become the $2 trillion business it is currently. While the country’s biggest banks, UBS and Credit Suisse, have a sizable international wealth management operation, many of their high net worth offshore clients maintain accounts in Switzerland to benefit from the privacy that comes with such an account. And while the Swiss government’s unyielding support of privacy in its banking system has been the target of scorn from governments across the globe for decades, extreme pressure from the likes of the U.S., U.K., Germany and France in recent years has forced the Swiss government to relent and agree to various tax agreements with some of these countries (see UBS and Credit Suisse Will Take Lumps from Swiss-British Tax Agreement and Swiss Bankers and US Gov’t Square off Over Credit Suisse).

Clearly, Swiss bank clients who operated their offshore accounts as a means to save on taxes will find this option less attractive. This is especially true for clients from the two largest European economies – Germany and U.K. – who will face a considerably high withholding tax on their assets parked in offshore accounts. And while Zeltner argues that there are other legitimate reasons for clients to continue using their Swiss banking accounts – like “the high level of training in Switzerland or currency and political stability” – these reasons are no doubt secondary to saving taxes. ^[1] This is why he predicts a reduction in the asset portfolio managed by UBS’s wealth management business by as much as CHF 12-30 billion ($13-32 billion). UBS manages about $300 billion worth of assets from European clients so this indicates assets could shrink by up to 10%.

The impact of this outflow on UBS’s overall price estimate can be understood by making appropriate changes to the chart above.

With the outflow being imminent, UBS would have to turn to other options to ensure sustainable growth in its asset base. The bank is reportedly focusing on Germany, Britain and Italy in what appears to be an attempt to offer offshore clients which it may potentially lose in Europe with better wealth management options at onshore locations. Moreover, emerging economies like Hong Kong, Singapore, Brazil, Mexico, Turkey and Russia are high on UBS’s list of countries it would like to expand in over coming years.

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1. Swiss banks to suffer big withdrawals over tax – UBS, Reuters, Sept 17 2012 [↩] [↩]