Wealthy clients in burgeoning Asia markets like China, India and Indonesia have rejuvenated Swiss banks' prospects, but a storm is brewing over assets from these newer, promising markets.
Asia-Pacific remains the up-and-coming market for private banks: hot economic growth in recent years has created a new generation of millionaires in need of advice and investment services.
Asia was the only region globally to post double-digit growth again last year – 15 percent – as Boston Consulting Group's newest edition of the Global Wealth Report shows.
Hottest Growth in Asia
In all other regions – North and Latin America, Europe, the Middle East – private banks are living off of existing clients, meaning off existing assets.
This isn't likely to change in coming years: Singapore and Hong Kong will be able to keep their growth momentum going, according to BCG, while the «old world» of private banking can only expect low single-digit growth rates.
Well-Positioned
This puts Swiss banks in a favourable position: spearheaded by UBS and Credit Suisse, they belong to the dominators in Asian private banking. Hefty investment in recent years have allowed them to expand their offshore activities in Singapore and Hong Kong to more markets.
Thanks to new assets from Asia, Swiss private banking has been able to maintain a top position in international offshore banking, and compensate an eroding business in Europe amid far more pressure for tax transparency.
Undeclared Money in Asia
However, the fight against undeclared assets and tax evasion as well as demands to enforce transparency directives aren't just a European or an American one.
«Swiss bank accounts» in Asia with presumably billions in undeclared assets are becoming a political hot potato as emerging markets deficits coming into focus, and that opens a whole new set of trouble spots for Swiss banks.
1. India: «We want our money back»
One of Indian Prime Minister Narindra Modi's campaign promises was to return undeclared funds to the country. After nearly two years, little headway has been made; Switzerland is safeguarding itself with the vestiges of banking secrecy.
But this week, Modi reached a breakthrough: during a meeting with Swiss president Johann Schneider-Ammann in Geneva, the two agreed to discuss an accelerated route to the automatic exchange of information. Estimates put the sum of undeclared tax money at up to $3 billion. How much of that is banked in Swiss firms isn't known. Statistics from Switzerland's central bank list only several billion Swiss francs.
2. Singapore: Second Switzerland With Reputational Worries
The city-state's forceful action against Banca Svizzera della Italiana, or BSI, illustrates that Singapore is worried about reputational fallout from the money-laundering and corruption scandal surrounding 1MDB.
Experts predict that banks in banks in Asia now faced a dramatically higher compliance and regulatory burden, and Swiss firms are expected to be under particular scrutiny. The private banking industry expects costs for risk management and regulation to rise by one-fifth this year, as finews.ch reported.
3. Indonesia: Booming Market and a Tax Amnesty
The Muslim-majority nation is viewed as the new boom market for Swiss private banks. From their hubs in Singapore, Swiss banks are ideally positioned for Indonesia, one of the world's most populous nations.
But opportunities are set against tangible risks in Indonesia: the government wants to introduce a tax amnesty of up to 12 months to stanch outflows of capitals and utilize funds towards building up the domestic economy.
According to estimates, as much as $900 billion of undeclared assets are parked outside of Indonesia, which translates to roughly the country's gross domestic product.
The amnesty is a hot topic among Indonesia's wealthy class, Falcon private banking head Erich Pfister confirmed to finews.ch. This is presumably at least in part because Indonesia is cracking down on tax offenders: officials in the country are looking into the tax situation of 78 citizens who were named as part of the «Panama Papers» leaks.
4. Toughened Stance in the Philippines and Sri Lanka
Newly-elected Rodrigo Duterte has promised to crack down on wrong-doing in the Philippines, promising to stamp out corruption and reduce crime in his first six months in office.
To do so, the 71-year-old has said that killing corrupt journalists be justified and has threatened to kill police officials involved in illicit drug trading.
Swiss banks could also become entangled in the corruption sweep if they are shown to have aided illegal activity. What the firms face should their involvement in illicit activities being targeted by Duterte be proven doesn't bear thinking about.
Both UBS and Credit Suisse have focused on acquiring business from the Pacific island's wealthy. Julius Baer also ramped up its activities in the Philippines, as finews.ch reported.
Similarly, Sri Lanka is also a potential hot spot: authorities are trying to shake out tax offenders with the lure of a tax amnesty. Officials in the country, who believe that up to $8 billion dollars may be hidden in offshore Swiss accounts, could however quickly step up efforts to recover undeclared assets with far more forceful measures.
Australia is also interested in recouping undeclared tax assets. «It's only a question of time before we find you,» Australian tax officials threatened recently.
5. Hong Kong
The former British colony including a fitting banking culture (buzzword: HSBC) with a bridgehead to China was long the keystone of Asia's financial center. Tycoons and billionaires like La Ka-shing contributed, with business and personal fortunes, to the city's development as a financial powerhouse.
UBS – then as Swiss Bank Corp. – also expanded initially to Hong Kong before it broadened its footprint to Singapore. Hong Kong managed to develop relatively independently even after Hong Kong was handed over to China in 1997.
This has changed in the last 24 months: China's leadership around Xi Jingping is increasingly expanding its influence in Hong Kong, part of wide-ranging crackdown on corruption. This has hit business substantially, especially as prominent businesspeople are held in custody for short or longer periods of time or put on trial.
Additionally, volatility in China and Hong Kong's stock exchanges last year and early in 2016 have rattled nerves, in particular because China's authorities seemed largely baffled about how to respond.
China's more apparent influence in Hong Kong comes against the backdrop of growing discontent among the population, with protests for political freedoms on the rise. This makes for a toxic mixture for a financial center, which will eventually contaminate the city's banks.
As Singapore shows, it doesn't take much for a bank to run into trouble after taking illicit funds, a threat which banks in the former British colony increasingly face. Clearly, Hong Kong won't be the land of milk and honey for Swiss banks in the coming years.
