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. Last Updated: 07/27/2016

Swiss Banks Lose Sparkle, Not Status

GENEVA -- Battered and bruised by falling markets, attacks on bank secrecy, tax amnesties and threats from up-and-coming financial centers, many observers have predicted the end of the road for Switzerland as a model of wealth management.

For its hundreds of large and small private banks, the last three years have been some of the toughest ever, forcing drastic cost cutting and restructuring measures, including mergers and joint ventures.

But despite constant pounding, Switzerland, home to a third of the world's offshore wealth, is clinging to its title as the global hub for managing the fortunes of the seriously rich -- at least for now.

"Talk of the death of Swiss private banking is utter nonsense, but it will change dramatically in response to regulation and tax pressures on the international stage," said Catherine Tillotson, director at the Scorpio Partnership, a London-based consulting firm.

The much-extolled virtues of stability, security and, of course, secrecy, as well as an international reputation and track record, are still a magnet for wealthy individuals and for firms looking to service them.

"Despite heavy pressures on Switzerland, despite tax amnesties and draft tax amnesties and despite the difficult economic situation, confidence in Switzerland remains very strong," said Alfredo Gysi, president of the Association of Foreign Banks.

"The big block [of banking in Switzerland] is still very attractive," agreed Peter Braunwalder, chief executive of HSBC Republic, the largest foreign bank in the country. "But everyone is concentrating on what is chipping off."

It's those little nicks that will lead to big changes in the industry, experts say.

Some prophets of doom have predicted that as many as half of the banks in Switzerland could give up or be gobbled up in the years to come, turned off by plunging profits and a disproportionately high cost base.

Bank secrecy has helped create a multi-trillion dollar industry, but it has come under fire from all quarters, including the Organization for Economic Cooperation and Development and the European Union, which say it allows tax cheats, criminals and dictators to stash their funds. An agreement with the EU allows Switzerland, and some others, to keep bank secrecy at least for the next seven years in exchange for slapping a withholding tax on the savings income of nonresidents.

That deal is still to be signed, and on the upside gives banks in Switzerland time to ponder their strategies should client confidentiality disappear in such a fast-changing world.

On the downside, serious competition from the likes of Singapore, Hong Kong and Dubai, which are not part of the EU deal, could coax away funds destined for Swiss banks.

What's more, the chances of more tax amnesties to claw back wealth stashed abroad appear to be increasing. While Swiss institutions survived the Italian threat and appear relaxed for now, anything that draws assets away cannot be a good thing.

Talk of consolidation in such a fragmented industry -- even UBS, the world's biggest wealth manager, has just 3 percent of the global wealth market -- is not surprising in a country with around 300 banks.

But add to that the relentless pressure on margins due to lower earnings and high fixed costs and mergers, and takeovers and joint ventures are even more likely going forward.

While some of the small, private banks serving only a handful of ultra-wealthy clients may survive, the mid-tier stands to suffer as the big boys of finance move in. They offer clients a broader range of products and are much better placed to handle the spiraling costs of technology and regulation.

Large foreign players like Societe Generale of France, which last month bought a majority stake in Compagnie Bancaire Geneve, are still interested in the Swiss market.

"The attitude for foreign firms is that they have to prepare for future growth," said Scorpio's Tillotson. "There's a lot of new wealth still to be created that will need to be looked after by private banks. Wealth management is not going to go away."