European offshore banks see first net outflows for several years, survey shows

News - Banking

Written by Ray Clancy

Tuesday, 03 August 2010 10:45

Offshore private banks in Europe have experienced their first net outflows for several years as offshore financial centres feel the heat of increased regulatory scrutiny, according to a new survey.

In 2009 more clients withdrew money from private banks in the Channel Islands, Luxembourg and Switzerland than those who invested new money, Mckinsey’s annual European Private Banking Survey shows.

The survey, based on information provided by 105 banks, showed that net client withdrawals from the Channel Islands hit 7% last year, while net withdrawals from Luxembourg reached 5%, despite a trend reversing rise in profitability for the Duchy’s private banks. But its banks were able to hold to profit margins of 42 basis points, more than twice the European average.

Switzerland also saw new outflows, although the country remains by far the largest private wealth management centre, accounting for about one third of assets under management. ‘The private banking market in Switzerland experienced net outflows of 1% in 2009, mostly driven by asset transfers back to continental Europe,’ the survey said.

But it added that wealthy Russians and Asians were still favouring the Alpine financial centre. ‘Swiss private banks suffered from a significant decrease in both revenue and profit margins, as cost margins remained steady,’ it added.

The survey suggests that political pressure in Europe and the US is driving these funds east, towards the financial centres of Hong Kong and Singapore. It also suggests that the fall results from private banks’ inability to cut down costs while clients remain reluctant to go back into investing, especially with regards to high-yielding asset classes such as hedge funds.

‘Political pressure, regulation and government initiatives in Europe and the US have put offshore private banking under significant pressure,’ says the report.

The report also shows that the private banking industry across Europe is struggling to maintain profitability amid marketing cost pressures and a smaller appetite for risk among investors. Consequently, less profitable investments such as cash and exchange traded funds are being preferred over structured products and hedge funds, which tend to attract higher fees.

Last year, profit margins slipped to 20 basis points from 26 in 2008, and the report predicts that the 57 basis point profit margins seen in the heady days before the financial crisis are unlikely to be repeated.

‘With the old tax proposition of offshore booking centres under pressure, the rationale for affluent clients to keep money offshore is eroding even more quickly,’ the survey concluded.