Aug 2010:
Increasing political pressure, stricter regulations and individual government initiatives within Europe and the United States have put offshore private banking "under significant pressure", but the picture is much more mixed than many realise, a McKinsey survey says.
Total offshore assets under management in private banks grew by 8% in the year, yet the assets in these institutions of affluent customers decreased overall, as “the rationale for affluent clients to keep money offshore is eroding”, according to McKinsey’s annual private banking survey.
“Increased current withholding tax or future changes are eliminating the tax benefits, while the propositions that are attractive to wealthier (ultra) high net worth clients, such as structuring options, multi-booking centre options or easier access to some alternative product types than in selected onshore booking centres, are less relevant for these affluent clients.
“Given the higher margins on affluent clients, this accelerated erosion will have an impact on offshore revenue margins going forward.”
Western Europe offshore deposits down 2%:
While outflows from Western European offshore centres touched 2% last year, this was not the massive hit some industry observers had been expecting, McKinsey pointed out.
Nor was it the first year in recent memory that these offshore booking centres have experienced net outflows. The difference between Europe’s onshore and offshore markets this year, though – of 5%, since onshore inflows were 3% for a second year, after three consecutive years of 9% growth – was slightly less, at 4%, in 2006 and 2007, though greater in 2005 at 7%, McKinsey noted.
What was perhaps not surprising was that the growth in deposits in these Western European offshore centres was greatest from Latin American, Eastern European, Middle Eastern and Asian clients, which grew by by 25%, 16%, 11% and 35% respectively.
At the same time, volumes from Western European clients in Swiss booking centres fell to 33% from 39% of total assets in a single year – which, the survey pointed out, reduced the vulnerability of these institutions going forward.
Other findings in the survey:
- Luxembourg’s banks, with 75% of their offshore assets coming from Europe, were more vulnerable to outflows than Switzerland banks, which, as reported, enjoyed significant growth in assets from the country's domestic retail market and non-European markets like Asia and the Middle East.
- Singapore and Hong Kong banks, with net inflows of 7% in 2009, significantly outperformed their European rivals. These were helped by Western European assets “booked in Singapore and Hong Kong”, which grew by 17% last year – although given the even greater growth of Asian assets into these banks, “the share of Western European offshore assets... [actually] fell to 12.5%” from 14.5%."
- Pressure on offshore banking centres is likely to continue, as it is “very clear that the tax shortfall for various governments remains significant and that current withholding tax levels, at current rates and only partially covering the total assets booked offshore, only compensate for this to a limited extent.
“Public deficits across Europe (and elsewhere), combined with a heavily reduced moral tolerance of “hiding money” for tax purposes will further encourage governments and administrations to evolve toward greater tax compliance.
“However, the speed and extent of this evolution and its impact on the various booking centres remain to be seen.” Indeed its effect upon future recruitment and creation of offshore banking jobs remains also to be seen.