Offshore Private Banking Assets Flow East
Wednesday, July 28, 2010

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.

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

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. 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 survey suggests that political pressure in Europe and the US is driving these funds east, towards the financial centres of Hong Kong and Singapore.

“Political pressure, regulation and government initiatives in Europe and the US have put offshore private banking under significant pressure,” observes the McKinsey report.

The report shows, however, 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.