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Private Banks In Europe Still Face Major Hurdles

In an article published today, titled "European Private Banks Still Face Uncertainty As Operating Conditions Evolve," Standard & Poor's Ratings Services says it believes Europe's private banking industry will remain in transition for the next two years.

"Profit margins among the region's private banks have weakened amid regulatory and other challenges over the past several years, and we believe this trend will continue," said Standard & Poor's credit analyst Dirk Heise. "However, we consider the banks able to cope with these conditions, as indicated by our ratings, which are firmly in the investment-grade category ('BBB+' or higher)."

Nevertheless, we note that as governments step up their efforts to remove the veil of secrecy surrounding private banking, competition for assets under management (AuM) will likely intensify. What's more, the cost of complying with tighter regulation in the EU will eat into banks' earnings.

Four key factors will likely change the way European private banks do business in the future, in our view. The most prominent is European governments' increased efforts to eliminate tax evasion, which has significantly heightened uncertainty about private banks' future business models. We expect to see renewed pressure on banks, given proposals for a global standard on the automatic exchange of tax-related information by the end of 2015. This is also in light of Credit Suisse's decision this month to plead guilty in a U.S. tax-evasion lawsuit and pay a hefty fine.

In addition, we believe tightening regulatory requirements will increase banks' complexity, resulting in material investments in risk management and compliance infrastructure that push up costs.

The third hurdle is how to generate net new money in light of fierce competition for onshore business, resulting in further erosion of margins. That said, we believe offshore business growth could come from opportunities in emerging markets, such as Asia-Pacific.

We also anticipate a shift in client behavior that could make competition even tougher. Clients could become less loyal, especially among the mass-affluent market segment. We expect to see clients increasingly demanding comprehensive advice, higher net real returns, and simpler, more transparent products.

Consequently, we expect private banks to continue to focus on maintaining good reputations, which alongside political stability in the financial centers should aid future AuM growth. In this regard, strengthening clientrelationships will become an important part of the banks' strategies for the next two years, in our view.

Standard & Poor’s Financial Services LLC

Les médias du groupe Finyear

Jeudi 5 Juin 2014

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