Private banks in Switzerland successful thanks to interest business
The Big 8 private banks were most affected by the difficult conditions of last year, but still achieved strong results. Some small banks also did well. They have transformed their business model in recent years, managed to keep costs stable and limit the decline in commission income. The number of small underperforming banks fell from 15 in 2021 to nine last year.
An increase in interest income saved many banks from losses or from being classified as underperforming banks. However, the cost/income ratio and return on equity RoE of the underperforming banks remain at a very high 97% and 0.1%, respectively. They have so far been able to avoid an exit from the market, but probably not for much longer. The assets under management of private banks in Switzerland fell by CHF 361 billion in 2022, from around CHF 3.3 trillion to around CHF 2.9 trillion (-11.1%) after the record year of 2021. The reasons for this are declining net new assets and, above all, the negative performance on the financial markets as a result of increased geopolitical and macroeconomic uncertainties. The ‘Big 8’ lost 12.7% of their assets under management compared to the previous year, medium-sized institutions 4.9% and smaller banks 6.9%.
Different picture for net new assets depending on bank size
After a strong 2021, net new assets were significantly weaker in 2022 at CHF 45 bn, which was due to a 78% drop in net new assets at the Big 8 banks (previous year: CHF 131 bn). The group of small banks was a positive surprise: although they hold only 6% of the industry’s assets under management, they generated 17% of the industry’s net new money last year. The reason for this is likely to be that the small banks have used the last few years to build on their own strengths by further refining their boutique business model and maintaining client confidence despite market and geopolitical turmoil.
Flourishing interest business provides breather for weak banks
Private bank revenues increased from CHF 19.7 bn to CHF 19.9 bn in 2022 compared to the previous year, primarily due to significantly higher interest income, which increased by over 50% year-on-year. Gross profit in 2022 fell only slightly year-on-year by 3.4% from around CHF 5.9 bn to just under CHF 5.7 bn. What is surprising is the significant increase in gross profit at the medium-sized (+17%) and small private banks (+28%).
“Especially the institutions at the lower end of profitability were able to take a breather thanks to rising interest rates. However, this should not hide the fact that the challenges for this group remain great,” explains Philipp Rickert, Head of Financial Services at KPMG Switzerland. “Efficiency improvements and investments in digitalisation remain top priorities to improve profitability.”
M&A activity: independent asset managers in focus
Even though the difficult market environment would have argued for further consolidation, mergers and acquisitions remained at a modest level in 2022 due to the positive interest rate environment, with transactions involving domestic independent asset managers (UVVs) increasing significantly. EIAs were involved in seven out of a total of 15 transactions. “The relatively high level of M&A activity in the UVV industry comes as little surprise given the increased regulatory requirements and an ageing advisor base nearing retirement,” said study leader Christian Hintermann, Partner Financial Services at KPMG Switzerland.
The number of private banks in Switzerland has fallen from 92 at the end of 2021 to 89 at the end of March 2023. Hintermann expects further consolidation, as there are still numerous underperforming banks despite the breather.
Outlook
“Looking ahead, the challenge is to grow profitably,” says Christian Hintermann. This is not an easy task given the decline in assets under management, relatively weak net new money, limited M&A opportunities and stagnating cost-income ratios at many banks. In addition, private banks in Switzerland have to cope with the costs and complexity of cross-border business, a shortage of talent and increasing digitalisation and regulation.
In contrast to the large and small private banks, the medium-sized institutions are in a challenging situation in that they do not benefit significantly from economies of scale or clear niche positioning. “This group of medium-sized private banks is particularly challenged to sharpen their business model,” says Philipp Rickert.
Methodology
In the annual study “Clarity on Swiss Private Banks”, KPMG and the University of St. Gallen (HSG) examined a total of 73 private banks operating in Switzerland and assessed the performance of these institutions as well as the most important industry trends.