Bull markets help Switzerland’s private banks to recover

in Financial Services, 23.08.2018

What a difference a year makes. When we published last year’s Clarity on Performance of Swiss Private Banks, we noted that radical change was needed to improve an underperforming industry. The past 12-18 months have delivered that change, but not quite as expected. As we launch 2018’s edition – Recovery of a divided industry – positive markets have boosted banks’ positions. But while the industry looks healthier than at any time since the financial crisis, serious underlying issues still need to be addressed.

Switzerland’s private banks are emerging from a dark period in their history. The weight of regulatory change over the past ten years has proved too big a burden for some. And structural change in the industry has caused others to go out of business or be absorbed by competitors. But finally, the light at the end of the tunnel is being reached. One-off costs in the form of fines and penalties are largely confined to the past, and most banks have completed the implementation of regulatory requirements such as FATCA and the AEoI. Executives’ time is now being freed up to focus on strategy and the future shape of their organizations.

Performances have improved. They need to improve further.

Supported by positive market developments, the results are already clear. Two-thirds of banks managed to increase their Return on Equity in 2017, and booming equity markets caused Assets under Management to grow by around CHF 200 billion. Overall, it is encouraging to see that net profit rose by almost 19% in 2017 alone, and has actually doubled since 2015. But banks are not yet out of the woods. Net New Money remains worrying low. In fact, it represented only 10% of last year’s growth in Assets under Management.

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Of our sample of 90 banks (representing 83% market coverage), one-quarter continue to perform poorly. A significant 13 banks suffered operating losses in 2017. Even worse, eight of those banks have been loss-making in each of the past three years. There’s clearly a lot of work to be done before we can declare that the industry has returned to robust health.

Now is the time to act

I would have expected more of the market-driven rise in revenue to filter down to the bottom line. But too many banks allowed operating costs to rise almost in line with operating income. More action is need to apply stricter cost management. I suggest this can be achieved by keeping an eye on employee numbers, which have been the key driver of costs increases over the past 18 months. And by banks taking a more proactive stance on new technologies such as robotics and process automatization. By doing so, they can not only improve their operating models and keep a handle on costs, but they can also improve the client journey.

The state of the industry is much rosier than at any time since the financial crisis. But future success depends on banks seizing the opportunity presented by current positive markets to make lasting changes. Because a market downturn is inevitable at some point – and banks must make sure they have done enough to improve their underlying performances in the meantime if they are to deliver sustainable results.

Clarity on Performance of Swiss Private Banks in 100 seconds


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