One year on from our last study, we have updated our analysis of Swiss private banks. Key was to see whether change is taking place and, if so, what impact it is having. But analyzing the performances of 85 of Switzerland’s 114 private banks produces a bleak picture. Almost every key performance indicator (KPI) deteriorated in 2016 – sometimes significantly. The vast majority of banks have not taken the action needed to reverse their decline.
Nothing short of radical change was necessary. But there is little to suggest that banks have grasped this challenge. Only a minority has implemented the kind of extensive transformation required. Which means the majority has not.
True, some larger banks have taken steps in the right direction. Notably, by exiting selected markets in order to refocus on core markets and client segments. Some have invested in digital solutions and automation to improve profitability and meet clients’ evolving expectations.
Key ratios are heading in the wrong direction
Median cost-income ratio rose to its highest level for more than seven years, peaking at 84% in 2016. Median operating income margin fell from 108bps (2010) to 89bps (2016). This reflects lower margin revenue streams, higher levels of declared assets, an inability to reduce costs quickly enough, and pricing models becoming redundant.
RoE is actually diluting owner’s value
We estimate the cost of capital for a Swiss private bank to be 7% to 10%. Yet median RoE has hovered stubbornly around 4% for the past five years. Put simply, this erodes the value held by banks’ owners. The question is for how long this can be tolerated without firmer action being demanded.
Net New Money turns negative
It’s almost unprecedented, but NNM actually entered negative territory in 2016. Swiss private banks in our sample managed to lose CHF43 billion, or 3% of their AuM. It’s fair to say that market exits by larger banks played a part in this reduction. But it is an uncomfortable statistic for Switzerland’s future as a global center for wealth management.
Swiss domestic consolidation has slowed sharply, but it’s not over yet
Large banks – which have historically been consolidators – have turned their backs on smaller deals. Not only can the risks outweigh the benefits in many such transactions, but large banks are pursuing generally larger deals in their core markets abroad. Of course, past rates of consolidation also mean there are fewer banks available in the market to acquire. And owners of the remaining banks feel less pressure to sell. Future domestic Swiss deals may center around M&A between small and mid-sized players seeking to build critical mass.
All of these factors (and many more that can be read in our study) point to the urgent need for change. Not incremental, step-by-step change. The alternative is a very poor outlook for Switzerland’s private banks. The current levels of decline in KPIs are unsustainable over the medium to long term. Something has to give. The question is how many management teams will recognize this and take the radical action needed to seriously change the way they operate.
Clarity on Performance of Swiss Private Banks in 100 seconds
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