Time for a reality check at Switzerland’s private banks
Size has become everything in Swiss private banking. We have identified Assets under Management of CHF100 billion to provide the necessary resources for banks to succeed, alongside creating efficiencies, improving cost-income ratios and bringing fresh blood into senior roles.
We admit to being disappointed in how Switzerland’s private banking industry performed in 2018. Up until last year, positive financial markets helped private banks to stay afloat, and even gave the impression that the industry was recovering. Yet, the reality is that financial markets are masking structural problems. Banks have been unable to enhance their underlying performances. The result? A catastrophic 2018 in which we saw Net New Money (NNM) fall to almost zero, a reduction in Assets under Management (AuM), declining profitability, and cost income ratios hitting their highest ever levels.
Together with the University of St. Gallen (HSG) we analyzed 87 private banks in Switzerland and evaluated their performance and the main industry trends.
One-third of banks are classed as ‘Weak performers’
Not all banks performed poorly, of course. But most of them did. In fact, we downgraded more than one-quarter (24 out of 87 banks) by at least one performance cluster. We now consider one-third of Swiss private banks to be Weak performers. These are overwhelmingly small banks, which generally lack the scale and profitability to be sustainable. Most worryingly, their prospects for revival – or even survival – seem questionable. The option open to most Weak performers is to merge, be acquired or go out of business.
NNM falls to almost zero
Even though global wealth continues to expand, NNM at Switzerland’s banks is stagnating. It was almost zero in 2018, with a median of only 0.2%. A lack of (expensive) onshore presence in high-growth markets is hindering banks’ abilities to acquire new clients in these geographies.
Cost-income ratio hits new high
This is extremely worrying. Driven primarily by an inability to manage down personnel costs, the median cost-income ratio for our 87 banks rose by 1.9 percentage points to almost 84%. The deterioration was especially stark for Weak performers, which saw the ratio jump sharply from 91.7% in 2017 to 100.8% in 2018.