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.
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.
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.
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.
Against this background, the number of Swiss private banks has continued to fall – from 163 in 2010 to 101 at the end of June 2019. This does not go far – or quickly – enough to yield the necessary change, however. We believe consolidation will pick up in the short term. It will re-center the industry around two models:
For the Swiss-owned banks, we have identified AuM of CHF100 billion as necessary to allow the resources to maintain an international physical onshore network, and to invest, develop business, and achieve operating efficiencies.
One issue that is holding banks back is the lack of diversity among leadership teams. The market is fundamentally changing. New technologies are emerging, younger generations are inheriting, and a growing proportion of the world’s wealth is being generated in markets such as in Asia. ‘Old’ ways of doing things are no longer sufficient. Yet, more than 40% of banks have not changed their CEO in more than seven years. The average age of a board member is up three years since 2012 to 62 years of age, and that of an executive committee member is up one year to 52 years of age. And less than 10% of members of these two bodies are women. Fresh perspectives are badly needed to deal with new challenges and opportunities.
Banks should objectively assess their situations and be realistic about their chances of survival. Senior management needs to look closely at what can be done to turn around the bank’s fortunes – including changes to the business or even M&A. Shareholders meanwhile must hold management to account in implementing the necessary strategies as well as considering their own best options, which may be an exit.
Despite setting out the challenges in this article, we are optimistic about the future of the Swiss private banking industry. There are cold, hard facts that need addressing, but Switzerland has a number of advantages that can help its banks regain ground globally. These include its economic stability, reputation for service quality, and a broad service offering. But banks will succeed only when genuine improvements are made to underlying profitability and performance, however. Otherwise, the decline will continue until rescue is beyond reach.
Discover further results on the performance of Swiss private banks in our study:
Clarity on Performance of Swiss Private Banks