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Swiss private banks accelerate their transformation

  • Christian Hintermann, Partner |

Favorable financial markets boosted Swiss private bank performances. Confidence grew further as a result of crisis management measures successfully introduced due to COVID-19. The industry has an opportunity to build on this momentum for change, to deliver the benefits to secure its survival.

As well as our own analysis of banks’ performances, we interviewed 27 C-level executives to understand how the Swiss private banking industry has dealt with the COVID-19 crisis, and whether it will emerge stronger. These executives, who were mainly CEOs, were generally positive about the future. They noted how quickly crisis management plans were implemented, and how any significant operational disruption was avoided. Also how the changes have begun to deliver benefits for both banks and their clients.

Of course, it helps that 2019 was dominated by favorable financial markets, as AuM (assets under management) at Swiss banks grew to record levels. Banks had also made a concerted effort to improve the generation of NNM (net new money), with the result that NNM increased by 3% last year to reach its highest point for a decade.

This combination of our annual analysis and feedback from CEOs leads me to make six observations about the current state of Swiss private banks:

Banks avoided disruption during the crisis

CEOs acknowledged that private banking was not very adversely affected by the COVID-19 crisis. Part of this is due to favorable financial markets improving banks’ performances, and part is thanks to the swift and decisive actions banks put in place as a response to the COVID-19 related lockdown. As a result, banks incurred very few losses on loans and managed to smoothly transition to home offices.

Digital transformation gains traction

Changes were generally introduced quickly and effectively, including measures such as process automation and digital client onboarding. Initial results suggest that the direct benefits range from more flexible working to greater efficiency and more intensive client communication that has enabled banks to increase their share of wallet. This is only the start of the journey, however.

Superior client returns build competitive advantage

It’s notable how banks that provided the highest returns on client assets were also the best at attracting new clients. This is no coincidence, as client returns have emerged as a key differentiator. Stark contrasts between the returns offered by different banks remain, and it is increasingly clear that higher returns and an ability to offer unique investment opportunities will further build competitive advantage.

AuM growth has become critical to success

Successful banks and those that perform poorly can often be distinguished by variations in growth rates. Banks are able to improve their cost-income ratios and RoEs by attracting new clients and delivering superior returns. In fact, our analysis of the past five years shows that a 10% rise in gross AuM translates into a bank improving its chances of survival by 6%.

Number of banks stabilizes as consolidation is interrupted

There were exactly 100 Swiss private banks at 30 June 2020. This is only a small fall from the previous year, thanks to consolidation plans being put on hold due to less financial pressure and the COVID-19 crisis. The need for consolidation has not gone away, though, as the number of poorly-performing banks remains high. CEOs note a greater openness to discussing possible mergers, with two announced in July 2020 reaffirming the trend even among well performing banks.

NNM and AuM reach new highs, but costs must be better controlled

Overall industry performance is mixed, with gross profit and net profit falling and RoE remaining low as weak banks become even weaker. Yet, NNM, AuM and annual AuM growth are higher than at any point in the past ten years. This is positive news, but we would emphasize that better cost management is needed if recent improvements are not to be sacrificed.

Looking ahead

Some of the measures banks have worked hard at over 2019 and 2020 are ones that we have been advocating for many years. The crisis period has accelerated this change sharply, and has given many banks the confidence that transformation is possible, and that it can deliver tangible benefits in a very short timeframe. We would strongly encourage banks to maintain momentum, and go further in effecting change that is long overdue and that can help them differentiate themselves in this competitive market.

Get more insight in our latest study: Clarity on Performance of Swiss Private Banks