Stronger banks proved resilient during the pandemic, while weaker banks fell behind. This divide between Switzerland’s stronger and weaker banks is growing looking at cost-income ratios, operating income margins and levels of Net New Money (NNM). However, one thing all banks share is the need to include environmental, social and governance (ESG) in their offering to ensure future success. These and other findings are featured in the annual analysis on the Swiss private banking sector’s performance by KPMG and the University of St.Gallen (HSG).
The past year has been anything but normal. Yet, as the initial dust clouds created by the pandemic begin to settle, we are able to look back at the real and considerable impacts COVID-19 has had – and will continue to have – on Switzerland's private banking industry. Its effects can be felt throughout the range of indicators we look at to analyze the performances of 83 Swiss private banks – and have accelerated the growing divide between Switzerland's stronger and weaker banks.
In a period of great change, we also call out environmental, social and governance (ESG) matters as an area of great importance. Interviewing Reto Ringger, founder and CEO of Globalance Bank, we got his views on how sustainability is driving the future of Swiss private banking, which client groups are particularly interested in ESG, and what mistakes traditional private banks are still making today.
Looking at the bigger picture in terms of industry's future amid an increasing polarization between banks' performances, we observe how:
After the first lockdown of 2020 eased, we saw consolidation gain momentum – much quicker than at any time in the past few years. Eight consolidation deals were announced between mid-2020 and mid-2021, five of which had closed by the end of July 2021. The result was a fall in the number of Swiss private banks to below 100 for the first time in living memory. We expect it to fall further to around 90 by this time next year.
We have been watching the gap widen for a while now. It grew further in 2020 as the stronger banks held firm against the effects of the pandemic, and weaker banks slipped further behind. We see this in KPIs such as cost-income ratio where strong banks improved by 2 percentage points while weak banks drove a 6 percentage point deterioration in the median, and in areas such as levels of Net New Money (NNM).
There is good news in one key indicator of growth, NNM. 2020 was the highest for NNM in the past 10 years. Banks generated CHF 94.5 billion last year, or 3.3% of Assets under Management (AuM). We still see the divide between strong and weak even here, though. Almost 98% of NNM was generated by just seven larger banks. At the other end of the spectrum, the struggles of weaker banks saw the median drop to 0.7%.
More than eight out of 10 banks suffered a fall in operating income margin last year. This is a continued deterioration that has been developing over years. Compare 2020 to 2010: in 2010, 35% of banks reported margins in excess of 120bps. Last year, only 6% of banks achieved this. This is a serious development, especially when the median operating income margin fell by 8bps to 81bps, the lowest on record.
We saw encouraging signs as banks got to grips with personnel expenses. This is critical to improving profitability, given that personnel costs make up 70% of a private bank's cost base. The number of FTEs (full time equivalents) fell across banks of all sizes last year, helping the median AuM per FTE rise to a 10-year high.
Momentum is growing around ESG, or environmental, social and governance considerations. A core group of Swiss banks has developed sustainable finance offerings in recent years, and there is wider recognition across the industry. Yet, with only 20 banks currently stating in their annual reports or on their websites that ESG is a strategic priority, more needs to be done to realize the potential and win over new generations of clients.
The message is clear: investments pay dividends. The stronger banks have demonstrated this. By putting a greater emphasis on ESG to win new generations of clients, banks of all strengths and sizes can help reinforce Switzerland position as the world's leading wealth management center in the face of growing competition from centers such as Hong Kong.