All things considered, 2017 was a good year for Swiss private banks, although the main contribution to the improved situation was the positive development of the financial markets. Operating costs are still too high at many Swiss private banks, and many continue to face an uncertain future. A number of Swiss private banks are in a position of strength and delivering outstanding performance. This is the picture emerging from the annual study by KPMG and the University of St. Gallen.
In its annual study, KPMG Switzerland, together with the University of St. Gallen, analyzed over 90 private banks in Switzerland and considered their profitability, growth and cost efficiency. 2017 was a positive year for Switzerland’s private banks. After years of struggling with structural change stemming from the financial crisis, the tide has begun to turn. Negative one-off impacts in the shape of asset outflows and penalties appear mostly confined to the past. Many banks have finished implementing the requirements of regulations such as FATCA and AEoI. And many banks are improving some key performance ratios, supported by bull markets. Booming equity markets led to an increase in assets under management of over CHF 200 billion as well as higher commission income. Net interest income was also up, partly thanks to rising US interest rates and an increase in loan volumes.
Swiss private banks achieved a net profit of CHF 2.8 billion in 2017, which is an 18.7% increase from 2016 and actually twice as high as 2015. Around two-thirds of the private banks operating in Switzerland managed to improve their return on equity in the past year on the back of this. The total equity invested across the sector generated a reasonable return of 7.1% accordingly, although it should be noted that this average owes much to the excellent performance of the very biggest private banks.
In 2017, the total assets managed by Swiss private banks increased by 7.8% to CHF 2,616 billion, compared with growth of 5.1% the previous year. Global equity markets grew in excess of 20% contributing 87.4% to the growth in assets under management. Over half of banks (54%) recorded net new money. Or to put it another way, nearly half of banks recorded net new money outflows. This is a surprising result as most net new money outflows for clients from the non-core business should actually have happened already, meaning more net new money would have been expected for 2017.
Although Swiss private banks are in much better shape than during the past decade, they are steadily losing market share. By contrast, foreign financial centers are enjoying rapid growth in terms of assets under management. Net new money for 2017 remained disappointing at just 0.9% of assets under management. Half of Swiss private banks still have a long way to go – and too many of them are still facing an uncertain future. It is worth remembering though that Switzerland is currently better placed as an offshore financial center than during the past decade. A group of very strong private banks have now emerged (“strong performers”) and account for around a third of the sector.
The positive mood on the financial markets saw two-thirds of private banks increase their return on equity. Some 36 banks or 82% above the median improved their return on equity in 2017 by an average of 1.8 percentage points. Half the banks below the median saw their return on equity increase by an average of 0.8 percentage points. Although the Swiss private banks above the median managed to increase their return on equity, the median for return on equity declined overall last year from 4.5% to 4.0%.
After two years of negative median net new money growth due to legacy outflows, net new money growth increased by one percentage point to a positive 0.8% in 2017. This reversal was primarily driven by the implementation of the first wave of AEoI in 2016, which had resulted in large one-off outflows associated with EU-based clients in particular. The net new money of banks with outflows amounted to CHF 36 billion in 2017, compared with CHF 65 billion in 2016. Seven banks managed to attract positive net new money in excess of over CHF 1 billion each, while 12 banks each recorded negative net new money figures of over CHF 1 billion. The proportion of banks with higher net new money increased to 58% in 2017.
Since 2010, a total of 56 Swiss private banks have exited the market. During the past 18 months, seven private banks ceased business in Switzerland, taking the number to 107 banks at the end of June 2018. This trend is consistent with a largely structural decline of 34% since 2010. This in turn can be explained by consolidator banks looking to scale up through acquisitions. The number of small, mainly sub-scale banks were the hardest hit, with numbers falling by 45% over this period as almost half shut up shop.
Number of Swiss private banks by AuM
Fig.: Switzerland as a financial center is home to 56 fewer private banks than in 2010.
2017 started slowly with only three deals announced in the first half of the year. Activity then accelerated to a record of 16 deals over the course of the year – the highest in the period under analysis. Transactions abroad in particular reached a peak as banks were able to actively adjust their business portfolio and/or adapt it to their strategic objectives. Assets under management from mergers and acquisitions amounted to CHF 9 billion in 2017, which equates to 10% of the CHF 90 billion recorded the previous year.
The median gross profit margin rose by 21.4%. But while favorable financial markets had a significant, positive impact on income, the effects on the gross profit margin were limited due to costs continuing to increase at many banks.
Operating costs grew at almost the same rate as operating income due to an increase in the average number of full-time equivalents. Higher IT and communications expenses were responsible for the 6.6% increase in total general and administrative expenses during 2017. A large proportion of these expenses relate to major banking platform projects at two large banks.
More of the market-driven rise in income should have filtered straight down to the bottom line. Operating costs at many banks rose in line with operating income – a worrying sign that insufficient attention is being paid to cost control and opportunities are being missed to improve shareholder returns. If markets suffer a downturn, many private banks will find themselves back in trouble.
Although the operating expense margin continued to fall in 2017, the drop should have been more significant given the considerable increase in assets under management. Banks should have been more stringent with regard to cost management, taking the opportunity to improve profitability and better prepare for potentially less favorable future markets.
The costs per employee has not moved much over the past few years, with the median value for Swiss private banks remaining at around CHF 230,000 per employee. Costs per employee in Ticino are still by far the lowest at CHF 179,000.
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