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One-third of Swiss private banks are weak performers

Press release: private banking study

Swiss private banks rely excessively on financial markets. The challenging market environment in 2018 has exposed how weak banks really are: Most private banks have made insufficient progress to enhance their business and operating model or to adapt their strategy to ensure sustainable success. As the annual private banking study by KPMG and the University of St. Gallen (HSG) reveals, the vast majority of Swiss private banks generated far too few new assets under management, and a lack of onshore presence in high-growth markets is limiting their ability to acquire new clients. As a result, the global market share of Swiss private banks is shrinking.

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Andreas Hammer

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KPMG Switzerland

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In its annual study, KPMG Switzerland and the University of St. Gallen (HSG) analyzed 87 private banks in Switzerland and evaluated their performance and the main industry trends. Overall, 2018 was a very disappointing year for Switzerland’s private banks. 

Market share falls as net new money stagnates

Global wealth is growing, but net new money (NNM) at Swiss private banks is stagnating. In recent years, only a few private banks have consistently generated NNM in excess of 5%. Median NNM in 2018 was a mere 0.2%. After years of blaming low levels of NNM on legacy issues, tax transparency (AEoI) and intensive regulation and compliance, private banks must face reality. Too many strategies have failed to produce growth or greater profitability, and a lack of onshore presence in high-growth markets is limiting their ability to acquire new clients even further. As a result, the global market share of Swiss private banks is shrinking.

A group of Swiss-owned private banks with over CHF100 billion AuM has developed over recent years. This has turned out to be the winning model. These banks generally have an international physical onshore network, including in emerging markets. This suggested threshold for sustainable success provides greater resources to invest, develop business, leverage the Swiss wealth management brand, and achieve operating efficiencies. It gives them the advantage in an industry where expensive onshore presence is necessary for expansion in the world’s high potential markets.

Deteriorating key performance indicators

Only one-third of private banks improved their cost-income ratios in 2018, as the median cost-income ratio increased by 1.9 percentage points to 83.6%. This is the highest level ever and is mainly driven by small banks and weak performers. Large banks were able to improve their cost-income ratio by 2.8 percentage points in 2018, to 79.1% (2017: 81.9%), while small banks operated at a median cost-income ratio of 86.3% (2017: 82.4%).

After recovering in 2017, the operating income margin eroded in 2018. Although the US interest rate rises boosted net interest income, and ten months of positive global market developments increased net commission income, 2018 saw the operating income margin rise at only 39% of Swiss banks.

The negative trend in return on equity (RoE) continued in 2018, with more than half of private banks seeing their RoE decline. The median value for the analyzed private banks came to just 4.1% for the past year, thus nearly on a par with that of previous years. As a result, RoE fell short of approaching a reasonable return of about 8-10% (close to the cost of equity). Large banks stood out as those able to improve their RoE last year: The median RoE at large and medium-sized banks improved by 2.0 and 0.8 percentage points respectively. At large banks, this represented an increase to 7.8% – the highest level since 2012 and in line with the target return. By contrast, the median RoE of small banks fell by 0.6 percentage points to 3.1%.

Consolidation to continue

The past 18 months saw the number of private banks in Switzerland further shrink to 101. This was the net effect of eight private banks exiting the market and one new bank being granted a license by FINMA. Since 2010, 62 private banks have thus disappeared from the local financial landscape (-38%). Although financial markets remain strong – having dipped sharply towards the end of 2018, before regaining ground in 2019 – private banks’ performances have deteriorated further, which is likely to prompt a fresh wave of consolidation.

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Slightly older and more female board and executive committee members

A look at the composition of the boards of directors shows that their members are getting older: The average age of a Swiss private banking board member rose from 59 years in 2012 to 62 in 2018. And that of an executive committee member is up 1 year to 52. In addition, more than 40% of private banks did not change their CEO in the past seven years. Only 12.7% of private banks changed their CEO twice or more in this period.

The share of board of director roles occupied by women doubled between 2012 and 2018 but remains low at 9.8%. While the representation of female board members grew strongly in the German and French-speaking parts of Switzerland (from 6% to 11% and from 4% to 10%, respectively), it is very low in the Italian-speaking part (2% to 3%). At CEO level, only six of the 127 CEOs over the past seven years have been female. All in all, 2018 is a record year with four female CEOs, three of which just newly joined the executive committee in 2018.

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