The number of Swiss private banks dropped from 106 to 101 in 2019. As this year’s study on banks by KPMG and the University of St. Gallen (HSG) reveals, the institutions are showing strong financial results in the first half of 2020 – even despite the coronavirus crisis. The crisis has, however, rung in a few key changes that benefit every stakeholder group. And last but not least: higher client returns generate higher bank returns.
In its annual study entitled "Clarity on Performance of Swiss Private Banks", KPMG and the University of St. Gallen (HSG) examined a total of 84 private banks in Switzerland and assessed both their performance and key trends in the industry. Additionally, 27 members of the executive management teams of Swiss private banks were asked how they were dealing with the coronavirus crisis and its consequences. These representatives of the banks’ executive management represent 55% of the assets under management of all private banks in the study (CHF 1.6 trillion).
M&A activity declined sharply from 19 transactions in 2018 to just nine in 2019 and five in the first seven months of 2020. The number of private banks dropped last year from 106 to 101, with another institution having disappeared in the first half of 2020, thus bringing the current total to 100. Since 2010, the number of private banks has declined substantially by 39%. Furthermore another two transactions having been announced in July 2020, meaning that the total number of private banks is likely to drop below 100 by year’s end.
As the financial performance of most Swiss private banks in the first half of 2020 was strong compared to the previous year, the coronavirus crisis does not seem to have exerted any additional, immediate financial pressure on them. In the long term, however, the economic repercussions of the coronavirus crisis are likely to herald more difficult years ahead, expedite the departure of unprofitable institutions from the private banking business and accelerate the consolidation trend once again. Margin pressure on commission income will persist, interest rates are likely to remain low for quite some time and the effective and systematic digitalization of banks’ business models is increasingly becoming an insurmountable task, especially for smaller banks. The real repercussions of the coronavirus crisis will only become apparent from 2021 onward, in part because the impact of delayed transactions will be felt in the coming months but also because the recessionary effects of important markets will only materialize gradually when government aid packages expire.
A performance of 10% combined with net new money growth of 3% helped assets under management to rocket by 14% in 2019. That kind of growth in net new money is remarkable and is an extremely encouraging sign for the private banking sector, particularly for the two thirds of banks reporting positive net new money. The analysis also reveals, however, that growth from M&A activities remained low due to the absence of large takeovers.
With the goal of more clearly identifying the characteristics of high-performance banks, a first-ever analysis was carried out on the performance of Swiss private banks over a five-year period (2015 to 2019). According to this study, the 84 private banks assessed increased their assets under management by 27% or CHF 616 billion. Half of this growth (CHF 283 billion) is performance-related and is largely attributable to the positive markets in 2017 and 2019. Net new money contributed CHF 153 billion over the five-year period, part of which stems from the net new money generated by new client advisors hired by the banks.
One aspect that stands out is that banks that were capable of growing their assets under management in the past five years also performed better with respect to their cost/income ratio and return on equity than those institutions that were unable to increase their assets under management. In fact, institutions with growth in assets under management reported a cost/income ratio of 80% and a return on equity of 5.6%. By comparison, banks without any growth in assets under management from 2015 to 2019 had a cost/income ratio of 93% and return on equity of 1.1%.
The banks were well capitalized during this period and generally capable of absorbing external shocks. The regulatory capital requirement for these banks has risen by CHF 853 million over the past five years, while their eligible capital rose by CHF 5.7 billion. This is partly attributable to the fact that less than 40% of profits were distributed to shareholders during the period from 2015 to 2019. While 29 banks (35%) did not pay out any dividend at all during this period, 54 banks (64%) refrained from making a distribution in 2019.
The analysis also reveals that higher returns for clients also helped improve not only banks’ profitability but their long-term chances of survival as well. Banks that generated a positive return for their clients in the last five years had a 25% higher chance of survival than banks unable to generate any returns for their clients. At the same time, those institutions that generated a return for their clients had a lower cost/income ratio and higher return on equity.
For the study, a total of 27 people in executive management – mainly CEOs – described the coronavirus crisis from their perspective during the first half of the year. All in all, the private banks have been coping with the pandemic quite well so far. It appears that the crisis management plans were implemented quickly and most banks had their employees working from home within just a few days. The conservative lending policies of the past few years were also able to limit loan losses. Only a few banks had to roll out cost reduction programs in response to the coronavirus crisis.
According to the executive managers surveyed, client relationships were strengthened during the crisis. In fact, expanding the communication channels actually helped improve banks’ dialogue with clients. Nevertheless, new client acquisition in particular is challenging since prospective private bank clients still prefer face-to-face contact, especially for the initial meeting.
The coronavirus crisis has shown how quickly banks are capable of implementing changes. Digital improvements that had been sidelined for years were implemented swiftly after the lockdown was announced. This led to more flexible working hours, greater efficiency, more intense communication with clients, new digital solutions like online client onboarding and process automation, all of which benefit the banks’ key stakeholder groups: shareholders, employees and clients. Successful banks are working now to build on these insights.