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From the beginning of 2020 to mid-2021, the number of private banks operating in Switzerland dropped from 101 to 96. The challenging market environment is causing problems for small private banks who saw their revenue plummet by around 13 percent in 2020. The large private banks are proving more resilient to the consequences of the coronavirus pandemic. That is one of the insights offered by this year’s study on banks by KPMG and the University of St. Gallen (HSG).

Although private banks pulled through the coronavirus crisis quite well initially, the environment remains challenging. This holds particularly true for the smaller institutions with less than CHF 5 billion in assets under management. Low interest rates were one main factor weighing on the results. At the same time, digitalization and the growing regulatory burden are stretching small private banks to their limits. Consolidation continues unabated as a result and is also being driven by both high pressure on margins and the need to achieve economies of scale.

Fewer than 100 private banks in Switzerland

This is reflected not least in the sharp increase in M&A activity since the first lockdown, with eight consolidation deals announced from July 2020 to July 2021. At the same time, the number of private banks operating in Switzerland dropped from 101 to 99 in 2020. Switzerland currently only has 96 private banks left, with that number expected to shrink to just 93 once the previously announced transactions are completed.

“We still think there’s an enormous need for consolidation, particularly among smaller and medium-sized private banks,” says Christian Hintermann, an expert on banks and partner at KPMG Switzerland. “That leads us to believe that transaction activity will remain at a high level in the next 12 months. We also expect the number of private banks on the Swiss market to decline by another quarter in the medium term.” The number of banks in Switzerland has already fallen by 40 percent in the past ten years (there were 158 private banks in 2011).

Increased movement in private banking

Figure 1. Number of announced M&A deals 2010 - July 2021

Gap between large and small private banks widens further

What stands out is that the gap between large and small banks widened even further last year. Large private banks fared better in 2020 than medium-sized and small banks, while also proving more resilient to the challenges of the pandemic. Despite the difficult circumstances, they were even able to increase their revenues slightly (+0.8%) in 2020, whereas medium-sized private banks recorded a decline of 7.2% and small institutions actually saw their revenue plummet by 12.8%.

A look at the cost/income ratio makes the differences clear: While the large private banks actually succeeded in improving this ratio somewhat (74%), the cost/income ratio at small private banks rose by 10 percentage points to 95%, the highest in the past five years. The cost/income ratio at medium-sized private banks stands at 84%, which is some two percentage points higher year on year. Across all private banks in Switzerland, the median cost/income ratio rose by 6 percentage points in 2020 to a record high of 85.9%. Although the banks were able to cut travel and marketing costs, the decline in operating expenses was unable to offset the lower revenues.

“The solid performance of strong banks in the midst of difficult market and pandemic-related challenges is testament to the investments they’ve made in recent years to strengthen their resilience. They did so by systematically investing in client acquisition and efficiency,” explains Philippe Rickert, Head of Financial Services at KPMG Switzerland. This is also reflected in the institutions’ return on equity: While large private banks have a median return on equity of 6.2%, this figure is 1.1% among small banks. Overall, the median return on equity amounted to 4.1%, which is a slight deterioration from the previous year (4.2%).

Increase in assets under management and net new money

Assets under management rose 3% to CHF 2,943 billion in 2020. This is mainly attributable to last year’s strong growth in net new money (up CHF 94.5 billion or +3.3%), with large private banks in particular attracting a lot of new money. In fact, some 95% of net new money was generated by seven of the largest private banks. While a total of 48 banks reported positive net new money, this metric was negative at 35 banks. According to Rickert, “the substantial inflow of new money in the past two years is an extremely encouraging sign for the sector itself and also for Switzerland as the private banking sector’s main financial hub.”

Mergers and acquisitions did not have any major impact on private banks’ assets under management last year since some of the transactions that had been announced were or will only be completed in 2021.

Only minor cost savings on office space

The 27 executives surveyed last year, most of whom were CEOs, had expected that working from home would generate savings on some office-related costs while also helping the banks achieve other efficiency gains. As things currently stand, however, expenses for office space have only been pared down to a small degree. Cost savings during the 2020 pandemic year were a modest 0.9%. The decline in travel and marketing expenses, on the other hand, led to more major cost savings at most banks, reducing general and administrative expenses by 9% (CHF 388 million).


Last year, executives had expected loan defaults in 2020 to only result in minor loan losses. While loan losses in the sector (including Lombard, mortgage and other loan losses) quadrupled from CHF 126 million to CHF 597 million compared with the previous year, a large portion of that is attributable to one bank. All in all, the number of private banks that reported increased loan losses in 2020 remained relatively stable at 31, compared to 28 private banks that had announced higher loan losses in the previous year.

Importance of digitalization and ESG on the rise

Another of the private bank study’s findings is that private banks are increasingly looking to focus on topics other than the coronavirus crisis. One of those is the whole ESG framework (environmental, social and governance), which is becoming increasingly relevant all the time. Private banks are developing in the area of ESG and adapting their offerings. The differences between banks are considerable, however. While most (60%) of the banks address the topic of ESG on their website, only around 20 financial institutions chose to position ESG as an important and strategic priority in their annual report or on their website. “Banks should leverage Switzerland’s strong track record with respect to ESG pioneers and sustainable investments to attract new generations of clients who consider ESG a key issue,” says Rickert.


Digitalization is also growing immensely important. Over the past ten years, for example, a 327% increase has been observed in the number of digitalization-related keywords appearing in banks’ annual reports. Nevertheless, private banks made fewer investments in IT in 2020 and reported lower IT-related costs than in the previous year. “The decrease in IT spending was mainly due to banks’ reluctance to make those investments during the year of crisis. We expect investments in IT to pick up again, since digital transformation will remain a key issue,” explains Hintermann.

Methodology

In its annual study entitled “Clarity on Performance of Swiss Private Banks,” KPMG and the University of St. Gallen (HSG) examined a total of 83 private banks in Switzerland and assessed both their performance and key trends in the industry. Additionally, 250 statements regarding banks’ circumstances during the pandemic were analyzed and 27 private bank executives – mainly CEOs – were surveyed.

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