KPMG Banking Study: Swiss banking centre stable

The KPMG banking study "Clarity on Performance of Swiss Private Banks", carried out by KPMG together with the University of St. Gallen (HSG), provides interesting insights into the Swiss banking centre. A total of 84 private banks operating in Switzerland were examined and assessed. For the first time, Philipp Rickert and Christian Hintermann, who led the study, not only looked at the performance of the banks, but also at the efficiency of employees during the Corona lockdown and other interesting industry trends.

Consolidation wave calms down for the time being

After 19 deals in 2018, M&A activity fell sharply, with only nine deals in 2019 and five in the first seven months of 2020. The number of private banks fell from 106 to 101 last year and by another institution to 100 in the first half of 2020. Since 2010, the number of private banks has decreased by a substantial 39 percent. In addition, two further transactions were announced in July 2020, so the number of private banks is likely to fall below 100 by the end of the year.

A first conclusion of the study: "The high margin pressure on commission income will namely continue, interest rates are likely to remain low for much longer and the consistent and effective digitalisation of the business model will increasingly become an unsolvable task, especially for smaller banks. The true impact of the Corona crisis will only become visible from 2021 onwards, as delayed transactions will still be reflected in the coming months on the one hand. On the other hand, the recessionary effects of important markets will only gradually take full effect when government aid packages expire."

Major structural hurdles remain

The 2020 banking barometer has not yet been published, but the number of financial institutions shrank by a further five to a total of 261 last year, according to the Swiss Bankers Association's (SBA) annual banking barometer. 226 had been in the black in the past financial year, while the remaining 35 financial institutions had to absorb a loss. According to the KPMG bank survey, the net profit of small and medium-sized banks, for example, fell to its lowest level in the last ten years.

In return, "deal" activity in 2020 falls to the same low level of the previous year (2019). However, the study leaders expect merger activity to increase in the coming twelve months.

Nevertheless, major hurdles remain. The costs of cross-border asset management are causing problems for some financial institutions. The globalisation and impending regulation of the banking industry and the simultaneous push towards digitalisation are unlikely to offset the already low margins on traditional commission business in the near future.

Banks' personnel costs, on the other hand, rose to their highest historical level. For example, 75 per cent of banks that improved their cost-income ratio recorded an increase in staff costs.

M&A deals in the past ten years (source: KPMG):

Strong increase in assets under management

In 2019, a 10 percent performance and 3 percent net new money growth sent assets under management soaring by 14%. This is a remarkable increase in net new money and a very encouraging sign for the private banking industry, particularly for the two-thirds of banks that reported positive net new money. However, the analysis also shows that growth from M&A activity has remained low due to a continued lack of large acquisitions.

For the first time, the performance of Swiss private banks was analysed over five years (2015 to 2019), with the aim of identifying more clearly the characteristics of the higher-performing banks.

Accordingly, the 84 private banks surveyed increased their assets under management by CHF 616 billion, or 27 percent. During this observation period, the banks were very well capitalised and overall able to absorb even substantial additional burdens. The minimum regulatory capital for these banks increased by CHF 853 million over the past five years, while their eligible capital increased by CHF 5.7 billion.

This is partly due to the fact that less than 40 per cent of profits were distributed to shareholders between 2015 and 2019. 29 banks (35%) paid no dividend at all during this period. 54 banks (64%) did not make such a distribution in 2019. "Banks are very well capitalised and able to absorb external shocks. Their eligible capital of CHF 30.3 billion is three times higher than the regulatory minimum of CHF 9.4 billion," the charts from the August 26 media conference on "Clarity on Performance of Swiss Private Banks" read.

The banks in the home office

27 executives of Swiss private banks were interviewed about the handling and consequences of the Corona crisis. These top bank representatives represent 55 percent of the assets under management of all the private banks analysed (CHF 1.6 trillion). All in all, the private banks have coped well with the Corona crisis so far. The KPMG study leaders confirm the observation that the crisis management plans were implemented quickly and that most banks had introduced home offices within a few days. In some cases, these measures are still ongoing.

Due to the conservative lending policy of the past years, credit losses could be limited. Only a few banks had to launch cost-cutting programmes as a result of the Corona crisis.

According to the managers interviewed, the relationship with customers has strengthened during the crisis. With the help of expanded communication channels, the dialogue with clients could even be improved. However, the acquisition of new clients in particular remains a challenge, as the majority of potential private bank clients still prefer face-to-face meetings, especially for initial contacts.

Generally speaking, the Corona crisis has been well managed so far. As the financial performance of most Swiss private banks in the first half of 2020 was strong compared to the previous year, the Corona crisis does not appear to have created any additional, immediate financial pressure. In the long term, however, the economic impact of the Corona crisis is likely to herald another difficult year, force the exit of unprofitable institutions from the private banking business and thus accelerate consolidation once again.

Digital transformation brings added value to all stakeholders

The Corona crisis showed how quickly banks can implement change. Digital improvements that had been postponed for years were quickly introduced after the lockdown was announced. This led to more flexible working hours, greater efficiency, more intensive client communication, new digital solutions such as online client onboarding and process automation, which ultimately benefited all key stakeholders of the banking institutions - shareholders, employees and clients. The successful banks in particular will continue to build on these insights.

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