One third of Swiss private banks are underperforming
Most private banks have not sufficiently improved their business and operating models or optimally adapted their strategy to ensure their success in the long term. As this year's private bank study by KPMG and the University of St. Gallen (HSG) shows, most Swiss private banks have been far from able to increase their assets under management sufficiently.
Today, KPMG Switzerland presented its latest study "Clarity on Performance of Swiss Private Banks" on the current situation in private banking.
In their annual study, KPMG Switzerland and the University of St. Gallen (HSG) examined a total of 87 private banks operating in Switzerland and assessed the performance of these private banks as well as key industry trends. The bottom line is that 2018 was a very disappointing year for private banks in Switzerland.
Declining market share due to stagnating net new assets
While prosperity is increasing worldwide, the net new assets of Swiss private banks are stagnating. Only a few private banks have been able to consistently generate more than 5 percent in net new money over the past few years. The median net new money growth in 2018 was just 0.2 percent. After years of justifying low net new money with legacy issues, tax transparency (AEOI), and stringent regulatory and compliance requirements, private banks are now facing reality. Too many strategies have failed to generate the expected business and profitability growth, and private banks are too rarely present in growth markets, further limiting their ability to attract sufficient new clients. As a result, the global market share of Swiss private banks is declining.
Over the past few years, a group of Swiss-owned private banks has emerged, each with more than CHF 100 billion in assets under management. This has proven to be a successful model. As a rule, these institutions have an international branch network that also extends to growth markets. The aforementioned minimum size for sustainable success means that they have greater resources for investment and business development, benefit from their brand as Swiss asset managers and also achieve economies of scale. In an industry where an expensive onshore presence is necessary for expansion in global growth markets, this gives banks an important competitive advantage.
Declining key figures
Only one-third of private banks improved their cost-income ratio in 2018. The median cost-income ratio increased by 1.9 percentage points to a new all-time high of 83.6 percent. This deterioration was primarily driven by small and underperforming banks. While large banks improved their cost-income ratio by 2.8 percentage points to 79.1 per cent in 2018 (2017: 81.9 per cent), small banks operated at a median cost-income ratio of 86.3 per cent (2017: 82.4 per cent).
Operating profit margin eroded in 2018 after a recovery in the previous year. Only 39 percent of Swiss private banks were able to increase their operating profit margin in 2018, even though interest rate hikes in the US and more than ten months of global market growth had led to rising net interest income and net fee and commission income.
Return on equity continued its negative trend in 2018, declining at more than half of all private banks. At just 4.1 percent, the median return on equity for the private banks surveyed was roughly constant compared to previous years, continuing to fall short of the target level of around 8-10 percent, which is roughly in line with the cost of equity. One bright spot in 2018 was the large banks, which were the only ones to increase their return on equity: The median for large and mid-sized banks improved by 2.0 and 0.8 percentage points, respectively. For large banks, this corresponded to an increase to 7.8 percent, the highest since 2012 and in line with the target return. In contrast, the median return on equity of the small banks declined by 0.6 percentage points to 3.1 percent.
Continued consolidation
Over the past 18 months, the number of Swiss private banks fell further to 101 now, the net result of eight private banks exiting the market and one institution receiving its banking license from FINMA. This means that a total of 62 private banks (-38 percent) have now disappeared from the Swiss financial landscape since 2010. Despite the continued strength of financial markets, which rebounded nicely in 2019 after their late 2018 slump, private banks' business numbers have continued to deteriorate. This is likely to amount to another wave of consolidation.
Slightly older and more female members of boards of directors and executive boards
A look at the composition of boards of directors shows that their members are getting older: The average age of board members in Swiss private banks rose from 59 to 62 between 2012 and 2018, while the average age of executive board members increased by one year to 52. Furthermore, more than 40 percent of private banks recorded no CEO changes in the last seven years, and only 12.7 percent of private banks replaced their CEO twice or more during this period.
The proportion of women on boards of directors doubled between 2012 and 2018, but remains low at 9.8 percent. While the proportion of female board members rose sharply in German and French-speaking Switzerland (from 6 to 11 percent and from 4 to 10 percent, respectively), it remained very low in Italian-speaking Switzerland (up from 2 to 3 percent). In terms of CEOs, only six of the total 127 CEOs in the last seven years were women. Nevertheless, 2018 recorded a high: there were four female CEOs, three of whom only joined the Executive Board during the year.
