Private banks under scrutiny

A bank's risk assessment should never be hypothetical. The following is not about a strong appreciation of the Swiss franc against the euro and/or the US dollar. It is generally about the state of Swiss private banks, which are increasingly having to surrender to or subordinate themselves to digital market models. An SNB has to be able to withstand market fluctuations and bends in the equity market, while a small financial institution that focuses too one-sidedly on foreign currencies, euro equities and bonds, or volatile high-flyers, could quickly flounder. In the process, not a few jobs of local bank employees are at stake.

The banks agree that payment transactions (47 percent; down 8 points), followed by investment advice (17 percent; down 3 points) and lending (14 percent, up 6 points) continue to be most affected by structural change. It should also be noted that Swiss banks see marketplaces or platforms (37 percent; up 18 points) and blockchain (28 percent; unchanged) in particular as the greatest threat to their business (source: EY Banking Barometer 2019).

Fewer and fewer traditional houses
It is not only the abolition of banking secrecy that is to blame for the fact that there are fewer and fewer Swiss financial institutions. According to bank insiders, not only are the "fat years" over, but bank specialists are having to "grit their teeth" as far as their future is concerned. Since 2012, around 12,000 jobs have been cut in the banking sector (source: insideparadeplatz.ch).

However, the above-mentioned studies indicate a far greater loss of jobs and reputation. Since 1996, around 150 of the 400 financial institutions that once existed have disappeared from the market. These include renowned institutions such as Bank Wegelin, which was sold to Vontobel last year, as well as lesser-known financial institutions. The share of banks in value creation has also fallen - even though mortgage volumes have doubled since the millennium.

The value added today concerns half with 4.8 percent (source: KPMG), at best half of the volume 20 years ago. Tendency decreasing for five years in a row!

What is also alarming about this is the fact that the low value added is shared among the largest banking houses. Even the big Swiss banks were among the losers on the stock market last year. For example, the value of Julius Baer in the leading index SMI fell by 41 percent, Credit Suisse had to record a loss of 38 percent, UBS of 32 percent.

Outsourcing through digitalization?
Denise Chervet, Managing Director of the Swiss Bankers Association (SBPV), sees further problems for Switzerland as a banking location: "UBS and CS in particular have moved thousands of jobs to low-wage countries over the last ten years. For François Degeorge, Director of the Swiss Finance Institute, on the other hand, digitalisation is "the biggest driver":

"Computers do some of the work today. That's painful for those involved, but good for the industry because it becomes more efficient." Study leaders of the "EY Banking Barometer" believe that the digital marketplaces offer more consumer loans - "offering business loans and mortgages at cheaper prices in some cases" - which ultimately increases transparency in the market. In addition, the barriers to entry for insurance companies and pension funds into the mortgage market would also benefit. "Our findings show that the structural change will hit retail banking first," says Olaf Toepfer, EY Partner and Leader Banking & Capital.

The financial services team of the consulting firm KPMG also provides information on the occasion of a newly published performance study on Swiss private banks. Their study on the dwindling number of the current 107 institutions is circulating in English under the title "Clarity on Performance of Swiss Private Banks.

The study's underlying forecast: "They will shrink to 70 or even 60 percent" of current levels in the next few years.

23 banks in the red
The situation no longer seems too rosy for Swiss private banks. As the KPMG experts already showed five years ago, the private banking industry is stumbling. Since 2013, almost a third of well-known players have disappeared from the scene. The KPMG experts are critical of the situation.

"The individual positioning of the private banks we surveyed is brutal," says Philipp Rickert, Head of Audit Financial Services at KPMG, based on available statistics. Rickert points to differences of 20 and more percent between the individual banks in key development figures. The consultants substantiated the consequences, for example, by presenting the development of the "cost-income ratio" (CIR) for the 90 private banks examined in the study.

Of the 90 institutions examined by KPMG, 23 banks are in the "weak performers" category based on the CIR criteria and the return on equity. 31 banks were in the "lower mid performers" category. According to the KPMG expert, a private bank that is too diversified and already competes against large global providers will not be able to "survive".

Some of the mediocre performers also failed to make the grade if they did not focus on core businesses. The consultants based their forecast on a series of figures compiled over a longer period of time.

Only very few banks have shown positive developments in recent years. So some small private banks would continue to tread water in the red, showing very weak profitability below one percent of annual earnings. The financial advisors are very pessimistic about the weaker performers.

The future of Swiss private banks, it seems, lies in the ongoing consolidation of individual businesses and a sober industry overview. For the already struggling banks, the KPMG experts have only one piece of advice. Philipp Rickert, Head of Audit Financial Services at KPMG: "Selling a bank is recommended while it's still possible."

Private Banking extremely competitive
Overall, the KPMG study concludes that Swiss private banking is currently in a better position than it has been for ten years. One key figure illustrates this: The cumulative net profit of the banks surveyed - UBS and Credit Suisse are not included in the KPMG study - almost doubled between 2015 and 2017 to CHF 2.8 billion.

However, the "best" private banks would also generate the greatest turnover. The experts do, however, point to some interesting trends. For example, many medium-sized private banks with assets under management of between CHF 5 billion and CHF 25 billion would be stuck. The "weak performers" include four large banks (over CHF 25 billion), four medium-sized banks and 15 small banks.

Will the already solid institutions among the Swiss private banks now rule the market?

The KPMG experts see two suboptimal developments: "Many, and especially the larger institutions, let cost control slide in 2017," or, as Hintermann pointed out, most private banks invested in staff and team training programs without creating more efficient work processes. "Overall, their expenses increased by 7.7 percent, while revenues increased by 9.7 percent."

The second concern is weak growth. In 2017, in one of the best years operationally for Swiss private banks, the 90 Swiss institutions managed to come up with just CHF 21 billion in new investments from clients. Christian Hintermann, KPMG partner and advisory financial services, said, "Many private banks no longer manage to acquire clients." Many growth offensives have virtually petered out until now.

"Compared with the previous year, the banks now see less good prospects for the future in all business areas," says Olaf Toepfer at EY Switzerland. This development is most pronounced in investment banking (down 26 percentage points) and asset management (down 13 percentage points). In addition, 63 percent of the banks surveyed believe that the value added by many Swiss banks will continue to decline.