The numerous challenges faced by Swiss private banks are sufficiently well-known. But what is the concrete financial impact of the planned clean money strategy, the new tax treaties and the change in clients’ behavior on Swiss private banks? A joint study conducted by KPMG and the University of St. Gallen (HSG) analyzed the performance of over 100 Swiss private banks from 2006 to 2011. While the general trend – declining profits, particularly for smaller banks – is well established, the results of the study illustrate the differences in performance, in some cases very large, between the various market players. While these differences did not grow significantly between 2006 and 2011, the situation for numerous smaller banks has become critical: While practically all banks were extremely successful and profitable in 2006 and 2007, today’s market environment is revealing which private banks have a sustainably competitive business model and efficient structures and have adapted quickly enough to the changed conditions.
Key findings of the study:
- Returns on equity have reached a non-sustainable level. In 2011 the industry’s median was a feeble 3.8%, just 2.4% excluding extraordinary income (e.g. release of hidden reserves, provisions). While the best banks achieved a return on equity of over 40% in 2006, there were just a few banks with a return on equity of over 12% in 2011.
- Around a quarter of private banks have reported losses year after year since 2008 if extraordinary income is disregarded. These are mainly smaller banks with assets under management totaling less than CHF 5 billion. Yet due to the comfortable equity base of most private banks, so far these losses have been bearable.
- All in all, assets under management remained relatively stable and have only declined some 10% since 2006. Taken as a whole, there were no substantial outflows of client money across the hundred banks analyzed. Individual, predominantly smaller banks, however, reported considerable outflows which led to a shift in market share from small to large banks.
- One characteristic of particularly successful banks is that they are able to attract client money, even in today’s environment. In this regard, nearly all of the banks with the worst results were small banks. While they also drastically cut their costs for the most part, the much stronger decline in income caused these banks to report considerably weaker efficiency ratios.
- So far the banks have not been successful in achieving sustainable cost reductions. For most banks, their operating costs in 2011 were at a level similar to that in 2007. Even the number of employees as well as the average personnel expenses have hardly dropped at all since 2006.
- Since the income of small banks with assets under management of less than CHF 5 billion is only at 65% of the 2007 level – 60% at medium-sized banks – with costs remaining nearly unchanged, the cost/income ratio has deteriorated massively. Performance at large banks with assets under management of over CHF 25 billion has been much more stable with income declining by 15% on average since 2007.
Since there are limits as to how much the cost base can be reduced and because both new regulations and the increased complexity of the business are causing new costs to arise on an ongoing basis, this begs the question of what the critical mass is for banks and where new growth opportunities can be found. While a very few small banks might be able to retain their standing among the leading group, even in today’s environment, these are most likely exceptions with a focused business model and efficient structures.
So far the changes, some of them dramatic, have only had a limited impact on the number of private banks in Switzerland. According to analyses by KPMG, the number of banks that primarily operate in the private banking sector dropped from 169 at the end of 2008 to 148 at the end of 2012. In the past two years, however, the number of closures has picked up while practically no new banks were being founded. M&A activities were relatively low in 2012, in part due to great uncertainties as to how the private banking business will develop in the future. The extremely poor financial performance of many banks, however, makes a continued, significant reduction in the number of banks inevitable. Whether this will happen primarily via takeovers or closures remains to be seen. Recent decisions at both the political (failure to establish a treaty with Germany) and the regulatory level (Federal Supreme Court Ruling on the matter of retrocessions and corresponding FINMA newsletter) make it clear, however, that the pressure on private banks will continue to grow.