Switzerland’s vaunted private banking scene is tipped to shrink further with a third of banks struggling to make ends meet in the face of adverse conditions. An annual health check of the sector has forecast that smaller players could be “driven to extinction”.
A study of 87 private banks by consultants KPMG and the University of St Gallen says that 34% were “weak” performers in 2018. That’s a 50% increase from 2017. More than half of this category operated at a loss last year, the report says.
The number of “strong” performers fell from 26 banks in 2017 to 19 this year and is dominated by larger players with at least CHF25 billion ($25.5 billion) of client assets under management (AuM).
The death of banking secrecy five years ago saw an end to the practice of sheltering billions in undeclared offshore assets in Swiss bank vaults. Since then, many wealth managers have struggled to find a business model to replace that cash cow.
They have not been helped by an unhelpful environment of rising regulatory costs, rock bottom interest rates and growing political and economic unrest around the world – presenting a perfect storm for their business.
This explains why the number of private banks in Switzerland has fallen from 163 in 2010 to 101 at the start of 2019. By the end of this year, KPMG predicts the number will drop below 100. There is a “high probability that a significant number of banks will exit the market in the next years,” KPMG says.
One of the biggest problems facing small banks is that they cannot afford a physical presence abroad, particularly in growing markets such as Asia. This makes it harder to attract new clients and their wealth.
A lot of banks are also struggling to keep a lid on the cost of running their business, as evidenced by the cost-income ratio benchmark. This measures the percentage of annual income that is eaten up by staffing, regulatory and other expenses.
Costs consumed a record 87.2% of income on average for small banks (with less than CHF5 billion AuM), leaving them with a wafer-thin profit margin of 12.8%.
The “Clarity on Performance of Swiss Private Banksexternal link” did not include the biggest wealth managers, UBS and Credit Suisse, but still represented CHF2.5 trillion of AuM of wealthy clients.