Nearly a quarter of private banks in Switzerland are expected to either be taken over by larger rivals or collapse altogether in the next few years, according to a report by KPMG and the University of St Gallen.
The gap between profitable banks and failing peers has grown in the last year, the annual report concludes. Smaller banks are worst affected because they lack the financial clout to cope with regulatory and technological developments or the scale to push onshore into growing markets such as Asia or the United States.
Larger banks were better able to cope with the effects of the strong franc thanks to sophisticated foreign exchange hedging mechanisms that smaller rivals could not afford to match.
Furthermore, despite many banks changing chief executive officers (12 last year), they still lack a clear strategic plan of how to turn around their business in an environment of low risk appetite by investors and rock bottom interest rates.
The number of private banks based in Switzerland has declined from 181 in 2006 to 130 at the last count, according to the study. The authors believe that 30 of the remaining banks face a bleak future and will most likely not survive.
The number of takeovers involving private banks stalled in the first half of 2015 compared to last year. But the report believes that buyers are simply waiting for prospective targets to shed their tax evasion legacy issues with the United States during an ongoing non-prosecution resolution scheme.
Tax deal crucial
The KPMG/University of St Gallen study looked at 91 private banks in Switzerland but the study did not include big hitters UBS and Credit Suisse in its research.
The number of loss making institutions declined between 2013 (39%) and 2014 (28.6%), which was attributed to the US-Swiss non-prosecution deal easing the need for banks to put aside large sums of cash to cover potential criminal action in the US.
However, a third of surveyed banks admitted that their performance had declined last year and 21% reported that they had only just achieved stability. Banks in these two brackets lost nearly CHF18 billion ($19 billion) in client asset outflows while those that reported increased strength saw net inflows of CHF25 billion.
“In general, many banks still appear to be undecided on which path to choose,” said Christian Hintermann, head of advisory financial services at KPMG Switzerland. “However, they don’t have much time left to make the necessary changes. We can expect the face of the industry to change significantly over the coming years.”