Many Swiss private banks are just treading water | KPMG | CH
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Many Swiss private banks are just treading water

Many Swiss private banks are just treading water

While the most spectacular upheavals in the Swiss private banking business are over, the hugely different environment that has emerged in the wake of the financial crisis as well as several uncertainties still pose a major challenge to the industry. As revealed by the study on private banking conducted by KPMG and the University of St. Gallen and contrary to expectations, the KPIs paint a big picture that is persistently adverse.


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As they do every year, KPMG Switzerland and the University of St. Gallen jointly examined the profitability, growth and cost efficiency of more than 80 private banks in Switzerland. While the most spectacular upheavals in the Swiss private banking business are over, the hugely different environment that has emerged in this industry in the wake of the financial crisis as well as technological and economic uncertainties still pose a major challenge to Swiss private banks.

The industry’s KPIs basically suggest a persistently adverse situation. Some private banks, however, are in the process of making radical changes to their business and operating models: They are exiting unprofitable, high-risk client segments, expanding their range of services, aggressively cutting costs and intensifying their focus on digital technologies. This change process should have a positive impact on future performance.

Poor cost-income ratio and low profit margins

The median cost-income ratio of private banks rose to 84.4% in 2016, its highest, and thus worst, level of the past seven years. Even in spite of cost-cutting programs, private financial institutions failed to reduce their costs quickly enough to keep pace with their more rapidly declining earnings base. 

In 2016, the median operating income margin (the ratio between a bank’s earnings and its average assets under management) of private banks with activities in Switzerland fell to 89 bps, its lowest level ever, mainly as a result of lower net commission income from extremely cautious clients as well as more intense competition. By contrast, the median in 2010 was at 108 bps. Interest income declined as well, however it picked up again over the course of 2016 due to the US Federal Reserve’s 25 bp hike in the key interest rate in December 2015.

Stagnating return on equity and predominantly inorganic growth

Private banks once again failed to boost their return on equity in 2016. The median value for the analyzed banks came to just 4.1% for the past year, thus nearly on a par with that of previous years. As a result, the return on equity still fell considerably short of market analysts’ estimates of 7% to 10%.

While the private banks analyzed have achieved significant increases in assets under management (AuM) since 2010, this growth has mainly been driven by acquisitions of other private banks: 73% of asset growth is attributable to M&A activities. Of that, some 90% was contributed by four large private banks which played an extremely active role in industry consolidation. During that same period of time, however, net new money only represented 15% of AuM growth.

When looking at the total AuM of all private banks analyzed, 2016 brought the first net outflow of the past six years which amounted to CHF 43 billion, or 3% of these banks’ AuM on 31 December 2016. This asset outflow is mainly attributable to large and medium-sized financial institutions that have refocused their core client segments and also systematically and swiftly eliminated their non-core client segments. Strategic considerations and the Federal Act on the International Automatic Exchange of Information (AEOI Act), which entered into force on 1 January 2017, may have been key factors behind this resolute approach.

Sharp slowdown in acquisition activity

There was a distinct decline in consolidation activity in the private banking sector last year. Nine of the 15 deals negotiated in the industry in 2015 were acquisitions of Swiss private banks compared to just two of the eleven deals reported last year. Because private banks have refocused their core client segments and simultaneously narrowed their target client segments, buyer demand for acquisitions has declined while price expectations on the sellers’ side have been too high.

Upheavals in the Swiss private banking business have hit smaller banks particularly hard: 80% (41 of 51) of the private banks operating in Switzerland which have either disappeared or withdrawn from the local market over the past few years have been small-sized banks (see figure). The median return on equity of banks in the “weak performer” group, i.e. the weakest group of banks, was at -9% in 2016. Of these, 83% are small-sized private banks. It goes to follow that more small-sized private banks can be expected to vanish as well.

The number of private banks operating in Switzerland has decreased drastically since 2010.[Source: KPMG Clarity on Performance of Swiss Private Banks]

At the same time, however, a few small-sized niche players have emerged. These report extremely positive performance and accounted for nearly half of the so-called “strong performers” at the end of 2016. Even among the weak performers, which still formed the largest performance cluster in 2015, some banks – including small-sized banks – have succeeded in making noticeable progress. Accordingly, these banks have advanced to the “lower-mid” cluster which represented the largest performance category for the first time in 2016, in part due to the deterioration in the performance of a large number of private banks in the “upper-mid” cluster.

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