Last updated: 09:42 / Monday, 25 August 2014
KPMG Report

Switzerland's Private Banks Go Through Its “Annus Horribilis”

Switzerland's Private Banks Go Through Its “Annus Horribilis”

Declining profitability and simultaneously low growth in assets over the past year have negatively impacted the performance of private banks in Switzerland. More than a third of them posted losses during the 2013 business year. Another equally significant factor behind private banks’ poor performance is the influence of the US tax program which prompted a total of CHF 900 million in provisions to be created in 2013 at the banks analyzed. Moreover, half of the smaller and medium-sized banks are reporting an outflow of assets. These insights were revealed by a study performed by KPMG and the University of St. Gallen (HSG).

Pressure on Switzerland’s private banks remains high, a fact that will encourage continued consolidation at the accelerated pace which already set in, noticeably, in 2014. Banks must ask themselves whether the time has come to make lasting changes to their business model or whether they would prefer to pull out of Switzerland’s private banking market. Private banks also need to reduce their cost base and try to exploit their growth opportunities despite the difficult conditions and stagnating assets under management. The financial performance of 94 Swiss private banks between 2006 and 2013 was assessed based on an analysis of their annual reports within the scope of the “Performance of Swiss Private Banks” study.

Among otherfindings of the study, one in three private banks is operating at a loss: The results of the study clearly show that more than one third of private banks in Switzerland reported losses during the last business year whereas this only held true for around a fifth of those banks in 2012. Not only that, but 59 of the 94 banks analyzed saw continued declines in terms of performance or merely succeeded in stabilizing their downward trend in 2013.

Return on equity declining at most banks: 36% of private banks report continuous drops with an average return on equity of 4.5% between 2006 and 2013. Most of these banks reported negative returns on equity in 2013. Another 28% of private banks also suffered a decrease in their return on equity yet still succeeded in stabilizing it at around 4% over the course of the past four years. There are also some banks that show greater potential. 16% of private banks boasted strong performance during the entire post-crisis period with an average return on equity of 14.9%. The remaining 20% of banks managed the turnaround with low yet rising returns.

Outflow of assets under management at small and medium-sized banks: Assets under management have remained relatively stable over the past six years. The underlying figures, however, reveal vast differences in the performance of individual private banks. 54% of small banks and 50% of medium-sized banks experienced net outflows of their assets under management during the 2013 business year. Net new money (NNM) for all of the banks analyzed only amounted to CHF 18.6 billion last year. The vast majority of this positive net new money was deposited at the big banks.

US tax program leads to drop in return on equity: Provisions for the US tax program came to a grand total of CHF 0.9 billion at the end of 2013. In their 2013 financial statements, 21 of the 94 private banks analyzed had created provisions for potential fines and consultancy fees while another 11 banks only created provisions to cover consultancy fees. The analysis revealed that the remaining two thirds of those banks have only created small provisions or none at all. In the near future, continued increases can be expected in terms of both provisions and expenditures.

Personnel expenses remain high: Over the past few years, average personnel expenses have remained stable at around CHF 213,000 per employee and have even risen further at the large banks. Despite the fact that personnel expenses account for about two thirds of a private bank’s typical cost base, there are hardly any indications that efforts might be made to cut these costs. This reluctance severely limits opportunities to boost profitability.

Consolidation is accelerating: A significant rise in M&A activities was observed in mid-2014. Some CHF 125 billion in assets under management were sold in nine M&A deals in the private banking sector during the first seven months of this year. While the number of transactions still hasn’t quite reached the level seen in 2013 as a whole (12 deals), the volume of assets under management sold within the scope of M&A transactions is already five times as high. The pace of M&A activities will probably continue to pick up since shareholders of private banks are increasingly asking themselves whether they really want to keep investing in their unprofitable banks. Clarity is expected regarding the fines related to the US tax program and this is also likely to prompt an increase in deals during the second half of the year.

Market share of big banks growing rapidly: In 2013, a combination of organic growth and M&A transactions allowed big banks (with assets under management of over CHF 25 billion) to boost their market share by a third over 2006. At present, they command 78% of total assets under management. The 58 small banks (assets under management of under CHF 5 billion), however, account for less than 8% of assets under management.

For those banks that failed to achieve their goals during the past year, the question is: Which of them will be in a position to return to a growth trajectory and which will withdraw from the market? “All in all, larger banks seem more likely to be on the winning side of things. They’re earning the highest returns on equity and continuing to expand their market dominance. Within this new reality of low asset growth and declining returns on equity, successful private banks certainly include those that are able to cut their average personnel expenses and simultaneously expand the business area – regardless of their size,” says Christian Hintermann, Head of Transactions & Restructuring Financial Services at KPMG Switzerland.