The Big 8 banks perform strongly while small banks improve
Large banks took a knock last year, but remained by far the strongest in the pack. Their challenge now is to secure profitable growth.
Despite a positive 2022, medium-sized banks – which are mainly subsidiaries of international banks – struggle to maintain profitability and grow income.
For small banks, the picture improved significantly last year, with generally impressive performances.
Section information This analysis covers the: • 8 large banks (the ‘Big 8'), with AuM in excess of CHF 100bn We also group the banks into four performance clusters ba sed on their C/I ratio, a key profitability metric. |
Aggregated financials of 8 large banks
8 banks covering 76.5% of industry AuM
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Number of Large banks by performance cluster
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Large banks were hit by a challenging year
Large banks were hit harder than the two other clusters last year. Especially impacted were gross profit (-7.2%), commission income (-11.8%) and Assets under Management (AuM) (-12.7%). At 11.8%, return on equity (RoE) is still attractive from a shareholder’s perspective, despite falling from 14.1% in 2021.
Large banks managed to keep the lowest cost income (C/I) ratio of all three clusters by far, however. Though it rose to 67.8% from 65.8% the prior year, it remains below 2018’s 71.1%. The increase in C/I was driven by a sizeable drop in commission income that was only partially offset by a rise in interest income.
Net New Money (NNM) at large banks fell dramatically to CHF 23bn in 2022, down from CHF 104bn the previous year. At only 0.9%, this is their weakest NNM showing since 2016. They do not appear to have yet benefited from the turmoil at Credit Suisse to any great degree.
While having a challenging year in 2022 large banks are still performing strongly. Looking ahead, the challenge is where profitable growth will come from in the future. Relatively weak NNM is not a good sign in a world where the rich’s wealth continues to grow quickly.
Aggregated financials of 19 medium banks
19 banks covering 7.1% of Industry AuM
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Medium-sized banks saw a boost in operating income but are the weakest cluster
Except for six, all banks in this cluster are subsidiaries of foreign banking groups and may be suffering from a lack of focus on standalone performances. Of the six weak performers, five are subsidiaries of global banks. All five have a C/I of 92-98%. Of the four strong medium banks, three are Swiss-headquartered and only one is a subsidiary of a foreign bank.
Medium-sized banks saw the biggest increase in interest income (+60%) of the three size clusters. Together with a limited fall in commission income, this led to an 8% rise in operating income. NNM remained stable at around 3%, but banks have struggled on the income side over the past five years. Despite a AuM boost from 2018 to 2022 and AuM being 18% higher, operating income remains lower than in 2018. Pressure on revenue margins led to a 12% fall in gross profit since 2018, despite banks actively managing their cost bases and having a stable number of FTEs and personnel expenses. At 3%, RoE is still insufficient.
Looking ahead, the decline in many ratios over the past five years is a major challenge for a cluster that needs to find ways to improve profitability sustainably. These banks face questions around where and how to operate. They are too big to be a niche player, but not big enough to generate greater economies of scale and maintain a significant international presence.
Number of Medium banks by performance cluster
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Aggregated financials of small banks
46 banks covering 6.4% of industry AuM
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Number of Small banks by performance cluster
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Small banks staged an impressive comeback
The biggest surprise in 2022 may have been how strongly small banks recovered. Gross profit was up 28% and C/I fell below 80% to 77.8%.
Only nine small banks were weak performers last year, compared to 15 in 2021. 66 small players have disappeared since 2010, with four doing so since the start of 2022. All four were weak performers. The remaining banks have made progress in developing their business models.
RoE of 5.5% remains below what an investor would expect from a private bank but continues to improve. Eleven small banks had an RoE of above 10%.
Small banks outperformed large and medium ones on NNM at a healthy 3.9%, following 4.6% in 2021. NNM was stable in absolute terms at CHF 8bn in both years.
Looking ahead, while many unsuccessful, weaker small banks have already disappeared, the picture for the remaining banks has improved. Initiatives to develop and focus their businesses appear to be paying off, with new clients and a boost from interest income helping their prospects. There is still a sizeable group a weaker small banks that are likely to disappear in the coming years, however.
