Interest income boosts private banks in Switzerland

• Most private banks are generating considerably higher income thanks to rising interest rates.
• Small banks in particular are benefiting from this: their gross profit for the first half of 2023 was already nearly as high as for the entire previous year.
• This resulted in a striking reduction of the cost-income ratio from 78% to 67%.
• Return on equity of private banks in Switzerland has improved from 5% to almost 10%.
• Hardly any movement in the M&A market: only two transactions in the current year.

The current interest rate environment is leading to a substantial shift in the income structure of private banks in Switzerland – moving away from commission-based business and towards the interest-based business. This is particularly evident at small banks: while their commission-based business still accounted for 58% of total operating income in 2021, this share dropped to 41% in the current year, whereas the share attributable to interest income rose from 24% to 41%. That is one of the findings of the half-year analysis of KPMG’s study on private banks.

In addition, small private banks in particular recorded a proportionate increase in trading income. "Growth in trading income is primarily due to an uptick in foreign exchange transactions as clients seek to benefit from higher US dollar interest rates," explains Christian Hintermann, an expert on banks at KPMG Switzerland.

While interest income as a proportion of total income also increased at medium-sized and large private banks, the increase was not as strong as at small institutions. The share amounts to around one third (2021: 16%) at medium-sized banks and around one quarter (2021: 13%) at large banks.

So far, 2023 has been a very successful year for small private banks in Switzerland, in particular: their gross profit to date has almost reached the same level as for the full year 2022. They have benefited extraordinarily from the current interest rate environment while raising their return on equity from 3.9% in 2022 to 10.7% in the first half of 2023. 

This is also reflected in their cost-income ratio, which improved by an impressive 13.3 percentage points, from 78.6% to 65.3% (median). Medium-sized private banks were able to reduce their cost-income ratio by 7.4 percentage points (now 74%). The Big 8 – including Julius Baer, Pictet and Vontobel, among others – have reduced their already low cost-income ratio by another 1.3 percentage points to 67.3%.

With just two transactions in the first nine months of the year (excluding the acquisition of CS by UBS), M&A activity came to a nearly complete standstill in the private banking industry. Reyl acquired Carnegie Fund Services, a Swiss fund representative, in June 2023, and UBP acquired Angel Japan Asset Management with around CHF 1.1 billion in assets under management.

"We expect this situation to persist until early 2024", says Hintermann. "Many banks are currently trying to benefit from Credit Suisse’s integration into UBS by strengthening their business with local client advisors and teams. We expect M&A activities to recover in the future."

"We anticipate record results, particularly at small banks since they’re likely to continue to benefit most from the dynamic interest rate situation," Hintermann says with confidence. "Nevertheless, you shouldn’t forget that the less favorable financial markets, as seen in the second half of this year, are likely to have a negative impact on assets under management and commission income or, in other words, on private banks’ core business."