19 June 2023
Private banks in Switzerland successful thanks to interest income
- Despite the challenging conditions, the "Big 8" still achieved strong performances in 2022; small private banks improved considerably year over year. Higher interest income contributed substantially.
- Following a record 2021, net new money fell from CHF 131 billion to CHF 45 billion – with the "Big 8" hit particularly hard
- Assets under management dropped 11 percent, from around CHF 3.3 trillion to CHF 2.9 trillion.
- Mergers and acquisitions slowed down in 2022; consolidation is not over, however
After hitting an all-time high in 2021, assets under management at private banks in Switzerland declined by CHF 361 billion in 2022, from around CHF 3.3 to around CHF 2.9 trillion (-11.1 percent). Reasons include declines in net new money and, above all, negative financial market performance due to heightened geopolitical and macroeconomic uncertainties. Compared to the previous year, the "Big 8" lost 12.7 percent of their assets under management, medium-sized banks 4.9 percent and small banks 6.9 percent.
Net new money situation differs depending on bank size
After a strong 2021, net new money was much weaker in 2022 (CHF 45 billion vs. CHF 131 billion in 2021), driven by 78 percent lower net new money at the the Big 8 banks. The small banks offered up a big surprise: Despite only holding 6 percent of the industry’s assets under management, they generated 17 percent of its net new money last year. This is likely due to the fact that the small banks spent the past few years building on their own strengths by refining their boutique business model even further and maintaining clients’ trust despite market and geopolitical turbulence.
Boost in interest income gives weak banks a breather
In 2022, income generated by Swiss private banks rose from CHF 19.7 billion to CHF 19.9 billion year over year, primarily due to higher interest income that was up by more than 50 percent over the previous year. In 2022, gross profit declined only slightly, by 3.4 percent year over year, from around CHF 5.9 billion to just under CHF 5.7 billion. The marked increase in gross profit among medium-sized (+17 percent) and small private banks (+28 percent) comes as a big surprise.
"Rising interest rates have allowed banks to take a breather, particularly those at the lower end of the profitability scale. But that shouldn’t distract from the fact that this group continues to face enormous challenges," explains Philipp Rickert, Head of Financial Services at KPMG Switzerland. "Efficiency increases and investments in digitalization are still top priorities for improving profitability."
M&A activities: focus on independent asset managers
Even if the challenging financial markets would have argued for further consolidation, the number of mergers and acquisitions remained at a modest level in 2022 due to the positive interest rate environment; transactions with independent asset managers (IAMs) in Switzerland, on the other hand, rose significantly. IAMs were involved in seven of a total of 15 transactions. "Given the greater regulatory requirements and an aging advisor base that is nearing retirement, the relatively high level of M&A activities in the IAM sector isn’t very surprising," says Christian Hintermann, Partner Financial Services at KPMG Switzerland, who headed up the study.
The number of private banks in Switzerland decreased from 92 end of 2021 to 89 at the end of March 2023. Given the fact that numerous low-performance banks are still around, Hintermann expects the consolidation to continue even despite the breather.
Outlook
“Looking ahead, profitable growth will be the challenge,” says Christian Hintermann. In light of the decline in assets under management, relatively weak net new money, limited M&A opportunities and stagnating cost/income ratios at many banks, that is no easy task. In addition, private banks in Switzerland have to cope with the costs and complexity of cross-border business, a shortage of talent as well as increased digitalization and regulation.
Contrary to large and small private banks, the situation surrounding medium-sized banks is challenging since they are unable to significantly benefit from economies of scale and clear niche positioning. “This group is particularly challenged to sharpen its business model,” says Philipp Rickert.
Methodology
In its annual study entitled "Clarity on Swiss Private Banks", KPMG and the University of St. Gallen (HSG) examined a total of 73 private banks in Switzerland to assess their performance and key trends in the industry.
For more information and the detailed study, please go to: kpmg.ch/pb
