Private banks are thriving thanks to interest income

Small banks can reflect on a strong 2023. They benefited particularly well from higher interest rates and increased their net interest income by almost 60%. The strong net interest result is mainly due to lower interest expenses as they pay comparatively low interests on their customer deposits. Total income of small banks increased by 20% and gross profit rose by two thirds, from CHF 321m to CHF 528m.

Medium-sized banks were equally able to significantly improve their net interest income and achieve an operating income growth of 10%. However, in contrast to the small banks, the trading income of medium-sized banks fell by almost half. Gross profit grew by 27% to CHF 817m.

The eight largest private banks were also able to grow their net interest income, although, with +11% at a considerably lower rate than their small and medium-sized competitors. The lower growth of the net interest result can be explained by higher interest expenses at large banks as they pay higher interest on their deposits compared to its small and medium-sized competitors. As a result of the decline in net commission income, total income of the large private banks stagnated and gross profits experienced an 8% decline, shrinking from CHF 4.8bn to CHF 4.4bn.

Due to the exceptionally solid net interest income, the median cost-income ratio fell by over seven percentage points to 74%, the lowest level since 2007. Out of 73 banks included in the study, 50 banks had a cost-income ratio of less than 80% and, therefore, belong to the "strong" or "upper-mid" performance cluster. For comparison, in 2020, only 30 banks were part of these groups.

A striking development is the strong improvement in the median cost-income ratio of small banks, which fell from 81.4% to 73.4% after years of being relatively stable, mainly due to the strong net interest result. Medium-sized banks were also able to improve slightly from 83.1% to 81.9% but remain the weakest group. Large banks continue to have the lowest median cost-income ratio, although the median has risen from 69.7% to 71.2% compared to the previous year.

Despite this positive development, there is still need for action according to study author Christian Hintermann. With the second interest rate cut just recently announced by SNB and rate cuts from other central banks this year as well as increased minimum reserve requirements of SNB, interest income is likely to decrease. On the other hand, we would expect interest expenses to increase as pressure from clients will grow and competition for customer deposits will intensify.

"Especially due to the expected decline in net interest income, banks should focus on their cost base, which has recently surged at many private banks," says Hintermann. Last year alone, private banks’ operating expenses rose by over half a billion Swiss Francs. Small banks recorded the sharpest rise in costs with an increase of 8% - almost twice as much as the industry average of 4.6%.

Following a drop in the previous year, assets under management grew slightly from around CHF 2.9tn to CHF 3.0tn in 2023. This was primarily due to net new money of CHF 67bn. With a median increase of 2.8%, the large banks were significantly more successful in attracting client assets than the group of medium-sized and small banks, with net new money inflows of 1.8% and 1.4%, respectively. Apart from 2022, net new money remains significantly below the level of previous years and is not sufficient for sustainable growth at most banks.

"Thanks to the positive market development, a stronger increase in assets under management would have been anticipated. However, the strong appreciation of the Swiss Franc against the US dollar and the Euro has wiped out the gains," says Philipp Rickert, Head of Financial Services at KPMG Switzerland.

According to Rickert, the impact of the relationship managers acquired from UBS and CS on the private banks’ assets under management remains to be seen: "The results of these investments will not become apparent until next year due to time-delayed effects."

Due to the positive interest rate environment, M&A activities in private banking virtually came to a halt in 2023. Besides the takeover of CS by UBS, the sale of Julius Baer's remaining 65% stake in Italian wealth manager Kairos to Anima Holding was the only wealth management transaction carried out by Swiss private banks last year. "Due to the high interest income, the private banks are cautious when it comes to inorganic growth. However, the pressure will increase again when the interest rate wave flattens and assets under management continue to stagnate," Hintermann is convinced.