Private banks coping well with the Corona crisis so far

In the annual "Clarity on Performance of Swiss Private Banks" study, KPMG and the University of St. Gallen (HSG) examined a total of 84 private banks operating in Switzerland and assessed the performance of these institutions as well as the most important industry trends. In addition, 27 executives of Swiss private banks were interviewed about the handling and consequences of the Corona crisis. These top bank executives represent 55% of the assets under management of all private banks analyzed (CHF 1.6 trillion).

Consolidation wave calms down for the time being

After 19 transactions in 2018, M&A activity fell sharply, with only nine transactions in 2019 and five in the first seven months of 2020. The number of private banks fell from 106 to 101 last year and by another institution to 100 in the first half of 2020. Since 2010, the number of private banks has decreased by a substantial 39%. In addition, two more transactions were announced in July 2020, so the number of private banks is expected to fall below 100 by the end of the year.

As the financial performance of most Swiss private banks in the first half of 2020 was strong compared to the previous year, the Corona crisis does not seem to have created any additional, immediate financial pressure. In the long term, however, the economic impact of the Corona crisis is likely to herald another difficult year, forcing the exit of unprofitable institutions from the private banking business and thus accelerating consolidation once again. This is because the high margin pressure on commission income will continue, interest rates are likely to remain low for much longer, and the consistent and effective digitization of the business model is increasingly becoming an insurmountable task, especially for smaller banks. The true impact of the Corona crisis will only become visible from 2021 onwards, as delayed transactions will still have an impact in the coming months on the one hand. On the other hand, the recessionary effects of important markets will only gradually take full effect when government aid packages expire.

Assets managed by private banks on the rise

In 2019, a performance of 10% and net new money growth of 3% sent assets under management soaring by 14%. This is a remarkable increase in net new money and an extremely encouraging sign for the private banking industry, especially for the two-thirds of banks that reported positive net new money. However, the analysis also shows that growth from M&A activity has remained low due to a continued lack of large acquisitions.

For the first time, the performance of Swiss private banks was analyzed over five years (2015 to 2019), with the aim of more clearly identifying the characteristics of the higher-performing banks. According to the results, the 84 private banks surveyed increased their assets under management by CHF 616 billion, or by 27%. Virtually half of this growth (CHF 283 billion) is attributable to performance, and mainly to positive markets in 2017 and 2019, with net new assets contributing CHF 153 billion over the five-year period. This includes all net new money generated by banks through the hiring of new relationship managers.

It is striking that those banks that were able to achieve growth in assets under management over the last five years performed better in terms of both cost/income ratio and return on equity than those institutions that were unable to increase their assets under management. For example, institutions with growth in assets under management had a cost/income ratio of 80% and a return on equity of 5.6%. In comparison, banks that did not achieve growth in assets under management from 2015 to 2019 had a cost/income ratio of 93% and a return on equity of 1.1%.

Higher customer returns bring higher bank returns

During the five-year observation period, the banks were very well capitalized and overall able to absorb even substantial additional stress. The minimum regulatory capital for these banks increased by CHF 853 million over the past five years, while their eligible capital increased by CHF 5.7 billion. This is partly due to the fact that less than 40% of profits were distributed to shareholders between 2015 and 2019. 29 banks (35%) paid no dividends at all during this period. 54 banks (64%) did not make such a distribution in 2019.

The analysis also shows that higher returns for customers also help to improve the profitability - and thus the long-term survival chances - of banks. Banks that generated a positive return for their customers over the past five years had a 25% higher chance of survival compared to banks that did not generate a return for their customers. At the same time, the institutions that generated a return for their customers have a lower cost/income ratio and a higher return on equity.

Private banks demonstrate effective Covid 19 crisis management

A total of 27 executives - mainly CEOs - gave their views on the corona crisis during the first half of the year in the study. All in all, private banks have so far coped well with the Corona crisis. It turns out that crisis management plans were implemented quickly and most banks had home offices in place within a few days. Due to the conservative lending policies of the past years, credit losses could be limited. Only a few banks had to launch cost-cutting programs as a result of the Corona crisis.

According to the executives interviewed, the relationship with customers has strengthened during the crisis. With the help of expanded communication channels, it was even possible to improve the dialog with customers. Nevertheless, the acquisition of new customers in particular poses a challenge, because the majority of potential private bank customers still prefer face-to-face meetings, especially for initial contacts.

Digital transformation brings added value to all stakeholders

The Corona crisis showed how quickly banks can implement change. Digital improvements that had been postponed for years were quickly introduced after the lockdown was announced. This led to more flexible working hours, greater efficiency, more intensive customer communication, new digital solutions such as online client onboarding, and process automations that ultimately benefited all of the banking institutions' key stakeholders - shareholders, employees, and customers. It is precisely the successful banks that will continue to build on these insights.

Source: KPMG