Private and retail banks: size alone does not guarantee success
Private and retail banks in Switzerland are showing resilience and have even been able to increase their average business volume in some cases. At small banks, however, it is the considerable personnel costs that are putting pressure on margins.
The Swiss financial center has experienced three turbulent years. In the new "Private Banking and Retail Banking Market Insight," auditing firm PwC Switzerland has examined the private and retail banks and provides assessments of profitability, business volumes, and income and cost drivers. The findings are based on the latest financial reports for 2018 to 2020.
The bigger the private bank, the more successful
Despite a difficult market situation, large private banks were able to increase their business volume to an average of 271 billion Swiss francs in 2020 thanks to high net new money inflows. The operating RORE (return on required equity capital) of 38.1% is also significantly higher than that of small and medium-sized private banks. This is due to strong brand identities, international presence and differentiated service portfolios, the PwC study notes. According to the study, these developments would continue in the future and allow large private banks to flourish comparatively independently of events on the financial market. Smaller and medium-sized private banks, on the other hand, were unable to keep pace with the big banks, especially in the pandemic year 2020, and recorded a manageable net inflow of new money. In particular, mid-sized banks saw a steady deterioration in operating RORE to an average of 10.5% from 2018 to 2020 due to declining operating profit margins.
Retail banks continuously increase business volume
In the retail sector, this discrepancy, which can be observed at private banks, is hardly noticeable. Operating RORE remained relatively unchanged over the observed years in all three size categories. Nevertheless, the retail banks were able to continuously increase their business volume with low volatility to an average of 148 billion Swiss francs (large retail banks), 31 billion Swiss francs (medium-sized institutions) and 4.5 billion Swiss francs (small retail banks). In addition to strong market positioning, the lower AuM share in retail banking and thus less dependence on the global financial market also played a role here. The share of assets under management is the primary growth driver, especially for the large and medium-sized banks with an AuM share of 50-60%. Smaller retail banks are more dependent on mortgage lending and generated their volume growth mainly through this. "In the coming years, these trends will continue," says Martin Schilling, Director Deals Financial Services - Asset & Wealth Management at PwC Switzerland. "However, large retail banks will pass the smaller banks in the long run, as they can further increase business volumes thanks to a broader range of services and a wider reach."
High operating profit margin of little use to small banks
In both the private and retail banking segments, the large banks have a lower operating profit margin due to the higher proportion of business customers. Over the period under review, it fluctuated accordingly between 57 and 62 basis points (private banks) and 68 and 75 (retail banks) in relation to business volume. However, small private and retail banks can derive little benefit from the higher margins, as they have the highest personnel costs in relation to business volume. In addition, due to their business model, small retail banks have to provide a higher relative share of capital adequacy than larger institutions, which further reduces operating RORE. However, the study also shows that staff costs have remained constant in the retail sector over the period under review - an indicator of a stable and profitable business environment.
Private banks struggle with higher cost-income ratio
Over the past three years, the cost-income ratio (CIR) of private banks has been significantly higher than that of retail banks in all magnitudes. Medium-sized private banks even showed a continuous deterioration in CIR from an average of 79% to 86%. Swiss offshoots of major European banks were hit particularly hard, with their operating profit margins halving from 2018 to 2020. In contrast, small and medium-sized retail banks performed above average with clearly lower CIRs of 51% and 53%, respectively, and demonstrated high efficiency.
Source: PwC
