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The general mantra in Swiss private banking is the higher the assets under management, the higher the profitability. But in reality, some smaller players operate just as profitably as their larger peers. It all boils down to the components of their business model. Successful operators have a focused product offering and client base while limiting their personnel and operating expenses. Read this blog to find out more about the key ingredients of their success.
Our research has found that certain smaller private banks (CHF <30bn AuM) have achieved attractive profitability levels also under challenging market environments (from 2019 – 2021). Despite the prevailing tendency outlined in our previous market update that higher volumes equate to higher returns on equity (RoE), it emerges that with an appropriate business model set-up, smaller banks can achieve similar financial success. An exclusive survey conducted by PwC sheds light on this particular size category, assessing the different components of the business models adopted by Top 5, medium and low 5 performers in terms of RoE.
Top 5 performers consistently outpaced their peers from 2019 to 2021, setting themselves apart from the other two surveyed cohorts, which struggled to achieve robust RoE figures. Even the median large private bank failed to keep pace with its Top 5 peers, despite having a larger volume of assets under management (AuM).
Given that there are no major differences between the top banks in terms of equity capitalisation rates, what differentiates them is their choice of business model components influencing income and expense drivers. Lower performing banks among this size bucket (CHF <30bn AuM) that want to transform their business model to achieve better profitability will need clear strategic orientation and the courage to change. They must realise that now more than ever, clients seek a private bank with sound financials.
The top banks in our survey concentrate on the following business model components to drive their income:
Profitable banks exercise caution when it comes to making decisions that influence their cost basis, emphasizing the following factors in particular:
“Our survey demonstrates that smaller banks, too, can be highly profitable or even outperform large private banks when it comes to profitability. It also shows specific areas where banks with lower RoE levels can improve.”
Despite the indisputable prevalence of size advantages in the Swiss private banking industry, our survey has proven the ability of smaller banks to reach equally attractive returns on equity. With a smart combination of business strategy components and an appropriate operational set-up, there’s no doubt that smaller operators can make up for any size-related disadvantages.
We also believe that other banks achieving lower profitability have the potential to close the gap, provided that they adequately set up the components of their business model and rely on their core competencies.