David better than Goliath?

High profitability despite low assets under management: a rarity in Swiss private banking

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.

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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.

Focused product offering and clientele

The top banks in our survey concentrate on the following business model components to drive their income:

Focus on a clear product strategy with a narrow core private banking product portfolio. This leads to a lower cost base by reducing complexity and development costs
Discipline in pushing through standard pricing terms without offering a lot of special conditions
Emphasis on private client base rather than institutional clients
High-net-worth individuals with investable assets of CHF 1m to 5m in discretionary mandates

Cost discipline and flexible operations

Profitable banks exercise caution when it comes to making decisions that influence their cost basis, emphasizing the following factors in particular:

They focus on a highly client-facing organisation with a high share of FTEs in the front office
They put relationship manager attraction and retention at the heart of their people strategy
They do not have an extensive branch network or locations abroad, emphasizing the importance of the Swiss branch
They implement a flexible and cost-effective IT landscape
They shine in terms of a lean operational set-up, including outsourcing of non-core functions (e.g. business/application processes)

“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.”

Martin Schilling, Managing Director Deals Financial Services, PwC Switzerland

Profitability depends on strategy more than size

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.