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Private Banking Switzerland: Market update 2021

The year 2020 was dominated by the COVID-19 pandemic, yet the Swiss private banking sector still got off relatively lightly compared to other industries. Thanks to the quick recovery of global markets, Swiss private banks could broadly sustain their assets under management (AuM) base and, as such, worse consequences could be prevented.

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  • The year 2020 was dominated by the COVID-19 pandemic, yet the Swiss private banking sector still got off relatively lightly compared to other industries.
  • Thanks to the quick recovery of global markets, Swiss private banks could broadly sustain their assets under management (AuM) base and, as such, worse consequences could be prevented. Despite the pandemic, Swiss private banks generated a record high net new money (NNM) of 3.1%.
  • However, the operating income margin suffered a decline of 7 basis points (bps) down to 82 bps, predominantly due to an erosion of the net interest income margin.
  • After a strong wave of consolidation among smaller banks in previous years, 2020 has seen a shift in M&A activity towards the mid-sized segment, with a total of 4 transactions out of 6.

Strong NNM inflows in 2020 driven by large banks​

At a glance
  • In 2020, global markets broadly recovered from their slump in March, and hit new highs by year end. However, Swiss private banks could not quite keep up with the strong recovery, and achieved a slight negative performance growth of -0.2%.
  • Even though the pandemic has led to restrictions on travel and physical meetings with clients, Swiss private banks could achieve the highest NNM growth in more than a decade, at 3.1% in 2020. Over the last 5 years, large private banks have made a strong turnaround, from NNM growth of -1.1% in 2016 to 3.4% in 2020, which is the highest since the financial crisis in 2007. On the other hand, NNM growth among small banks was -2.8%, and as such moved into negative territory for the first time in the last 5 years. Mid-sized banks have been struggling for a decade, with an average NNM growth near zero.
  • Overall, the private banking sector’s AuM grew by 2.8% and reached CHF 2.9 trillion in 2020 based on our sample. However, the operating income margin suffered a decline of 7 basis points (bps) down to 82 bps, predominantly due to an erosion of the net interest income margin. After a strong wave of consolidation among smaller banks in previous years, 2020 has seen a shift in M&A activity towards the mid-sized segment, with
    a total of 4 transactions out of 6.
Outlook

NNM growth has been vastly dominated by large banks in the recent past due to three reasons:

  • First, large banks benefited from their global footprint in high-growth markets such as APAC, LATAM and the Middle East.
  • Second, clients seek trust in large banks during uncertain times due to their financial stability.
  • Third, large banks seem to have adapted better to the restrictions caused by the pandemic compared to small and mid-sized banks. Larger banks have made larger investments in technology, such as new digital client channels, while small banks often lack the necessary resources.

We expect a similar picture for the next few years. Large banks will be able to attract positive NNM inflows between 2%-5% p.a., whereas the small and mid-sized banks will be struggling to attract any NNM inflows in the next few years.


Poor returns on regulatory required capital achived by small banks

At a glance​

The Swiss private banking sector’s median after-tax return on regulatory required equity (RORE) of 8.0% dropped below the 10% mark for the first time in 2020.

The median return on equity (ROE) in 2020 was even lower at 4.2%, due to the overcapitalisation of Swiss private banks of roughly between two and three times required capital for reputational and marketing reasons. Large banks’ RORE decreased most significantly from 17.8% to 12.8% in 2020, due to lower net income generation in the pandemic year.

Mid-sized banks reached a RORE of 11.4% in 2020, and therefore remained slightly above their 5-year average of 11.2%. Small banks continue to struggle, with an all-time-low RORE of 2.0% in 2020.

Outlook

Despite a relatively high CIR of around 80%, Swiss private banks operate a balance sheet-light business with client assets being held off the balance sheet. This leads to lower risk-weighted assets and, in turn, a higher RORE. As a consequence, large and mid-sized banks are still able to cover their cost of capital on a RORE basis.

However, small banks are constantly destroying value, since they clearly missed their cost of capital goals in the past years. The continued decrease in RORE for small banks should put further pressure on consolidation in this segment. However, since the owners of smaller private banks are not always acting in a fully rational way, this consolidation among small banks can still take a few years until these banks are really heavily loss making.


Recent uptick in deals of mid-sized banks​

At a glance

Consolidation in the private banking sector has slightly decelerated from an average of 9 transactions p.a. during the tax dispute episode between 2009 and 2016 to around 7 transactions p.a. over the past five years. In 2020, there were 6 private banking transactions, of which the disposal of Reyl & Cie SA was the largest in terms of AuM of around CHF 13.5bn (see table below).

After a wave of consolidation among weakly-performing smaller banks, in 2020 we primarily saw transactions with AuM above CHF 2.0bn with mid-sized banks involved as the most prominent group. These banks performed quite healthily, and the reasons for disposal were individual.

Outlook

Due to the increased risk in cross-border regulation, some banks had to redefine their core markets which led to a series of asset deals in the past. The low level of activity in asset deals over the last two years shows that banks have already retrieved from their non-core markets, and are focusing more on their core markets where they want to grow.

In the next few years, we would expect the number of transactions with smaller banks involved to increase again due to further pressure on profitability in this category of banks.

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Contact us

Martin Schilling

Martin Schilling

Director Deals Financial Services, PwC Switzerland

Tel: +41 58 792 15 31

Chiphong  Vu

Chiphong Vu

Advisory, Senior Associate, Deals Financial Services, PwC Switzerland

Tel: +41 58 792 14 80