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NNM growth has been vastly dominated by large banks in the recent past due to three reasons:
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.
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.
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.
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.
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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Director Deals Financial Services, PwC Switzerland
Tel: +41 58 792 15 31