Private Banking Switzerland: Market update 2022

Volume continues to attract volume

Again and again, big private banks have demonstrated their ability to capitalise on the scale of their business structure, their trustworthiness and their global footprint. This has also applied in the favourable market environment post-pandemic: the large banks in our sample saw NNM increase by 4.4% in 2021, an even higher growth rate than the previous two years. At the end of 2021 these institutions had average AuM of CHF 290 billion.

After years of struggling to attract net new money, in 2021 medium-sized private banks (those in our sample had average AuM of CHF 14.4 billion at end-2021) continued on an upward trend that started in 2020. Interestingly, this NNM growth has been driven by Swiss entities of large European and US banking groups ‒ the very same players that were the main cause of negative net new money figures from 2017 to 2019.

While the small players in our sample (with average AuM of CHF 2.2 billion at end-2021) have recovered from heavy outflows in 2020 to post respectable NNM growth of 4.3% in 2021, they have failed to keep up with large private banks over the overall 2017 to 2021 observation period. Thanks to their more advanced asset management skills, larger players have been able to achieve better performance than their smaller counterparts in any market environment.

We expect this pattern to continue: renowned, trustworthy brands will generally be able to maintain NNM growth of around 4% p.a. regardless of the markets, while small and mid-sized players will be more dependent on the markets and will find it more difficult to attract consistent NNM inflows.

And it’s not just volume growth where size counts

Large and medium-sized players have also outperformed in terms of cost-income ratio (CIR). Banks in these size buckets have improved the efficiency of their operations and recorded significantly lower CIRs in 2021. Small banks, by contrast, have seen the highest cost-income ratios throughout the entire observation period.

These CIR rate developments are driven by the operating business: Banks had been experiencing pressure on operating income margins since 2017, but in 2021 all three categories saw them stabilise or even improve slightly year on year. Again there was a clear pattern, with larger banks recording bigger improvements than their smaller counterparts. As for the outlook, while we don’t see any easing of competitive pressure in the near future, results from interest business in an environment of higher interest rates should have a positive impact on total operating income margin in the next few years.

On the operating expense side, a significant factor is personnel expenses, which traditionally account for 65% to 75% of total OPEX. The average number of FTE reached record-high levels in 2021, notably at big banks, while smaller players saw staff numbers remain relatively stable. Given the huge importance of skilled employees in the relationship-focused private banking business, we expect larger banks to continue stepping up staff numbers, while the number of FTEs will likely remain stable at smaller banks. Given the war for talent going on in many industries including banking, annual expenses per employee also look set to rise slightly annually over the next few years. General and administrative expenses, up slightly every year since 2017, are also likely to increase year on year in the foreseeable future.

Large banks dominate operating return metrics

Over the observation period, large banks also recorded significantly higher returns on invested capital, measured in terms of both operating return on total equity (ROE) and operating return on regulatory required equity (RORE). Medium-sized banks have also been able to turn AuM growth into profitability, but to a lesser extent than their bigger peers, owing to a lack of similar economies of scale. Small private banks, which tend to rely on a comparatively high capital base for reasons of reputation, have failed to deliver the sort of operating ROE and RORE numbers that investors expect. Looking ahead, we expect large players to deliver even better returns on invested capital in a favourable market environment, while small banks continue to struggle to generate real value for their shareholders.

In this blog we’ve covered some of the key findings of our research. For more detail, plus additional information on mergers and acquisitions activity in the Swiss private banking business, check out the full paper. Naturally we’d also be glad to discuss the findings of our research and any other matters related to private banking in person.