Private Banking Market Update – 2023 in a nutshell

In 2023, the global financial environment faced challenges such as geopolitical tensions, inflation concerns, and a looming recession. However, Swiss and Liechtenstein-based private banks managed to achieve relative stability, benefiting from their home countries' political stability and safe haven status. Each private bank size cluster generated solid return on equity figures and cost-income ratios below 80%. Especially the small private banks continued their upward trend in 2023, primarily thanks to higher interest rates. Inorganic growth activities via M&A remained low, with banks prioritizing internal stability over external expansion. The study reveals how banks navigated the turbulent waters, seized opportunities, and achieved solid performances. We wish you an insightful read.

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In 2022, the decline in AuM marked the end of record heights, but not all size buckets experienced a return to positive AuM growth in 2023. Large private banks continued to attract net new money (NNM) in 2023, with an even higher growth rate compared to the prior year. However, large private banks still remain 8% below their peak AuM level in 2021, which was influenced by pre-interest rate hike developments. 

Net new money represented the key driver for AuM development in 2023, with market effects having a comparatively lower impact. Medium-sized banks failed to capitalize on this driver, experiencing a net new money outflow for the first time since 2019. Smaller private banks achieved comparable AuM and NNM growth rates to their largest counterparts, possibly due to ex-Credit Suisse clients seeking smaller institutions as their preferred wealth management partners. 

The financial figures showed a significant increase in net interest income, leading to historically high operating income margins across all size clusters, particularly in small-sized banks. On the other hand, net fee and commission income remained almost unchanged compared to the prior year. 

Smaller private banks benefited most from increased interest rates given the net interest income has a higher impact on total operating income at smaller banks due to the loan business having a higher weight in terms of total business volume. However, medium and large-sized banks also took advantage of increasing net interest income margins, albeit to a lesser extent, as their interest-bearing business is of relatively lower importance in their overall business activities. The sustainability of these high net interest margins and income for the private banking sector is doubtful due to anticipated declines in interest rates.

Large and medium-sized private banks have consistently outperformed smaller counterparts in terms of cost-income ratio (CIR). However, this trend has shifted, with smaller banks achieving a total CIR of 71% in 2023. This is particularly due to a stronger emphasis on interest-related banking activities and high interest rate levels, which reduced the CIR from 84% in 2022 to 71% in 2023. Medium-sized private banks failed to generate equal excitement, with their combined CIR only decreasing by 2.5 percentage points compared to 2022. The largest banks reported an increase in their CIR to 70% in 2023, primarily due to an absolute decline in net commission income and an increase in operating expenses. However, this has not been offset by a sufficient increase in net interest income generation.

In 2023, small private banks experienced a significant profitability upswing. Large private banks, despite their high AuM volume, experienced a reduction in their return on equity for the second consecutive year. The group struggled with a higher operating cost base, outweighing the growth in AuM volume and the - although limited - positive effect from interest-bearing business activities. Medium-sized banks achieved a modest progression in their RoE to 5.4%, but this is still too low from an equity investor's point of view. Small private banks demonstrated their ability to leverage the opportunity presented by higher interest rates, achieving a record-high RoE of 8%. Nevertheless, some institutions within this size group were still loss-making in 2023.

As interest rate cuts are generally expected, small private banks will be most affected by RoE volatility. It is questionable whether the outstanding results seen in 2023 are sustainable, and it will become increasingly challenging for inherently loss-making banks to navigate upcoming periods and become profitable again. Large private banks are poised to derive greater advantages from a lower interest rate environment, which facilitates growth in AuM through a combination of net new money NNM influx and performance effects. They are expected to outperform smaller and medium-sized counterparts in the next few years and in the long term.