Private Banking Switzerland: Market update 2023

What’s moving the domestic private banking sector? Some key highlights of our latest Market Update 2022 publication.

Increased interest levels - a curse in terms of AuM volume

Large private banks saw their total assets under management (AuM) decline by 14.3% to roughly CHF 2’650bn by the end of 2022. This was predominantly because of unfavourable financial market conditions particularly owing to higher interest rate levels, which in turn eroded company valuations. Another factor, which contributed to this observed AuM decline were lower net new money growth rates versus prior years. Medium-sized banks, which had seen a remarkable increase the previous year, experienced a drop in AuM in 2022 too, mainly due to financial market performance. However, the decline was less pronounced than at larger private banks. 

AuM at smaller private banks contracted the least in relative terms. After previously underperforming larger private banks, this cluster has now put in a stronger relative performance. Along with medium-sized players, they may have been benefitting most from the challenging situation at a large Swiss universal bank starting in the 4th quarter of 2022, prompting increased inflows of net new money.

Not all size groups achieved better cost-income ratios

Small and medium-sized banks managed to reduce their respective cost-income ratio to 83% and 78% respectively in 2022. This was mainly because their income outstripped their expenses in absolute terms, primarily thanks to increased interest income counterbalancing lower net commission income.

Large private banks, by contrast, had a more difficult time in 2022, with their average cost-income ratio rising slightly to 69%. This was primarily because their AuM-based commission income fell more significantly than interest income was able to compensate this decline. The achieved personnel expenses reduction in absolute terms - presumably due to lower variable components - hindered the average CIR to increase even further. Nevertheless, the 69% CIR remains a strong rate compared with other previously observed periods.

Small banks’ profitability remains unsatisfactory despite higher interest income

In 2022, large private banks continued to lead the market from a profitability perspective by maintaining high profitability KPIs. Despite lower operating income, they managed to align their operating expenses, preserving their competitive edge and generating satisfactory investment returns on average.

Medium-sized banks saw only a modest rise in profitability on average, with a 0.6% increase in return on equity, mainly due to better net interest income. Despite the improvement, their profitability remains behind expectations, pointing to inherent structural challenges that may require such private banks to reassess their business models.

Compared to prior years, small private banks reported impressive bottom-line growth in 2022, with increases in net interest income more than offsetting the decline in net fee and commission income. Smart strategic directions coupled with favourable interest rate levels almost quadrupled their average return on equity. However, they have yet to reach profitability levels that would be deemed particularly attractive from an investor’s perspective.