Our recent PwC Swiss private banking market updates (see here for the 2022 update) found that larger private banks were better able than their smaller counterparts when it came to generating attractive returns on equity (RoE).
However, our analysis showed that a few smaller private banks were also able to achieve comparable levels of financial success. We’ve taken a closer look at the business models adopted by these smaller players to be successful, also in a challenging market, and achieve similar RoE to their larger competitors despite the assumed disadvantage in size.
Financial performance – Median return on equity
Comprehensive but detailed survey
We sent an identical questionnaire to Swiss and Liechtenstein private banks with less than CHF 30 billion in assets under management (AuM). They were asked 20 key questions covering the core pillars of their business model and their operational set-up. The 32 respondents were subsequently grouped into three buckets (Top 5, Medium performers and Low 5 performers) based on the publicly available financial results for 2019 to 2021. The financial results of these 32 institutions were additionally compared with the results achieved by the large, Swiss-based private banks (>CHF 50 billion AuM).
Key findings
Our sample analysis reveals that the Top 5 performers consistently outpaced their peers from 2019 to 2021. They set themselves apart from the other two surveyed cohorts, which struggled to achieve robust RoE figures. Notably, the Top 5 group demonstrated an impressive ability to increase returns, even in challenging market conditions such as those experienced in 2020.
How do smaller private banks outperform?
On the basis of our survey we’ve identified four key business model levers used by the successful smaller banks:
- Product offering
- Clientele
- Personnel structure
- Operational landscape
Product offering
The Top 5 banks have a clear and focused product strategy with a narrow product portfolio that mainly relies on core investment instruments. This helps them achieve better financial results by reducing overhead costs, complexity and product development expenses. Other banks offering a wider product range can close the gap in profitability by controlling costs and streamlining processes.
Top performers focus on individualising client portfolios, tailoring them to specific needs and investment objectives. This contributes to the bottom line, builds strong client relationships and attracts new clients through positive word-of-mouth endorsement.
The most important asset classes offered by the Top 5 banks are traditional asset classes such as equities and bonds. Other banking groups have a more diverse asset class, offering additional asset classes such as alternative investments as well as structured products or derivatives. It’s interesting to note that the Top 5 primarily put together the client’s portfolio individually, whereas medium and low-performing banks follow a standardised approach.
“Size does matter in private banking, but smaller players can still operate highly successfully by making smart decisions on their products, target clientele, personnel and operational landscape.”
