Competitive Swiss Private Banks

Published today, the «International Private Banking Study 2005» by the Swiss Banking Institute of the University of Zurich analyzes the competitiveness of 156 banks active in private banking. The study includes banks from Austria, Benelux, France, Germany, Italy, Liechtenstein, Switzerland, the UK and the US. After the difficult years between 2001 and 2003, Swiss banks have reemerged as highly com- petitive players by improving their profitability and investment performance for their clients.

Profitability

Margins in the private banking sector are almost back to the levels registered before the market slowdown four years ago. Competitive forces and the often cited pressure on mar- gins seem to be offset by a stronger recovery in general market conditions. Profitability is also back on track: average return on equity is the highest in Benelux (29.3%), followed by the US (23.6%), Switzerland (19.7%), the UK (19.6%) and France (19.5%). Since Swiss banks and banks from Liechtenstein show significantly higher equity capital levels com- pared to their peers, their ROE value would be significantly higher if compared on the ba- sis of equal capital levels.

Operational efficiency

Operational efficiency has gained much attention in private banking as the sector has be- come more accounting driven. Generally speaking, cost/income ratios have stabilized at around 65% - roughly the same levels as before the stock market bubble. Total revenues per employee are generally the highest among banks from Switzerland and Liechtenstein. This is clearly attributable to the high average assets under management per employee at banks from the two countries. Private banks from Switzerland, Liechtenstein and the US are the largest value generators when measured by stakeholder income (net profit plus taxes plus personnel costs). As most private banks are not listed, shareholder value is not measurable.

Investment performance

Investment performance measured by the weighted average outperformance across all in- vestment funds of the private banks of one country show that Swiss and US banks are in the upper tier of all banks when these performance measures are compared. In the most important single comparison – the net long term overall performance – Switzerland ranks second behind the US who leads the ranking. In the categories mixed funds over five years, Swiss banks rank number one. Compared to the last study, it is only the Swiss banks that have improved their overall average (net) outperformance. On risk-adjusted terms, US banks are ranked significantly lower.

Size and growth

The study further explores how size, profitability, efficiency and growth affect each other and investment performance. Overall, there seems to be some evidence for a moderate level of economies of scale in terms of profitability. However, size has no significant influ- ence on efficiency – when measured with cost/income ratios – in private banking. Size and growth variables are not positively correlated. The study shows that the net new money flow reflects past investment outperformance of a bank’s investment funds, thus implying that superior investment performance attracts money in private banking.

Conclusions

The changing private banking landscape leads to a multitude of factors that divide the win ners from the losers more clearly than ever before, thus bringing a new element of unpre- dictability and volatility into an already competitive arena. The predominance of Swiss private banking still seems evident as key figures such as revenues and assets under man- agement per employee are the highest; although the recognized trend to a more open inter- national competition could challenge this position. Switzerland is both a legacy market and a synonym for contemporary private banking virtues. The big question that remains is the prospect of growth. The author of the study, Dr. Teodoro D. Cocca, concludes by saying: “Swiss banks have proven to be very adaptive in a challenging environment, which could be a guarantee for finding a balance between profitable and growth business.”

nullDie Studie “The International Private Banking Study 2005” (in Englischer Sprache) kann unter www.isb.unizh.ch kostenlos bestellt oder heruntergeladen werden.null