The private banking margins have come under increasing pressure over the last few years. Compared with 2004, private banks in Switzerland, Liechtenstein and the Nordic countries have managed to improve their margins. In contrast with the development of the margins, return on equity has developed positively everywhere since 2004. Under consideration of the international differences in capital ratios, Swiss banks are the leaders.
Operational efficiency has improved in all countries since 2004. On average, private banking suppliers managed to decrease cost/income ratios by almost five percentage points. With a cost/income ratio of 65.7% Swiss banks are in the lower ranks. However, as regards revenue they are amongst the leaders: together with the banks in Japan and Liechtenstein, Swiss banks generate the highest overall revenue and gross profit per employee.
Measuring investment performance relative to the benchmark, banks from the Nordic countries perform best. Average investment performance of Swiss banks has decreased slightly in comparison to foreign competition since the last study was carried out. Regardless, the Swiss banks still belong to the best third or the best half depending on indicator.
Size and growth
The study examines how size, profitability, efficiency and growth stand in relation to one another and how they influence investment performance. To the “eternal” question of the advantages and disadvantages of size, a clear-cut answer could not be found. Overall, limited evidence can be found for economies of scale measured against profitability; however, smaller banks appear to be more efficient. Size and growth variables do not positively correlate. In other words: large banks do not grow more quickly than small banks. For the first time in this study, it could be shown that banks which systematically outperform with their investment funds also benefit directly from a high inflow of net new money. This is a clear indication of the increasing importance of investment performance with the private banking clients as a criterion for selecting a bank.
Sector credos need challenging
Detailed examination of the figures of Swiss banks uncovers some surprising aspects: For example, there is a negative relation between the amount of assets under management per employee and the corresponding margins achieved. As a countertrend to “open product architectures” one can observe that it is becoming more and more important for private banks to have own investment funds as a criterion for differentiation. Initiator and head of the study, Prof. Dr. Teodoro Cocca: «These results should encourage reflection within the sector. Some of the traditional sector credos, such as the necessity of growth or open and therefore undifferentiated product offers, should at least in part be critically challenged.»
The internationalization of private banking continues. This development can also be seen in the intense expansion efforts of the large Swiss banks. In the meantime, however, other international large banks also nourish international or even global ambitions. The intensifying competition between local suppliers and «global players» is reflected in across-the-board convergence of margins. Swiss banks appear excellently positioned in this environment. They have gained themselves an excellent reputation, can rapidly adjust their range of products according to investment trends and set the benchmark for various economic indicators. Despite the strengths of Swiss private banks, room for improvement can be identified in both investment performance and operational efficiency. Professor Cocca concludes: «Swiss banks are still the champions in private banking. However, technique and fitness need fine-tuning so that a demanding public continues to be captivated.»