Swiss Private Banking thwarts the financial crisis

Despite severe revenue shrinkage in the course of the financial crisis, Swiss private banks can still be found among the most competitive players internationally. However, offshore business models have stagnated as pressure on them intensifies. The latest edition of the «International Private Banking Study» from the Swiss Banking Institute at the University of Zurich confirms this tendency in an analysis of the competitiveness of 263 private banks in eleven countries for the years 2007 and 2008.

Swiss private banks were overall able to achieve net new money inflows in 2008 despite substantial outflows at particular institutes. Banks following a conventional offshore business model thereby showed weaker growth rates than institutes with an onshore focus.

Figures also show a negative correlation between assets under management per employee and margins which were realized on these assets. Furthermore, an intensified trend towards open architecture concepts can be observed.

«The private banking margins have come under increasing pressure over the last few years,» the leader of the study, Professor Teodoro D. Cocca, explains. However, banks in Switzerland, Liechtenstein, the Benelux Countries and Scandinavia have managed to keep their margins on a constant level. Return on equity has developed negatively everywhere since 2007. Under consideration of the risks which are subject to the equity, Swiss and Liechtenstein banks show the highest figures. This is due to the high average BIS Tier one capital ratio in these countries.

Size is not essential

The study examines how size, profitability, efficiency and growth stand in relation to one another. «Size was not a clear advantage within the time period analyzed,» Prof. Cocca says. There is indeed a positive correlation between the size of a bank and realized margins. However, there is also evidence of smaller institutes generating higher per capita revenues and profits.

Furthermore, the study shows that it is difficult for very successful banks to maintain their advance over a whole market cycle. Banks which are successful in a boom period are on average hit stronger by the subsequent market downturn. This suggests that these banks tend to take higher risks.

«The financial crisis has left a clear mark on the private banking market,» Prof. Cocca says. Although this crisis is hardly digested, new challenges arise in the form of regulatory pressure in connection with the ongoing discussion about banking secrecy. Strategic risks for private banks have increased in the course of this discussion. «This will lead to winners and losers and provoke significant restructurings in the private banking market,» Prof. Cocca adds.

The increasing diversity of different business models is quite noticeable. Whereas some players enforce a strategy of independency, some others pursue the contrary approach, building fully integrated models. As there is no clear evidence for the superiority of one particular model, both approaches seem to address specific client preferences and should therefore continue to coexist in the market.

Margins under pressure

As Prof. Cocca says, the trend towards fully tax-compliant business models will have a significant influence on the private banking industry in the next years. This tendency will be a particular challenge for banks with a significant share of undisclosed assets in their clients’ books. «Given the international pressure as well as the recent regulatory trends, banks risk to be caught in a strategic trap unless they adapt their business models,» Prof. Cocca adds. Furthermore, a transformation towards full tax compliance would hurt bank‘s margins. In order to keep margins higher, cross-selling efforts and a stronger emphasis on expanding the product range will be necessary.

The changes in the private banking market do not only challenge banks but also call upon authorities. It is up to them to guarantee legal security for existing private banking clients during the restructuring process and to ensure a favorable international playing field for the banks.