Switzerland's wealth managers have never fully recovered to pre-financial crisis levels, according to McKinsey data seen by finews.asia. The pandemic is the latest watershed event to hit the battered industry.
Twelve years separate the global financial crisis of 2008/09 and the coronavirus-induced economic crisis – not enough time for Switzerland's storied wealth managers to recover, according to McKinsey data seen by finews.com.
According to the consulting firm, the pool of profits earned by Swiss private banks is below that of 2007 – before major mortgage-related losses, and largely prior to the end of lucrative offshore banking for foreigners. The McKinsey data illustrates the trio of woes to befall the industry: lack of growth, dwindling revenue, and a rigid cost base.
Elite Handicap
In 2019, net new money vanished to an average one percent, compared to 2007, when banks were hauling in an average of seven percent of fresh money from clients. Revenue margins tanked to 80 basis points, from 97, in the same period – but cost-to-income margins kept relatively steady at 58 basis points (59 bp in 2007).
A sin of omission, according to Jan Quensel, associate partner at McKinsey in Zurich: «Costs have taken on renewed significance after the correction of assets under management. And spending on front-facing functions is a significant chunk, which grew the fastest in the last three to four years, at nearly three percent,» he told finews.asia. That is now proving the elite industry's handicap going into the coronavirus turmoil.
Mandates Come Through
Swiss houses are still showing comparatively strong margins, according to a report by McKinsey last month examining wealth managers in western Europe. In Switzerland, the average revenue profit stands at 80 basis points, compared to Europe's average of 73 points – largely because Swiss firms are more successful at selling high-margin discretionary mandates.
Effectively, Swiss private banks have managed a more complete or rounded offering as foreign competitors: they reap an average 42 basis points from recurring revenue, against a backdrop of since 2007 falling brokerage fees and retrocession payments.
Revenue Roiled in Crash
The corona crisis is about to roil the revenue mix for wealth managers, according to McKinsey: brokerage fees as a revenue component are back, thanks to the trading boom early this year. By contrast, recurring revenues tapered as a side effect of assets dropping amid financial market swings.
In Europe, clients hiked their already-high cash component to 33 percent, from 30 percent previously. High cash holdings are a double whammy for banks, which earn nothing on cash and cash-like products, and also have to pay surcharges on Swiss francs in Switzerland due to negative interest rate policy.
Cuts Through All Levels
As a result, margins are stuck at lows, growth is uncertain – and spending cuts appear to be the only leverage banks have. «We believe front-to-back spending cuts along the core banking processes are coming, supported by a reduction in complexity, for example in markets and products,» McKinsey's Quensel said.
Further out, cuts alone aren't enough. The lenders to the wealthy need to figure out how to grow, which according to McKinsey they can achieve by seeking closer ties to their clients and acquiescing to client needs better. The buzzword is «client experience,» fostered by digital channels, which are enjoying renewed momentum due to the pandemic.
Digitization isn't the natural habitat of Switzerland's wealth managers, which were graded poorly in a recent study by Oliver Wyman. Private bankers also need to work on their pitch: one-third of clients weren't contacted proactively by their advisers during the rough-and-tumble trading months of March and April, according to Quensel.
