Faced with declining assets, Swiss private banks are pumping the brakes on costs nearly across the board. But that is only a short-term solution.
The decline in assets reported by flagship Swiss private banks is considerable. Julius Baer's assets under management (AUM) have shrunk by 52 billion Swiss francs ($54.3 billion) since the beginning of the year, the Zurich-based bank announced in an interim report Monday.
Local competitor Vontobel reported a decline of 42.5 billion francs from the end of 2021, while EFG saw its AUM contract some 31 billion francs in the same period. At Credit Suisse, group-wide client AUM fell by around 222 billion francs year-on-year in the third quarter. Market leader UBS saw invested funds decrease by $726 billion. Sobering figures indeed.
Impatient Shareholders
Since the second quarter, challenging geopolitics and the poor stock markets have been hammering the earnings base of the wealth managers hard. There were bound to be consequences. While the management of some financial institutions was cautious over the summer, the bosses are now pumping the brakes.
It makes no difference whether the institutions have a broad shareholder base like Julius Baer, or whether they have entrepreneurial families as anchor shareholders, such as EFG International and Vontobel.
Job Freezes
Vontobel has surprisingly imposed a job freeze, planning to reign in spending by up to 70 million francs by the end of the year. EFG International set its sights on a significantly lower cost/income ratio (CIR) of 69 percent for 2025.
The measures are working, at least for now. Julius Baer has achieved a significant increase in gross margin since the beginning of the year. EFG International can also boast of earning more with less volume through September. At UBS, however, profits were down across the board in the third quarter. Although the world's largest private bank trimmed $348 million of operating expenses, revenues fell 10 percent, outpacing cost cuts which fell 6 percent.
Structurally High Cost/Income
What analysts at Barclays observed over the summer seems to be coming to pass. If earnings decline, Swiss private banks cannot continue their savings initiatives. Because revenues are heavily dependent on the sheer volume of assets, costs are mostly attributable to expensive client advisors, whom they go to great lengths to retain.
The CIR, already structurally high, is in danger of deteriorating further as a result. At Credit Suisse, this important metric recently reached 108 percent due to a series of losses.
If earnings continue to fall and firms do not want to make drastic job cuts, other expenses will face the spending scalpel. It could be the transformation of IT and digitization efforts in particular could be delayed. The industry as a whole is facing a Herculean task, where legacy systems account for a large part of the costs, and the conversion of IT services to the cloud also promises to be expensive.
Spending Without Alternatives
Listening to IT specialists and consultants, private banks have just begun the transition to the cloud. Moreover, there seems to be no alternative to this conversion, at least in the minds of the experts. Those unable to keep pace risk being forced out of the market in the medium term by new players or from other industries. The result is a difficult balancing act between saving and investing is looming on the horizon.
Julius Baer plans to spend about 1 billion francs on technology over the next three years and save 40 million francs annually. This paradoxically leaves managers stepping on the brakes with one foot and flooring the accelerator with the other, stressing the entire vehicle.
