The earning power of many Swiss private banks remains modest, according to an annual study. Hopes of wresting wealthy clients away from UBS, which is busy integrating Credit Suisse, are a tall order.

Over the past decade, the number of Swiss private banks has shrunk significantly, with mainly smaller institutions with a few billion francs in client assets disappearing.

According to KPMG's annual survey, the smaller private banks were able to somewhat avoid this fate last year. The turnaround in 2022 was mainly due to interest income, which flowed again making them significantly more flush with the turnaround in interest rates, as the report released Tuesday showed.

Is Bigger Better?

This gives the small banks with assets under management of less than 10 billion Swiss francs ($11.2 billion) some breathing space. But fundamental problems remain unsolved. For one thing, this cohort of banks suffers from a challenging cost and revenue structure, resulting in a cost-income ratio (CIR) of 80 percent or higher for about half of the 46 banks surveyed.

Secondly, the capacity for investing in new technologies is significantly lower at the small banks than at the large ones, as the study shows, leading KPMG analysts to the conclusion this particular banking segment will continue to die.

Medium-Sized Banks in a Bind

The situation is hardly better for the 19 medium-sized banks with assets under management of between ten and 100 billion francs.  This group, which includes numerous branches of foreign banks, did see earnings rise significantly last year. Nevertheless, many of them don't have their cost side sufficiently under control, reflected in a CIR that is mostly in the red zone of 80 percent or above.

According to KPMG, this insufficient earning power is due in part to mid-sized banks neither excelling as pure niche players nor exploiting economies of scale like their bigger counterparts. Another factor may be that subsidiaries embedded in foreign groups operate a different earnings management system than in Switzerland.

Large Banks Searching for Growth

At first glance, the large private banks with assets of over 100 billion francs fared poorly in the KPMG comparison. The biggest damper on their performance was the commission business. Among other things, it suffered from the fact that international clients in particular repaid loans and withdrew funds from their private bank last year.

Despite the lowest gross margins, by comparison, the so-called Big 8,  from Pictet to EFG, achieved a CI ratio almost 15 percent better than average. That freed up the institutions to focus less on cost management and more on finding profitable growth.

Necessary Acquisitions

This seems to have worked quite well so far as the Big 8 are concerned, which have grown massively over the past decade, and continue to play in the top leagues of European banks, according to the authors.

Further leaps in growth, especially among the big players, will be only possible through acquisitions, which were marginal last year, and completely silent this year.

No UBS Effect Yet

According to the study, the much-cited UBS effect didn't manifest itself at Swiss private banks last year. In any case, net new assets growth fell to 45 billion Swiss francs after the record year of 2021, with the large private banks being particularly affected.

However, the last word has probably not yet been spoken. Wealthy clients tend to delay following their client advisors' advice when they change managers.

Tough Competition

The pressure on Swiss private banks to expand could even increase because of the combined UBS, as the bank aims to become a new yardstick among wealthy bank clients.

According to KPMG, the banking colossus could move into new spheres if it succeeds in one day shifting the huge asset pile acquired from Credit Suisse onto a single integrated platform.

Reputational Damage

According to the authors of the study, the withdrawal of client assets in 2022 also suggests that the reputation of the Swiss financial center has suffered as a result of the Credit Suisse debacle, but it's uncertain whether this loss of trust will linger.

In any case, a large proportion of the clients of Swiss private banks are still willing to pay a premium for client-oriented and reliable banking services in a highly competitive Swiss financial industry.