One in ten of Switzerland’s exclusive private banks disappeared last year. The trend is set to worsen because those banks left standing aren’t drawing painful lessons from failed rivals, according to study that equates to shock treatment for the industry.

The problems in Swiss private banking are well-documented: the end of banking secrecy, a sickly economy in Europe – their traditional hunting ground – higher spending on lawyers and compliance staff, and a large chunk of expenditure in the costly Swiss franc.

This has become even more pronounced in the past year: white-glove private banks aren’t earning any fees from clients who are hoarding piles of cash instead of trading.

Pricey Cash Piles

In addition, banks pay 75 basis points on cash deposits above a certain amount with the central bank due to a negative interest rate policy – private banks forked out a total of 247 million Swiss francs last year for this, according to statistics from KPMG. 

Private banks including Pictet, Lombard Odier and Julius Baer have sought to pass on the costs to some clients to dissuade haven flows.

«White Glove» Wipeout

A study of 87 firms by KPMG does not include UBS or Credit Suisse because of their size, nor Genevan firms Pictet & Cie, Lombard Odier, or Mirabaud, which only began publicly releasing some financial figures two years ago.

The consulting firm was bleak in its predictions for last year (in German), but nevertheless included several more encouraging notes.

Bracing for Worse

This year's study contained none of last year's hopeful shimmers: «It’s only going to get worse,» said Philipp Rickert, head of the firm’s financial services practice in Switzerland.

Seven banks classed as the industry’s weakest performers were sold or liquidated in the last 12 months, and they were quickly replaced in the bottom group by other banks whose performance worsened.

Triple the Required Capital

KPMG exhorted the banks to adapt faster: «Radical change is urgently needed in the industry to prevent the situation from escalating even further.»

This requires investment, but many private banks prefer to bulk up on capital – to the point of holding several times the legal requirement to demonstrate their stability. These funds could be tapped to expand, KPMG argued, and for much-needed infrastructure investments.

Exclusivity as Silent Killer

The warning is the starkest yet from experts, who have long predicted that smaller players in the industry either have to grow in assets, focus, and specialize, or perish under the weight of rising costs.

Service is another sticking point: A good private banker is expected to be not just a trusted financial advisor, but to have a larger view of a client through his personality, his family, his hopes and dreams, and his future plans.

The irony for private banks in Switzerland is that the very thing which defines them – their exclusivity, their white-glove client service, and their attention to personal details that clients don’t get with retail banks like Raiffeisen – is killing them. 

Offshoring White Gloves

Banks like to refer to this as a «holistic» client view, though few client advisors actually possess it.

This meticulous, attentive style of service is pricey to maintain. Labor costs alone are very high, and they are still largely based in Swiss francs – after all, it is difficult to offshore the white-glove treatment.

«Desirable» Clients

Industry heavyweight UBS has openly said it doesn't want new money if it can't earn enough money with it. Many smaller, unprofitable firms are lax about ensuring that clients pay off.

«Many of these banks have clients who don't have enough assets, but they are giving them the 'big client' treatment. Eventually, that's going to hurt financially,» said Christian Hintermann, head of KPMG's advisory for financial services.

Nearly One-Fifth in Cash

In addition, the banks aren't making enough money to make the business they do get worth their while: an average of 18.5 percent of assets are currently held in cash or cash-like products, which doesn't earn any fees, as opposed to a mere 5 percent prior to the financial crisis.

Banks should instead be looking for larger clients who don't merely want to sit on their cash, but put it to work – the same elusive «desirable» clients that Zeltner is after for UBS.

80s-Era Software

Behind the scenes, banks in general have been slow to make their businesses more efficient. In industries like automotive or manufacturing, robotics and other automated processes have slimmed production lines and lowered assembly costs.

There is very little parallel in Swiss banking, which long posted fat margins and relatively low costs and risks.

Some Swiss firms still work with IT systems which date back to the 1980s, according to bankers – unthinkable in other industries.

Focus, Specialize or Die

Firms like Avaloq, Finnova and Temenos have prospered in recent years because banks are updating and unifying their IT platforms, which actually makes them more expensive to maintain, according to KPMG.

As other studies (in German) have pointed out, being a small private bank isn’t the death knell. Provided a bank can specialize and offer a product, service or market which isn't readily available elsewhere, it can thrive, KPMG concurred.

Some have done so: Lienhardt & Partner in Zurich and Bonhote, a Neuchatel-based private bank, have successfully targeted the real estate and property fund niche, respectively. Partner-run private bank Reichmuth & Co. in Lucerne targets institutional clients.

Missed Opportunity to Cash Out

A long-awaited wave of consolidation in private banking fizzled, partly due to a large part of their assets being «undesirable,» or undeclared to tax authorities. Those who could have cashed out waited too long, says KPMG.

«If you look at these weak performers, who wants to buy such a thing?» Hintermann says. Private bank owners may be able to sell a portion of their assets to a rival – probably not at a great price – but then are stuck with a financial entity and the corresponding costs until the bank's license can be returned.

«That's the reality for owners who have missed the moment to sell.»