The alpine nation's wealth management industry's weakness was ruthlessly exposed in 2018: the number of private banks shrank dramatically, KPMG found. 

Consulting firms like KPMG, EY, and PwC pinpoint the vulnerability of Swiss private banks: an annual study from KPMG on Thursday listed the continuing weaknesses of the once-flourishing industry. Volatile market swings were the initial catalyst for last year's weakness.

Specifically, Switzerland now counts just 101 private banks, after eight institutes vanished in the last 18 months (just one gained a banking license from regulator Finma). This represents a drop of 38 percent – or 62 firms – since 2010.

M&A Gathers Pace

KPMG's analysts make clear that the spiral will continue. The consultants note that despite favorable first-quarter markets, bottom-line results continue to tumble, «which is likely to prompt a fresh wave of consolidation.»

The wave has already started: Bank am Bellevue sold itself to Luxembourg's KBL European Private Bankers, Syz has roused takeover interest, Falcon Private Bank is in talks, and Belgium's DeGroof Petercam is looking to sell its Swiss subsidiary.

Spending Surges

Two sets of data back up the trend: the sector's cost-income ratio has never been worse, KPMG said. The measure – expressed as an industry-wide median – has surged 1.9 percent to 83.6 percent, which represents an all-time high. Meanwhile, net new money great just 0.2 percent. Swiss private banks are losing market share, according to KPMG.

The consulting firm also fingered smaller private banks, with assets in the low single-digit billions, as weighing particularly heavily on the wider industry. A number of these firms have failed to alter their business or operating models or strategy adequately.

Mid-Sized Group Emerges

In other words, after the struggles of private banks in recent years – struggling to free themselves of their legacies, adapt themselves to a new, more transparent tax regime, tougher compliance, and regulatory guidelines – have tapered off, they have no excuses anymore for poor performance.

KMPG highlights that a group of private banks with more than $100 billion has emerged in recent years. Size, the conventional wisdom goes, is one way to buck the industry downturn, according to experts.

Industry Sobers Up

Swiss institutes are sobering up to the realization that they aren't winning their share of the worldwide growth in wealth: they aren't present enough, or large enough, in the faster-growing private banking hot spots.

Size seems to be indispensable, but building and maintaining foreign offices is expensive. Private banks of a certain heft are the only ones to be able to afford the time and funds it costs to build up abroad. KPMG puts the minimum size to successfully maintain a network of international branches at $100 billion in client assets.

Bad Omen For Small Players

The prediction is a bad omen for the swath of Swiss private banks which are small but hanging in there: too puny to pursue an ambitious expansion strategy and too hidebound to meaningfully alter their business into a profitable one.

KPMG correctly registered that the latest wave of consolidation to hit Switzerland's private banking industry this year has already accentuated.