Swiss private banking has got its mojo back not only in the form of near record-high profits but also a source of vitality flowing again, which almost seemed to have dried up after various tax disputes.
Record profits were predicted, but their sheer size came as a surprise. One Swiss wealth management bank after the other has posted well to very good half-year results in the past few days.
This does not only apply to their profits but in particular to the amount of new business they did, a clear indication of «genuine» growth in the sector.
Billions Flood In
Clients have entrusted considerable sums to Swiss private banks. In the second quarter, market leader UBS said $25 billion of net new fee-generating assets went into its core Global Wealth Management division and another $9 billion flowed into its fund business.
At Zurich-based company Julius Bär, fresh inflows doubled year on year to 10 billion Swiss francs ($10.8 billion), while its competitor EFG International overshot its target by pulling in around 4.2 billion francs in the first half of the year.
Even the clients of Geneva-based UBP, which struggled with a drop in interest margins, entrusted it with another 2 billion francs.
Short-lived Celebrations?
However, the percentage growth in new money is in single figures, and the stream of new money cannot wash away the reality that even major players such as UBS are facing shrinking margins on private banking.
Nonetheless, this summer, net new money is back, but the «welcome home» party could be short-lived.
Curse of Clean Money
The influx of funds has dried up since the de facto end of Swiss banking secrecy. The fact that assets under management grew was despite this was primarily down to bullish stock markets since the 2008 financial crisis.
This caused the funds invested to balloon, but if the market performance is excluded, a sobering picture emerges.
As consultancy McKinsey pointed out last year, new money growth was 1 percent in 2019 compared with 7 percent in 2007. The profit margin shrank to 80 from 97 basis points over the same period. However, the cost margin fell only marginally to 58 from 59 basis points. Overall, the McKinsey consultants calculated that the profit pool of the Swiss private banking was 50 percent below that of 2007.
Consolidation
The lack of organic growth fueled acquisitions. At the personnel level, this took the form of poaching entire teams from the competition and of constant consolidation at the institutional level.
Since 2010, the number of private banks has fallen by almost 40 percent. A year ago, the Swiss financial center had exactly 100.
On the other hand, the lack of growth led to peculiar acts of denial such as the practice of posting new money several times across divisions – which is allowed in Switzerland provided an appropriate declaration is made but meets with opprobrium abroad.
Some leading private bankers even said new money was a misleading metric and no longer wanted to bother with it. Now that customer funds are flowing more freely, such voices have fallen strangely silent.
Stock Market As Bellwether
The question arises of whether the influx of funds is sustainable. It can be gleaned from the banks' quarterly earnings reports that client activity is intertwined with the situation on the stock markets and bullish investor sentiment – the same impetus that drives securities trading.
The banks have already warned that trading volumes will decline over the summer. Will the same thing happen to fresh inflows? In the face of such uncertainties, it has become even more important for the industry to extract more from the assets it already holds.
From the client's perspective, this should be done primarily through returns, but the banks are also becoming increasingly interested in a steady income.
No Strategy
UBS said Tuesday it had succeeded in selling its clients more higher-margin financial products as well as mandates that pay regular fees. The world's largest private bank still has some catching up to do on this. Of the $3.230 trillion in assets under management in the GWM division, only $1.461 trillion generates fees – just over a third.
Julius Baer has been more successful on this. Over 56 percent of its clients’ assets are already packaged into such products. But even mandates are ultimately only a means of stabilizing existing profitability. They are not a forward-looking strategy.
All the more reason for bank bosses to use the breather the markets are taking for time to reflect.
Focus Instead Of Growth
Perhaps the question which should be asked is about focus. What are you actually for? Is your institution a universal bank like UBS or Credit Suisse, a sales bank that outsources everything but its core business – or a specialist provider with exclusive expertise?
Once that question has been answered, it is important to adapt processes accordingly and, above all, focus on clients. New money might then flow in all on its own.
Otherwise, cut-throat competition will start up again as soon as the influx of money dries up. That might not end well for the industry.
