Retail banks seem to be flourishing while small private banks flounder. A PwC study takes a look at a Swiss paradox.

The air is getting thin for small Swiss private banks. At least that seems to be the case according to the «Market Insights 2022» study by global consultancy PwC, which concludes that size plays a far more critical role in private banking than it does in the domestic retail sector.  

The large private banks benefit from strong brands, international presence and differentiated service. The small institutes, on the other hand, have to contend with high operating costs.

Tackling Headwinds

In a challenging market where the low-interest-rate environment was exacerbated by the pandemic, the large banks still benefitted from significantly higher operating returns on regulatory required equity capital (RORE).

In 2020, for example, the large private banks generated an operational RORE of about 38 percent on average while the medium and small ones only made 10 percent. «Furthermore, the medium- and small-sized private banks were unable to attract substantial NNM inflows similar to the cluster of the large private banks in the time period from 2018 to 2020,» the study said.

Little Impact on Retail

The same does not seem to hold true for the retail banking sector, where RORE performance between 2018 and 2020 remained stable. «This is partially driven by the lower AuM share in the business volume, which implies less exposure to global financial markets,» PwC said.

But this does not completely explain why the smaller retail banks are able to keep up with their larger brethren, but PwC did say there were three factors that could explain this. 

They are focused «on a clearly specified geographical region within Switzerland, which reduces the competitive environment», and they are relatively efficient because of their standardized product portfolios while also emphasizing the types of lending that produce higher returns.

Operating Costs Weigh on All

The small institutes in private banking and retail do have to contend with higher operating costs than their larger competitors. But this seems to have a larger impact on private banks, the authors of the study write.

«This can be explained by the fact that the proportion of employees covering non-client-facing activities with fixed cost character (e.g. compliance officers, back-office employees etc.) is clearly higher at small private banks compared to their medium- and especially large-sized peers,» PwC said.

As a result, they indicated that a potential solution was modernizing and digitalizing processes although doing that would entail additional investment. Another option would be to acquire other institutes or hire additional relationship managers. «Again, for such measures, sufficient capital must be available. An increase of efficiencies could also be realized by simplifying and standardizing the product and service offering», PwC said.

Looking Externally

A further way to improve efficiency and cut costs is to look externally. As an example, Geneva-based private bank Lombard Odier has been offering services to other banks for years.

Hypothekarbank Lenzburg, a regional mortgage lender, has an open banking product called Finstar. It has collected a good deal of expertise with it in the past few years – as well as numerous clients.