European private banks are now under greater pressure to differentiate themselves from competitors as the end of bank secrecy and new technologies re-shape the sector, but the outlook for 2018 and in coming years is positive, according to analysts.
The operating environment has become more challenging with financial regulators tightening transparency and compliance rules. The global automatic exchange of information standard, which requires banks to collect information about the account balances and income from capital earned by their foreign-based clients and share it with the relevant tax authorities, has considerably reduced the incentives for clients to open an account with a private bank in another country.
Switzerland, which was well-known for its strict bank secrecy rules for years, adopted the standard on Jan. 1, 2017 and started exchanging information with foreign tax authorities from the beginning of 2018. As a result, domestic banks were hit by large fund outflows and this affected their ability to generate net new money, a key measure of profitability in the wealth management sector.
In its latest study of 85 Switzerland-based banks, KPMG found that over half, or 56% of them, reported net outflows in 2016, resulting in aggregate net new money of negative CHF43 billion, the weakest result in six years. The information exchange rules were part of the reason for the outflows but smaller banks have also been affected by cross-border rules which are limiting their ability to approach offshore clients, according to KPMG partner Christian Hintermann.
Net new money remained a challenge throughout 2017 but the outflows are expected to subside in 2018 and the results will be more positive, Hintermann said. "Even though markets were a bit rocky in early 2018 for most private banks, the prospects are pretty good."
Despite the outflows, 2017 saw "a significant increase" in assets under management at private banks, Hintermann said.
Bigger is better
Despite the regulatory challenges, European private banks are well positioned to benefit "at least in coming years" from the continuing growth in global assets with their "strong capitalization, negligible credit risks, and stable funding structures," S&P Global Ratings credit analysts said in a sector report in May.
Bigger banks are likely to be less affected by the increasing regulatory challenges or the growing threat from technology companies which are getting into the banking space. Smaller private banks, meanwhile, will have "to find a unique offer to justify higher fees for their specialized advisory services," S&P Global Ratings said.
Tougher regulation has made it more difficult for small banks to pursue a niche strategy and they are less able to invest in new technology, Hintermann said.
"For larger banks, the challenge also is to decide in which fields they play. The top two or three banks globally may be an exception but not for the rest. If you have a few hundred billion, then you still need to be very clear in which market to go, you still cannot have a full global offering," he said.
Tech competition
Competition from the technology sector remains largely indirect for private banks so far. "When you look at how robo-advisory [services have] developed, nobody really sees it as a standalone competition in the high-net-worth segment. Private banks are also using technology to add to the services they have and are less concerned about independent robo-advisors," Hintermann said.
Robo-advisers, as well as big technology companies such as Google or Amazon, could become a direct threat to private banks in the coming years but large private banks, in particular, can adapt, according to S&P Global Ratings' analysts. "A hybrid approach, combining algorithmic investments or recommendations with personal advice, could enable banks to lower costs and retain cost-conscious customers. We expect the larger players to have economies of scale to make the necessary investment into new technologies, while smaller banks might struggle with the associated costs," the analysts said.
Even though the European market is seen growing at a slower pace than that in Asia, many of the biggest private banks are expanding their Asia-based business as well as other emerging market operations, the analysts noted. However, some of the big European players are still interested in investing at home as well. Swiss group Julius Bär Gruppe AG, one of the global heavyweights in the sector, plans new acquisitions, branch openings and staff upgrades in Europe, Yves Robert-Charrue, head of the group's European operations told Reuters June 11.
This S&P Global Market Intelligence news article may contain information about a report issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here. S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
