Swiss private banks closed a record number of M&A deals in 2017 after a slowdown in the previous year as many have adjusted their business portfolios, but domestic deals remain few and far between, professional services firm KPMG said in a study published Aug. 23.
The Swiss private banking space has been in flux for the past couple of years as regulatory changes, together with Switzerland joining the global standard for automatic exchange of information, or AEOI, have put pressure on the sector and triggered a wide-reaching restructuring.
Many banks are now rearranging their business to serve the world's richest people, while still battling net asset outflows as a result of the AEOI and cross-border regulation limiting their ability to freely approach offshore clients.
This has particularly impacted smaller banks in the country that do not have the scale or international exposure to weather the ongoing changes in the market.
Since 2010, the number of Swiss private banks has fallen by 34% to 107 as of June 30, KPMG said. But domestic consolidation has been difficult because big Swiss banks lack the appetite to swallow smaller rivals.
Out of the 16 M&A deals made by Swiss private banks in 2017, only five were part of the consolidation in the domestic market, where smaller banks were taken over by other Swiss institutions, KPMG said. In 2016, there were just two consolidation deals as fund outflows at Swiss private banks were highest due to the AEOI. This standard provides for the mutual exchange of information on financial accounts between tax authorities in a bid to fight tax evasion.
Net new money, a key indicator of the amount of new business in private banking, saw positive median growth of 0.8% in 2017 following two years of negative development, KPMG found.
"This reversal was primarily driven by the implementation of the first wave of AEOI in 2016, which had resulted in large one-off outflows associated with EU-based clients in particular," it said. Even so, the sector's aggregate net new money in 2017 remained weak, accounting for only 0.9% of total assets under management, KPMG said.
Furthermore, the number of Swiss private banks that recorded positive net new money exceeding CHF1 billion in 2017 was lower than that of institutions that booked outflows of more than CHF1 billion — seven and 12, respectively, KPMG said.
Even though the overall outlook for Swiss private banks in 2018 is rather positive, the sector remains challenged in terms of cost management and in need of further consolidation. While the median gross profit margin of the 90 banks in KPMG's sample rose by an annual 21.4% in 2017, operating costs surged at almost the same rate, KPMG said.
"Operating costs at many banks rose in line with operating income — a worrying sign that insufficient attention is being paid to cost control and opportunities are being missed to improve shareholder returns," KPMG said.
The poor key metrics that have been hard to remedy even in a positive market environment could mean that some banks are missing consolidation opportunities as well, according to the study's findings.
"Owners of [underperforming] banks must urgently challenge their current situation and strategy to form a realistic view of what can be changed and whether they should more actively consider selling the bank," KPMG's experts advised.
There are factors likely to drive a strong consolidation within the Swiss private banking sector, but the positive macroeconomic environment and rising deal prices make it hard to predict exactly how this is going to play out in the future.
"While some owners might be dissuaded from selling due to reduced pressure or better prospects, others might believe the time is right to divest while sale prices are increasing," KPMG said.