Private Banking in Switzerland Facing Fundamental Change
2009 bringing significantly lower earnings for Swiss private banks; wave of consolidations expected; despite the economic crisis and increasing regulatory pressure, Swiss private banks are sticking to their strategies.
Zurich, March 18, 2009—Top managers at Swiss private banks rank the current economic crisis as the most severe since 1924 and are operating on the presumption that there will be a wide-ranging wave of consolidation. This is the finding of a survey by the international strategy consultants Booz & Company among 20 top opinion leaders in Swiss private banking, looking at the current position in their industry. “The results are a warning to be cautious,” says Carlos Ammann, Managing Partner of Booz & Company in Switzerland. “While there is general agreement amongst the top private bankers interviewed on the extent of the crisis, at the same time they are demonstrating confidence that their own business model is not threatened. Furthermore, the majority of those interviewed judge that the strategy pursued to date will also enable them to gain market shares.”
Further losses in earnings of up to 30% expected
The effects of the economic crisis are not fully reflected in the financial results 2008 of the Swiss private banks due to a very strong first half year, and a number of private banks have managed to benefit from significant capital inflows. Given massive losses in the value of assets under management and the significant erosion of margins, however, the biggest efforts to be made by the banks still lie ahead. In FY 2008, the private banks had to accommodate losses in earnings of around 20%. According to calculations by Booz & Company experts, unless there is a significant recovery in the financial markets in FY 2009, a further 30% contraction in earnings must be expected.
Realignment needed in offshore private banking
No one had expected a financial market crisis on this scale. Those interviewed are equally surprised by the determination and speed with which foreign governments are attacking banking secrecy in Switzerland. The reactions of the market players are very different: for the megabanks operating worldwide, business involving undeclared assets has long been up for reassessment – here, it is the operative risks and the concern about loss of reputation which are the main considerations. For the medium-sized and small private banks, protection of privacy has traditionally been a key part of their business philosophy – and these market players are correspondingly challenged by the latest demands, since in addition they often lack the “multi-shoring capabilities” of the megabanks. The example of other offshore centres, however, makes it clear that clients are reacting very nervously to changes in the regulatory requirements.
The Booz & Company analysis distinguishes between three fundamental sets of issues which private banks need to consider very closely for their future strategy: which markets and customer segments should be served offshore? Where should a comprehensive cross-border range of services be offered? In which markets is onshore market handling sensible, and which market might even become a second “domestic market”?
The large private banks have already made significant investments in “onshore” representations. However, individual locations need to be re-evaluated with a view to the changed market conditions.
Cost pressure is increasing, and further consolidation lies ahead
Due to the changed earnings situation, the private banks face the challenge of further reducing the cost base. “The variable elements of pay are proving to be very helpful in the downturn, as it enables the cost base to be reduced in the short term. However, further and even more far-reaching cuts are needed to ensure long-term profitability,” explains Andreas Lenzhofer, Principal at Booz & Company in Zurich who oversaw this survey. All those interviewed believe that private banks without a clearly-defined profile or with an unclear ownership structure cannot survive, and that scale-driven mergers to preserve profitability are inevitable.
“That said, in view of the major challenges being faced, it should not be forgotten that so far Switzerland as a base for business and finance in general – and the Swiss private banks (apart from the well-known exceptions) in particular – have survived the current financial crisis relatively well,” says Lenzhofer. “While those banks with a real or ‘perceived’ underwrite from the state are able to profit from massive inflows of cash, in many cases these funds are simply being parked with them and can be won back again with a comprehensive private banking services portfolio.”
Those interviewed agree that the early-warning systems of most private banks have proved of little help to date in understanding how the crisis came about and its effects. Booz & Company experts are therefore stressing the importance of thinking in scenarios and anticipating possible consequences, particularly in volatile times.
The study suggests that the banks need to develop strategies for the extreme cases, such as the complete and uncontrolled melt-down of banking secrecy. “Reflecting about a company’s own abilities can also open up new opportunities,” explains Ammann. “The knowledge and experience of the Swiss private banks in trans-border private banking are unique. These strengths can be expanded even further through suitable acquisitions and strategic alliances.”