The flow of net new assets reduced to a trickle and soaring costs combine to cause a massive headache for Swiss private banks. So far, the damage has been limited, a new study shows. That might change though.
Consultants hate to be proven wrong. It happened to Axel Oliver Sarnitz (pictured below). The partner of German consultant firm zeb was forced to admit as much at the presentation of the new Private Banking Study: His experts had been pretty far off the mark with their 2012 predictions for the industry.
The decision to henceforth accept only clean money became a much easier hurdle to take for Swiss private banks than zeb had anticipated. They more than compensated the outflow of black money with new assets, Sarnitz concluded.
Rescued by the Market
What his team didn't know back in 2012: the markets came to the rescue of Swiss private banks in an unexpected way. In the years from 2010 to 2014, critical as they were for the transition, customer assets appreciated to 2'550 billion francs, a net increase of 300 billion. Meanwhile, new money only contributed a third to the increase of the asset base, zeb said.
«Conditions in the market during the years in questions helped Swiss private banks massively,» Sarnitz concluded at a press conference. They won't be able to rely on this factor in future, he thinks.
Margins Under Pressure
Slowing growth in emerging markets, a lack of impulse from the U.S., the simmering debt crisis in Europe and geopolitical conflicts all contributed to the expectation that the markets won't yield quite as much in future. «We do not see any support coming from this side,» the German banking expert said.
That is exactly the aspect the consultant firm is highlighting in its latest study. What would happen, zeb wants to know, if markets wouldn't yield much from now through 2020, costs and net new money stagnated and the management of the bank dropped their tools.
On «Thin Ice»
This answer is clear: Margins, already under pressure following the surge of the franc in January, would decline substantially. Of the 20 private banks analysed by zeb, only four would retain a «healthy» margin (gross profit relative to assets under management) of over 20 basis points.
In a bear market – with a ten percent drop in book values over five years – only two of the 20 banks in the study would remain profitable. Sarnitz sees a lot of «thin ice» for the industry, or in a free adaption of Warren Buffett: in low tide, most Swiss private bankers are left stark naked.
The clock is ticking for the industry, according to zeb. The business models have to be spruced up, an effort consultants like to help with.
The German firm recommends the banks to set themselves apart from the mass, reduce the complexity of their business and to make good use of the digital technologies available. Sarnitz is aware of the fact that many will be out of their depth with these tasks. As some competitors, zeb expects a third of Swiss private banks to disappear within five years.
