The Swiss private banking market will continue to be highly profitable, but competitive and regulatory pressures are building up and are par...

The Swiss private banking market will continue to be highly profitable, but competitive and regulatory pressures are building up and are particularly felt among the country’s mid-tier private banks, according to a recent report by KPMG, the business services consultancy.

KPMG says the Swiss private banking market remains highly attractive. “With over a third of the world’s private banking assets being held by Swiss banks, Switzerland is the traditional headquarters of international private banking, and despite a deterioration in
market conditions recently, it remains a highly profitable business sector,” said the business services consultancy.

The report, entitled, Hungry for more? Acquisition appetite and strategy in the global private banking and wealth management industry, added that Swiss private banks’ solid reputation for stability and discretion is highly valued. “And with banking being one of the country’s major industries, there is ready access to a large pool of talented, highly-qualified and experienced people.”

Nevertheless, Swiss small and medium-sized banks are suffering from a comparatively high cost base. KPMG sees this will be exacerbated by the increasing costs of complying with tightening international regulations. “It is estimated that the cost of compliance amounts to approximately 8 per cent of total costs for banks with fewer than 100 employees and 3.7 percent for larger organizations,” said the report.

Historical comparative advantages of Swiss private banking such as complete client confidentially, are under threat from regulatory authorities. “Demographics also play a role: younger, more sophisticated and more demanding inheritors do not necessarily share the loyalty of the current generation of investors,” said the report.

The report added: “They may well decide to take their money elsewhere, unless the banks can persuade them to stay or offer onshore facilities in their own countries.”

KPMG believes small and mid-tier private banks should look at five areas in order to remain, or improve competitiveness, these include:

Tackling Costs
New technologies have become a driving force for dramatic efficiency gains and cost reductions. Expect to see further IT-based rationalisation, both at the front-end (customer-friendly investment strategy tools, Web-based interactive communication platforms with clients) and in the middle and back-office (ranging from simple IT streamlining to increase flexibility and reduce costs, to outsourcing of entire IT processes), says KPMG.

Back-office and middle-office operations may expect headcount reductions as a consequence. Many Swiss private banks are facing a dilemma over outsourcing, with a need to balance cost-cutting with continued client discretion and trust.

Other measures are likely to include greater focus on performance-related remuneration for relationship managers. At a broader level, we are likely to see more organisational restructuring and focusing on core competencies.

Clear Product Strategy
Banks are assessing which are their most profitable products, and how they can improve sales by more precise targeting of clients. There are also decisions to be made on whether banks continue to sell their own products or focus on streamlining their offering of third-party products to maximise client satisfaction, argues KPMG.

Knowing the Customer Better
Clients’ needs are changing and additional pressure is developing from their shifting demands, says the study. “More and more high net worth individuals have come to expect comprehensive, harmonised and sophisticated financial and tax advice,” said KPMG.

"Traditional" family wealth requirements are declining in importance as a younger, more demanding generation assumes responsibility and seeks out more lucrative investments (such as hedge funds). Banks are beginning to pay closer attention to what clients (and particularly future clients) perceive to be the most important products and services, said the report

This encompasses high value-added services by tax and financial planning specialists, as well as advice on sophisticated products to clients from Asia-Pacific, Eastern Europe and Latin America. The new generation of clients is in general less risk-averse, less loyal and more performance focused.

Attracting New Clients
KPMG’s research says that banks are applying a variety of measures to attract new clients, ranging from outright acquisitions or setting up new operations abroad, through alliances, to recruiting customer relationship managers who will leverage existing client relationships or acquire new clients abroad on the bank’s behalf.

Establishing new operations abroad or undertaking acquisitions are both risky and costly options, especially for medium-sized banks which may not have the financial critical mass to expand into foreign markets such as Asia-Pacific or Latin America. Initial investment often requires additional resources to be spent subsequently on infrastructure or, in the case of acquisitions, in the integration issues arising from cultural differences or new regulatory environments.

It takes a great deal of capital strength to break out of the Swiss/European market and into faster growing regions, given the high investment required and the relatively slow payback that can be expected. Alliances are proving successful, as they involve considerably less strain on resources and usually provide a faster pay-off than outright acquisitions, argues KPMG.

“The less costly option is to recruit specialists to acquire new clients in other, mainly emerging, markets,” said the research.

It added: “A mid-sized Swiss private bank may be able to build upon its image and long-standing reputation abroad, and can offer a whole range of private banking services which are often quite unknown to clients in emerging markets, combined with tax and other ‘family office’ specialist advice.”

Strategic Re-Assessment
Ultimately, argues KPMG, there may come a time when, for whatever reason, it makes more sense to sell. This may include situations where owners are unwilling to undergo necessary restructuring; an attempt to rationalise the client/activity portfolio by selling non-core operations; a situation where alliances or acquisitions are not deemed possible in the short to medium term; or perhaps when a new owner generation prefers a “cash-out” instead of continuing to run the family business.

In this situation, it becomes crucial for banks to make a precise assessment of when is the best moment to sell, so that attractive deals can be achieved in the home market.