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UBP in the press 05.10.2016

Private Banks: Adapting for future growth

Private Banks: Adapting for future growth

Le Temps - Recent half-year results announcements by Swiss private banks have shown a number of similarities: cash-related business has grown significantly, transaction and fee income is under pressure, and net new money (NNM) is seeing fairly weak growth. This is a clear reflection of the fundamental trends in our industry.

Firstly, the figures show that clients are highly risk-averse, even accepting negative interest rates on short-term investments. Clients are also seeking refuge in stable but low-yielding bond investments, aiming to preserve their capital and obtain a limited but guaranteed income until maturity. The situation has enabled private banks to increase sharply their interest-related revenues, taking advantage of opportunities to invest excess portfolio cash, as well as growing their loan books as a result of very low borrowing rates. It is an unusual situation for these banks, whose main remit is to provide advice and manage portfolios in return for a fee, and which are generally very cautious in their asset/liability management.

We are also seeing a decline in trading activity, which is affecting brokerage revenue. This trend is not being caused solely by client risk aversion, but also by increasing regulatory constraints. Current regulations in Switzerland and across all financial markets are aimed at making bank fees more transparent, providing necessary controls over products sold in each country, defining cross-border rules and ensuring that products are always aligned with clients' risk profiles. These regulations are now applied by all banks, and the new environment they have created is making banks less responsive and restricting the scope of their activity, inevitably pushing down volumes and therefore reducing brokerage revenue. On top of that, there is a big shift among the most active "self-directed" clients towards more suitable and less costly solutions, such as online brokers.

Banks' results for the first half of 2016 highlight ongoing low levels of net new money, a situation that KPMG describes as "No New Money" in its report entitled "Clarity on Performance of Swiss Private Banks". Even though everyone agrees about the long-term growth potential of the client segments targeted by private banks, it is a zero-sum game: in a low-growth world, genuine wealth creation is limited, and any increase in assets under management is being driven by the performance of listed assets. Variations in the amount of NNM being attracted by the various banks are mainly to do with differences in recruitment and acquisition strategies. In simple terms, business lost by one bank is gained by another, but meanwhile margins are being eroded across the board. At the same time, banks are now missing out on a large proportion of wealth creation as clients shift towards direct investments. Overall, adding in the business impact of tax compliance programmes, private banks' performance in terms of NNM was disappointing in the first half of 2016 and has been for several years now.

In this gloomy environment, we can acknowledge two facts: Firstly, in order to maintain their growth strategies, private banks are taking the risk that their profitability and balance-sheet strength will deteriorate over the long term. Secondly, they are having to deal with losing market share to direct investments, which are attracting a rising proportion of global wealth. Of course, real estate is an asset class that has always been over-represented in global client wealth. However, at a time when returns on risk-free assets are so low, clients are increasingly focusing on direct investments, including real estate, infrastructure, new technologies, aircraft and gold.

It is still the case that the main rivals to private banks are other private banks. More than ever, however, they are also seeing competition from direct investments that bypass private banks, generating little revenue for them, except possibly the interest on mortgages used to buy real estate. Direct investments are attracting an increasing proportion of investment flows, but are still marginal in terms of private banks' overall revenues.

Private banks' growth issues are not solely related to reduced wealth creation and stiffer competition: they are also being caused by insufficient returns from traditional assets and the increasing appeal of direct investments. The trend is confirmed by the amount of funds that can now be raised for technology, venture capital and infrastructure projects. Overall, a significant portion of new savings flows are bypassing the established activities of private banks and are therefore not making any contribution to their growth.

As a result, banks need to make changes in two areas. Firstly, they need to adjust their costs in line with their growth potential and ability to generate revenue. Secondly, they need to reinvent their offering, so that they can continue to capture and manage the bulk of their clients' financial assets and increase NNM, without necessarily engaging in aggressive and costly recruitment policies.

Read the original article in French: www.letemps.ch


Michel Longhini
CEO Private Banking


This document is a marketing document and reflects the opinion of Union Bancaire Privée, UBP SA, (thereafter UBP) as of the date of issue. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it directed to any person or entity to which it would be unlawful to direct such a document. This document has not been produced by UBP’s financial analysts and is not to be considered as financial research. Reasonable efforts have been made to ensure that the content of this document is based on information and data obtained from reliable sources. However, UBP has not verified the information in this document and does not guarantee its accuracy or completeness. UBP accepts no liability whatsoever and makes no representation, warranty or undertaking, express or implied, for any information, projections or any of the opinions contained herein or for any errors, omissions or misstatements. The information contained herein is subject to change without prior notice. UBP gives no undertaking to update this document or to correct any inaccuracies it it which may become apparent. Past performance is no guarantee for current or future returns and an investor may consequently get back less than he/she invested. This is a marketing document and is intended for informational and/or marketing purposes only. It should not be construed as advice or any form of recommendation to purchase or sell any security. It does not replace a prospectus or any other legal documents that can be obtained free of charge from the registered office of a fund or from UBP. The opinions herein do not take into account individual investors’ circumstances, objectives, or needs. Each investor must make his/her own independent decision regarding any securities or financial instruments mentioned herein and should independently determine the merits or suitability of any investment. Investors are invited to read carefully the risk warnings and the regulations set out in the prospectus or other legal documents and are advised to seek professional advice from their financial, legal and tax advisors. The document neither constitutes an offer nor a solicitation to buy, subscribe for or sell any currency, product or financial instrument, make any investment, or participate in any particular trading strategy. This document is confidential and is intended only for the use of the person to whom it was delivered. This document may not be reproduced (in whole or in part) or delivered to any other person without the prior written approval of UBP. Telephone calls to the telephone number stated in this presentation are recorded. When calling this number, UBP will assume that you consent to this recording. UBP is authorised and regulated in Switzerland by the Swiss Financial Market Supervisory Authority and is authorised in the United Kingdom by the Prudential Regulation Authority. UBP is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority.


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