Private banks achieved sharp increases in net income and assets under management in 2017, both in Geneva and the rest of Switzerland. For Geneva banks, net income rose between 17% (for Lombard Odier, to CHF 146 million) and 36% (Pictet, to CHF 572 million), broadly outpacing the banks based in German-speaking Switzerland that we selected for comparison purposes (Julius Baer, J.Safra Sarasin and Vontobel). Assets under management at the Geneva banks were up between 6% (UBP, to CHF 125.3 billion) and 17% (Lombard Odier, to CHF 274 billion) last year, supported to a large extent by buoyant markets in 2017.
Net new money was positive in Geneva, except at Edmond de Rothschild, which saw an outflow of CHF 2.4 billion because of “refocusing on priority clients and markets”, and at UBP, where there was an outflow of CHF 1.2 billion. However, although this indicator is closely watched, it has its limitations because banks generally do not break down net new money between private assets, asset management products, deposits and the currencies concerned, which are all factors that influence how profitable those assets are. Nevertheless, the figures confirm that banks remain highly capable of attracting capital.
Return on assets: between 5 and 17.6 basis points
For a bank to increase its assets under management, “the first method, the most obvious and attractive one in my view, remains that of acquisitions,” explains Guy de Picciotto, CEO of UBP. “The second one is to hire new teams. The third involves lending: given today’s very low interest rates, many clients want to borrow at 1% in order to try to make more than that on the financial markets, or to buy real estate.” So are banks offering cut-price loans to attract new clients? The boss of UBP doubts it, or “possibly for a small proportion of high-net-worth clients”.
Another trend observed in the last few years is that private banks have been making use of client deposits, whereas they did not do so in the past. Wider interest margins show that some banks are using these deposits to grant loans to clients, or are investing the deposits in the market to boost returns.
For Geneva banks, the return on assets – i.e. net income as a proportion of assets – ranged between 5 basis points and 17.6 basis points. Julius Baer and J. Safra Sarasin achieved returns of 21 and 18.5 basis points respectively in 2017.
Making up for repatriated assets
On the basis of 2017 results, what can we expect the next few years to bring for the wealth management industry? The aforementioned factors supporting asset growth will remain in place, but obstacles will also arise. “The first issue concerns interest rates,” says UBP’s Guy de Picciotto.
“We are in a period of rising interest rates, especially in the US. Demand for loans may fade.”
The second issue relates to clients clearing past tax liabilities and repatriating assets.
“Overall, the process will be complete by the end of 2018. The new countries with which Switzerland will automatically exchange information, such as Saudi Arabia and South Africa, are unlikely to have a considerable impact,”according to Mr de Picciotto.
Does he see any risk of a wave of departures among clients based in countries with unreliable or corrupt legal systems, to prevent their wealth from becoming known in their home countries? “Some clients have repatriated assets because they were obliged to do so as part of their tax amnesties. That explains why several banks saw weaker growth in assets under management last year.” However, Guy de Picciotto does not see any risk for Geneva’s banking industry: “Those repatriations could prove temporary, and both Switzerland – a very stable country – and its banking industry have maintained their appeal. However, if clients’ situations become untenable, they tend to leave their home countries and move to Monaco, Dubai or the US.”
Twenty years of overcoming obstacles
As well as the additional costs arising from new regulations – such as MiFID in Europe – tougher competition between banks is another factor making it harder to attract new money, continues Mr de Picciotto: “Some banks, particularly listed ones, need to deliver growth in assets under management because that is what the markets want to see. This results in a price war, particularly for very large clients.” Are clients negotiating more than in the past? “Some have negotiated, because bank fees in the banking secrecy era may have been higher than those of competing banks outside Switzerland."
" Today, however, our fees are fully aligned with, and sometimes more attractive than, those in other markets, and the quality of service we offer is much better in my opinion.”
With the European market – which is the number one export market for Geneva wealth managers – remaining “somewhere between closed and half-open”, is the future less bright than before? “For 20 years now, the media have been predicting the end of banks. It started with the internet bubble and continued with Switzerland’s agreement with the European Union on the taxation of savings income, but also the 2008 financial crisis, Rubik, the end of banking secrecy, the US fines, the emergence of the fintechs and, finally, automatic exchange of information. Despite all that, the Swiss banking industry is faring pretty well, although it may have consolidated and its participants may be larger than before. Many other industries would not have survived.”