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PwC’s Market Update on the Swiss Private Banking Sector 2019 The year 2018 proved to be challenging for Swiss private banks. The global equity market downturn in Q4 led to a significant decline in assets under management and profits. Swiss private banks reported a median return on equity of 4 %, significantly lower than the sector’s average cost of capital. Only 20 % of banks achieved a return on equity of 10 % or more in 2018. Small private banks in particular are struggling, clearly illustrated by a cost/income ratio of over 100 % for the first time in our records (median). In 2018 there were seven private banking deals, led by the Notenstein La Roche Privatbank transaction, where total assets under management of CHF 16.5bn were transferred from Raiffeisen Schweiz to Vontobel Holding. Developments in assets under management In the past five years, assets under management (AuM) have been primarily driven by performance growth induced by market fluctuations. In the same period, Swiss private banks’ ability to attract net new money (NNM) has been quite limited, contributing around +/−1 % to total AuM growth. Before the beginning of the tax disputes between Swiss private banks and several sovereign countries in 2009, NNM growth ranged between 3 % and 5 % per year. In 2018, the median performance growth contribution of -5.7 % to total AuM was heavily influenced by the global market downturn in the last quarter. Considering the rapid market recovery in the first half of 2019, we assume that many private banks have been able to recoup their losses. Growth in net new money Following the introduction of the Automatic Exchange of Information in 2017, median NNM growth was near zero for all categories of banks. This was due to the fact that roughly half of all private banks had positive NNM growth, balancing out the other banks’ negative NNM growth. Small banks, which were able to attract large NNM inflows of 3.8 % in 2016 and 4.2 % in 2017, were not able to carry their positive momentum forward into 2018, and were able to grow their NNM by only 0.1 %. On the other hand, large banks, which had the largest outflows of -5.1 % in 2016 and -1.0 % in 2017, were at least able to level out to zero NNM growth in 2018. Composition of assets under management Small private banks have the highest portion of advisory and execution-only mandates in their AuM, although the percentage declined from 74 % to 72 % between 2014 and 2018. This reflects the strong advisory focus of relationships at small private banks. With a further reduction of 3 % in mandates in their own funds, small private banks were able to shift 5 % of their AuM into discretionary mandates. There was little change in the AuM composition of mid-sized banks, which reported a 2 % increase in advisory and execution-only mandates at the expense of discretionary mandates. Large private banks, however, were able to more than double the portion of client assets in their own mutual funds, from 7 % in 2014 to 15 % in 2018. Number of banks and M&A activities in Switzerland In the last five years, the total number of Swiss banks has declined by 10 %, whereas the number of banks primarily operating in wealth management (stock exchange, foreign- controlled banks and private bankers) has decreased by a more significant 16 %. The private banking sector in Switzerland continued to consolidate in 2018, with seven trans- actions announced, which is slightly below the average number of transactions of around eight per year since 2002. The majority of transactions either involved smaller banks or were asset deals of around CHF 1bn each. Announced Target Stake Buyer Seller Purchase price AuM May 18 Notenstein La Roche Privatbank AG 100.0 % Vontobel Holding AG Raiffeisen Schweiz CHF 700m CHF 16.5bn Jul 18 MM Mourgue D’Algue & Cie 100.0 % Gonet & Cie, Banquiers privés Private individuals n/a CHF 1.0bn Jul 18 Schroder & Co Bank AG (Eastern European Portfolio) Asset Deal CBH Compagnie Bancaire Helvétique SA Schroder & Co. Bank AG n/a CHF 0.7bn Sep 18 Banque Paris Bertrand Sturdza SA 40.0 % Investcorp Private individuals n/a CHF 5.3bn Sep 18 Berenberg Bank (Schweiz) AG 80.1 % Private individuals Joh. Berenberg, Gossler & Co. KG n/a CHF 6.8bn Oct 18 Lombard Odier (US Portfolio) Asset Deal Vontobel Holding AG Lombard Odier n/a CHF 0.6bn Nov 18 Sallfort Privatbank AG 100.0 % Banque Heritage S.A. Private individuals n/a CHF 1.13bn 130 130 131 128 126 145 136 130 125 122 2014 2015 2016 2017 2018 248 253 261 266 275 Total banks Stock exchange-, foreign controlled banks, and private bankers Big banks, cantonal banks, regional banks, and other banks Source: SNB 74% 72% 21% 26% 5% 2% 2014 2018 64% 66% 29% 27% 8% 8% 2014 2018 70% 64% 23% 21% 7% 15% 2014 2018 Small-sized banks AuM < CHF 2bn Mid-sized banks AuM CHF 2-10 bn Large-sized banks AuM > CHF 10bn Advisory & execution-only mandates Discretionary mandates Client assets in own mutual funds -0.5% -1.4% 3.8% 4.2% 0.1% 3.3% -0.9% -0.8% 0.2% 0.3% 0.5% -0.9% -5.1% -1.0% 0.0% 2014 2015 2016 2017 2018 AuM > CHF 10bn AuM CHF 2-10 bn AuM < CHF 2bn 0.6% -0.9% -1.4% 0.8% 0.2% 5.2% -4.0% 2.0% 6.7% -5.7% 2014 2015 2016 2017 2018 Performance growth Net new money growth 83 private banks in 2018 14 years of data 75 KPIs 88 % market coverage # of private banks in 2018 6 th edition since 2010 7 deals in 2018 Private Banking Switzerland Market Update July 2019

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  • PwC’s Market Update on the Swiss Private Banking Sector 2019The year 2018 proved to be challenging for Swiss private banks. The global equity market downturn in Q4 led to a significant decline in assets under management and profits. Swiss private banks reported a median return on equity of 4 %, significantly lower than the sector’s average cost of capital. Only 20 % of banks achieved a return on equity of 10 % or more in 2018. Small private banks in particular are struggling, clearly illustrated by a cost/income ratio of over 100 % for the first time in our records (median). In 2018 there were seven private banking deals, led by the Notenstein La Roche Privatbank transaction, where total assets under management of CHF 16.5bn were transferred from Raiffeisen Schweiz to Vontobel Holding.

    Developments in assets under managementIn the past five years, assets under management (AuM) have been primarily driven by performance growth induced by market fluctuations. In the same period, Swiss private banks’ ability to attract net new money (NNM) has been quite limited, contributing around +/−1 % to total AuM growth. Before the beginning of the tax disputes between Swiss private banks and several sovereign countries in 2009, NNM growth ranged between 3 % and 5 % per year. In 2018, the median performance growth contribution of -5.7 % to total AuM was heavily influenced by the global market downturn in the last quarter. Considering the rapid market recovery in the first half of 2019, we assume that many private banks have been able to recoup their losses.

    Growth in net new moneyFollowing the introduction of the Automatic Exchange of Information in 2017, median NNM growth was near zero for all categories of banks. This was due to the fact that roughly half of all private banks had positive NNM growth, balancing out the other banks’ negative NNM growth.

    Small banks, which were able to attract large NNM inflows of 3.8 % in 2016 and 4.2 % in 2017, were not able to carry their positive momentum forward into 2018, and were able to grow their NNM by only 0.1 %. On the other hand, large banks, which had the largest outflows of -5.1 % in 2016 and -1.0 % in 2017, were at least able to level out to zero NNM growth in 2018.

    Composition of assets under managementSmall private banks have the highest portion of advisory and execution-only mandates in their AuM, although the percentage declined from 74 % to 72 % between 2014 and 2018. This reflects the strong advisory focus of relationships at small private banks. With a further reduction of 3 % in mandates in their own funds, small private banks were able to shift 5 % of their AuM into discretionary mandates. There was little change in the AuM composition of mid-sized banks, which reported a 2 % increase in advisory and execution-only mandates at the expense of discretionary mandates. Large private banks, however, were able to more than double the portion of client assets in their own mutual funds, from 7 % in 2014 to 15 % in 2018.

    Number of banks and M&A activities in Switzerland In the last five years, the total number of Swiss banks has declined by 10 %, whereas the number of banks primarily operating in wealth management (stock exchange, foreign-controlled banks and private bankers) has decreased by a more significant 16 %.

    The private banking sector in Switzerland continued to consolidate in 2018, with seven trans-actions announced, which is slightly below the average number of transactions of around eight per year since 2002. The majority of transactions either involved smaller banks or were asset deals of around CHF 1bn each.

    Announced Target Stake Buyer Seller Purchase price AuM

    May 18 Notenstein La Roche Privatbank AG 100.0 % Vontobel Holding AG Raiffeisen Schweiz CHF 700m CHF 16.5bn

    Jul 18 MM Mourgue D’Algue & Cie 100.0 % Gonet & Cie, Banquiers privés Private individuals n/a CHF 1.0bn

    Jul 18 Schroder & Co Bank AG (Eastern European Portfolio) Asset Deal CBH Compagnie Bancaire Helvétique SA Schroder & Co. Bank AG n/a CHF 0.7bn

    Sep 18 Banque Paris Bertrand Sturdza SA 40.0 % Investcorp Private individuals n/a CHF 5.3bn

    Sep 18 Berenberg Bank (Schweiz) AG 80.1 % Private individuals Joh. Berenberg, Gossler & Co. KG n/a CHF 6.8bn

    Oct 18 Lombard Odier (US Portfolio) Asset Deal Vontobel Holding AG Lombard Odier n/a CHF 0.6bn

    Nov 18 Sallfort Privatbank AG 100.0 % Banque Heritage S.A. Private individuals n/a CHF 1.13bn

    130 130 131 128 126

    145 136 130 125 122

    2014 2015 2016 2017 2018

    248253261266275

    Total banks

    Stock exchange-, foreign controlled banks, and private bankers

    Big banks, cantonal banks, regional banks, and other banks

    Source: SNB

    74% 72%

    21% 26%

    5% 2%

    2014 2018

    64% 66%

    29% 27%

    8% 8%

    2014 2018

    70% 64%

    23%21%

    7%15%

    2014 2018

    Small-sized banksAuM < CHF 2bn

    Mid-sized banksAuM CHF 2-10 bn

    Large-sized banksAuM > CHF 10bn

    Advisory & execution-onlymandates

    Discretionary mandates

    Client assets in own mutual funds

    -0.5%-1.4%

    3.8% 4.2%

    0.1%

    3.3%

    -0.9%

    -0.8%

    0.2% 0.3%0.5%

    -0.9%

    -5.1%

    -1.0%0.0%

    2014 2015 2016 2017 2018

    AuM > CHF 10bn

    AuM CHF 2-10 bn

    AuM < CHF 2bn

    0.6%-0.9%

    -1.4%0.8%

    0.2%

    5.2%

    -4.0%

    2.0%

    6.7%

    -5.7%

    2014 2015 2016 2017 2018

    Performance growth

    Net new money growth

    83private banksin 2018

    14 years of data

    75 KPIs

    88 % market coverage# of private banks in 2018

    6thedition since 2010

    7 deals in 2018

    Private Banking Switzerland Market UpdateJuly 2019

  • ProfitabilityAfter a short-lived recovery in the median operating income margin to 89 bps in 2017, it dropped to 86 bps, the lowest since the beginning of our records. The operating expense margin levelled off, and has remained more or less stable at around 74 bps in the last few years. Owing to the continued worsening in the operating income margin, the operating profit margin of 12 bps in 2018 was also a new historical low. Sixty per cent percent of private banks reported lower profit margins than the previous year. The latest decline in operating income and operating profit margin can be primarily attributed to the downturn in global equity markets in the last quarter of 2018.

    Income margin developmentThis year, the operating income margin of small banks fell below the 100 bps mark for the first time, reaching 90 bps. This can be attributed to both volume loss and margin decline in AuM and loan amounts. A further increase in operating expenses put an additional strain on small banks’ operating profit. The result was that 52 % of small banks made a loss, reporting a negative median operating profit of -5 bps. A 10 bps decline in mid-sized banks’ operating income between 2017 and 2018 was largely driven by lower net fee and commission income, while their cost base remained relatively stable. The income margins of large banks remained constant, with a small improvement in the operating income margin of 2 bps in 2018.

    Expenses per FTELarger Swiss private banks reported significantly higher personnel expenses per full-time equivalent (FTE) compared with mid-sized or smaller private banks (all measured as median). Personnel expenses include salary costs and bonuses, as well as social insurance benefits and pension fund payments in favour of employees. Employees of large private banks make up the vast majority of all Swiss private banking employees in our database (32,800 FTEs or 88 % in 2018). Mid-sized banks and their 3,500 FTEs account for roughly 9 % of all employees, and employees of small banks account for 900 FTEs or 3 % of total FTEs. The total number of FTEs declined by 3 % in 2018.

    Cost/income ratio The cost/income ratio is the main KPI for measuring a private bank’s efficiency and compares a bank’s operating expenses against its operating income. Historically, smaller private banks have had significantly higher cost/income ratios, reaching a new unfortunate peak of above 100 % in 2018. Small banks clearly lack sufficient AuM to fully utilise their infrastructure. At the same time, mid-sized and large private banks have been able to stabilise their cost/income ratios at slightly above 80 % over the last three years. As eight of the 27 large banks in our sample reported cost/income ratios of below 70 %, there still seems to be significant room for efficiency gains at other large private banks. At the overall market level, the median cost/income ratio increased from 64 % in 2005 to 85 % in 2018.

    Return on equity With a median return on equity (ROE) of approximately 4 %, the majority of Swiss private banks are consistently failing to reach their cost of capital, and are subsequently diluting shareholder value. Small banks in particular have underperformed recently. In 2018, more than half reported a net loss and negative ROE. Only two small banks reported an ROE of above 10 %. In total, only 18 of the 83 Swiss private banks observed reported an ROE of above 10 % in 2018. Banks in French-speaking Switzerland clearly lead the pack, with the top five in terms of profitability all headquartered in Geneva (all above 15 % ROE).

    © 2019 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers AG, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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    Contacts

    Christoph BaertzPartner Deals Financial Services+41 58 792 14 [email protected]

    Martin SchillingDirector Deals Financial Services+41 58 792 15 [email protected]

    92% 90%93%

    85%

    101%

    76% 77%

    82% 81%

    83%

    77%80%

    82% 82%

    81%

    2014 2015 2016 2017 2018

    AuM > CHF 10bnAuM CHF 2-10 bnAuM < CHF 2bn

    1.4% 1.4%

    0.3%1.1%

    -0.5%

    5.0%6.0%

    4.3% 4.4% 4.0%

    5.3%4.6%

    5.8%

    4.2%5.3%

    2014 2015 2016 2017 2018

    AuM > CHF 10bnAuM CHF 2-10 bnAuM < CHF 2bn

    195 190 198 199 202 211 226

    247 236 232 236 235 237 247 251

    2014 2015 2016 2017 2018

    AuM > CHF 10bnAuM CHF 2-10 bnAuM < CHF 2bn

    in CHF thousands

    11 24 20

    71 67 54

    107 103

    81

    10 25 16

    73 63

    48

    106

    97

    80

    10 14 15

    54 56 49

    101

    98

    78

    15 16 13

    56 51 49

    105

    94 85

    -512 13

    54 46 49

    90

    84 87

    2014 2015 2016 2017 2018

    Operating profit (in bps)

    Net fee & commission income (in bps)

    Operating income (in bps)

    AuM > CHF 10bnAuM CHF 2-10 bnAuM < CHF 2bn

    94 95

    87 89

    86

    76 7773 74 74

    Operating income (in bps)Operating expense (in bps)

    2014 2015 2016 2017 2018

    18 18

    13 15 12

    Operating profit (in bps)

    Authors Martin Schilling, Chiphong Vu, Manuel Rüdisühli

    Special thanks for supporting us in this study: Marina Kopp, Pascal Krattiger, Joshua Hergersberg, Emanuel Weber