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The Challenges Faced by Swiss Private Banks Amidst UBS’s Expansion

The landscape of Swiss private banks has been undergoing significant changes in recent years, with the emergence of larger banking institutions and the challenges faced by smaller and medium-sized banks.

The impending merger of UBS and Credit Suisse has created further uncertainty in the sector, impacting the earnings and growth prospects of these private banks.

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Over the past decade, several smaller Swiss private banks, managing a few billion francs in client assets, have vanished from the market. These institutions have been finding it difficult to compete with the likes of UBS, which is now expanding further through its merger with Credit Suisse.

While a recent survey by KPMG indicates that smaller private banks experienced a revival in interest income in 2022, fundamental issues persist. A significant number of these banks have a high cost-income ratio, primarily due to a challenging cost and revenue structure.

Moreover, limited investment capacity in new technology hampers their ability to adapt to changing market dynamics, which may ultimately contribute to their demise.

Medium-sized banks, with assets ranging from 10 to 100 billion francs, are also grappling with their own set of challenges. Although this group showed improved earnings last year, many of them still struggle with expense management issues, as evidenced by their high cost-income ratios.

KPMG attributes this lower earning power to the inability of mid-sized banks to specialize or benefit from economies of scale. Additionally, foreign subsidiaries of these banks may employ different earnings management systems, further complicating their financial performance.

Even major private banks, with assets exceeding 100 billion francs, face hurdles in maintaining profitability. Commissions, in particular, have proven to be a pain point for these institutions, as international clients repaid loans and withdrew funds from their private bank, affecting their overall performance.

Despite their stature and reputation, the major private banks, including Pictet and EFG, experienced higher cost-income ratios compared to the industry average. While these banks have managed to prioritize profitable growth over cost management, their margins remain relatively low.

Even after the merger of UBS and Credit Suisse, the analysis suggests that there was no significant UBS effect on Swiss private banks in the previous year. However, the united UBS aims to become a new benchmark for wealthy bank clients, putting pressure on Swiss private banks to expand and differentiate themselves.

The integration of Credit Suisse's assets onto a single platform presents an opportunity for UBS to penetrate new markets. This further intensifies the competition faced by Swiss private banks.

The impact of UBS on the sector is yet to be fully realized, but the pressure to expand and compete persists.