Light at the end of the tunnel? April 8, 2014 Contents Current - - PowerPoint PPT Presentation

Light at the end of the tunnel?

April 8, 2014

McKinsey & Company | 1

Contents

▪ Current state of industry – where are we today? ▪ What is the health of (Swiss) Private Banking? ▪ How to cope with long-term challenges? ▪ Conclusion

McKinsey & Company | 2

Private Banking industry averages

Substantial differences in performance between regions

SOURCE: McKinsey Private Banking Survey 2013

Net inflow North America Asia Switzer- land 2012 Growth Percent Middle- East Performance AUM growth Western Europe Revenue margin Cost margin Profit margin Eco- nomics Bp

Worse than last year In line with last year Better than last year

8 6 2 8 5 3 7 17 10 5 3 2 4 18 14 23 59 82 27 52 79 17 65 82 21 68 89 68 40 108

McKinsey & Company | 3

Private Banking has lost attractiveness – Switzerland and UK hit worse than Western Europe and Asia

Switzerland Western Europe Profit pool, indexed Profit pool, indexed UK Asia Profit pool, indexed Profit pool, indexed Profit margin Bp 35 23 39 21 Profit margin Bp 35 17 66 22 54 100

• 46%

2012 2007 72 100

• 28%

2012 2007 82 100 2007

• 18%

2012 44 100 2012

• 56%

2007

McKinsey & Company | 4

Margins in Swiss Private Banking, bp

Decline in profit pool driven by decreasing revenue margins and costs

Cost margin Revenue margin Slight recovery of revenue margin after bottom in 2010, decline in 2013 Profit margin 40 60 80 100 2013E 12 11 10 09 08 2007 87 89 88 85 88 96 97 66 68 66 62 64 63 58 24 22 23 21 21 33 39

SOURCE: McKinsey Private Banking Survey

Increase of cost margin in all years, except 2010 and 2013 60 76 Cost/income ratio

McKinsey & Company | 5

Consolidation has started

SOURCE: Swiss Nationalbank, Association of Foreign Banks in Switzerland, Press

Illustrative example: Foreign banks in Switzerland # of players (banks and branches of foreign banks) 625 375 330 297 Total banks, # 1990 2000 07 2012 Market exits of foreign banks through sale and closure 2007-2013 (not exhaustive) Sold Clo- sure 120 130 140 150 160 Traditional Swiss names have also been in talks or completed transactions

McKinsey & Company | 6

Contents

▪ Current state of industry – where are we today? ▪ What is the health of (Swiss) Private Banking? ▪ How to cope with long-term challenges? ▪ Conclusion

McKinsey & Company | 7

Three questions

Are the current revenue margins sustainable given further regulatory pressure? 1 Can growth momentum be restored? 2 Can cost pressures be mitigated? 3

McKinsey & Company | 8

Margins have come under pressure since the financial crisis

SOURCE: McKinsey Private Banking Survey

1

Revenue margin, bp ∆ 2007- 2012 bp

• 8
• 14
• 27

SUSTAINABILITY OF REVENUE MARGINS

Trend 89 97 82 109 75 80 85 90 95 100 105 110 H1 2013E 12 11 10 09 08 2007 96

Western Europe APAC Switzerland

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Different forces affecting revenue margins 1

SUSTAINABILITY OF REVENUE MARGINS

Positive impact

▪ Stronger trading activity ▪ Widening interest spreads ▪ Consolidation and market discipline

Focus of today

Negative impact

▪ Competition from low cost digital channels ▪ Ban of retrocessions/inducements

a

▪ Trend towards lower cost products (especially passive)

b

▪ Increasing concentration of wealth (UHNWI with lower

margins) c

McKinsey & Company | 10

Regulatory developments are likely to reduce revenue margins further

SOURCE: McKinsey Private Banking Survey 2013, expert estimates

a

ROUGH ESTIMATES

Revenue margin, bp

▪ Compensating

the lost revenues from retroces- sions will require banks to price advice (e.g., through advisory mandates)

▪ Early experiences

from other markets (NL, UK) hint at customers’ reluctance to pay for advice Potential impact of complete retrocession ban Future revenue base 74-84 Mitigation measures 5-10 Baseline 68-73 Loss of retroces- sions

• 15 to
• 20

2012 revenue margin 89

▪ Repricing of discretionary and advisory mandates ▪ Increased custody and infrastructure fees ▪ Higher share of discretionary/advisory mandates ▪ ….

SUSTAINABILITY OF REVENUE MARGINS

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Passive funds show strong growth – equity share slowly recovering

SOURCE: Lipper

Swiss fund market (excludes inst. mandates) Percent/CHF billion for 100%

xx CAGR 2007-H1 2013 (%)

Change in asset allocation Change in active vs. passive Shift out of mixed assets and alternatives towards bonds and real estate A clear shift in assets from active to passive funds is visible over the past few years

b

SUSTAINABILITY OF REVENUE MARGINS

36 29 34 31 34 35 27 27 30 32 34 34 4 21 14 541 6 4 14 12 2008 2007 683 6 2 11 17 2011 628 7 4 14 11 2010 639 5 100% = Alternatives Real Estate Money Market Mixed Assets Equity Bond H1 2013 721 4 4 11 12 2012 723 6 4 11 11 0.4

• 5.2
• 0.2

11.7

• 5.7

5.1 1.0 10 13 20 23 25 24 90 87 80 77 75 76 100% = Passive Active H1 2013 721 2012 723 2011 628 2010 639 2008 541 2007 683 18.5

• 2.1

1.0

McKinsey & Company | 12

2 1

• 1

2 7

• 30
• 25
• 20
• 15
• 10
• 5

5 10 15 20 25 30 35 12 11 10 09 08 07 Switzerland (Ø growth = ~2% p.a.) 2 1 2 1 3 8

Net new assets remained low in Switzerland and Europe – market effect dominates growth 2

LACK OF GROWTH MOMENTUM

SOURCE: McKinsey Private Banking Survey

12 11 10 09 08 07

Net new assets Market performance

Western Europe (Ø growth = ~3% p.a.) APAC (Ø growth = ~9% p.a.) AuM growth, % 7 9 8 7 3 23 12 11 10 09 08 07

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6.8 1.7 1.2 5.9 5.9 11.2 0.2 1.8 Switzerland Western Europe North America, Japan Emerging markets Switzerland 0.2 Western Europe 1.8 North America, Japan Africa 0.7 CEE 0.8 LatAm Middle East Asia ex JP Total 19.1

Emerging markets with biggest share of wealth creation but USA remains single biggest growth engine

SOURCE: McKinsey Wealth Pools V13.2

Global HNW wealth creation, 2012 to 2016FC, USD trillion

2

LACK OF GROWTH MOMENTUM China 3.8trn India 1.2trn South Korea: 0.5trn Taiwan: 0.5trn Saudi Arabia: 0.4trn UAE 0.3trn1 Russia: 0.4trn USA: 4.2trn Japan: 1.1trn Brazil: 0.5trn Mexico: 0.3trn Argentina: 0.2trn

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Swiss Private Banks suffer of steadily increasing cost base

SOURCE: McKinsey Private Banking Survey

3

Cost Margin, bp

COST PRESSURES

60 63 68 76 72 79 Cost Income Ratio, % 68 59 65 55 60 65 70 75 80 2012 Switzerland Western Europe APAC 11 10 09 08 2007 H1 2013E

McKinsey & Company | 15 SOURCE: McKinsey Private Banking Survey

7 10 10 9 5 +3% p.a. Investment management IT Overhead Operations Front support1 RM compensation 2012 68 10 20 14 2007 58 4 10 16 11 Cost margin, Switzerland, bp

ESTIMATES

1 RM assistants, specialists, real estate, sales and marketing

Cost margin has been increasing, driven by complexity and desire to grow 3

Key drivers of cost increases

▪ Increased legal &

compliance/KYC requirements

▪ Regulatory changes ▪ Technological progress ▪ Aggressive team hiring ▪ Lower than expected

inflows from hiring

▪ Low flex. in RM comp. ▪ n/a

COST PRESSURES

Payout ratio 15-20% Payout ratio 10-15% Required measures to gain 5% CIR

▪ Reduce RM

compensation by 20-25%

▪ Improve

front-to-back ratio by 33%

▪ n/a

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Regulatory change drives costs in many areas 3

COST PRESSURES

Soft barriers Investor- protection Private Banking Financial transpar- ency Central Counter- parties Structure Banking/ Trading Capital, liquidity, leverage Capital/liquidity/governance requirements for subsidiaries of financial groups

▪ IHC/C-LAR (US) ▪ FSA requirements (UK) ▪ Ring-fencing (ICB, Liikanen)

Ban on retrocessions, and restrictions on advice, product liability

▪ MiFID II (EU) ▪ RDR (UK) ▪ Fidleg and retrocessions (CH)

Market access restrictions

▪ MiFID II (EU) ▪ Solicitation

restrictions Automatic data ex-change

▪ FATCA (US) ▪ OECD/G20

standards

▪ DAC (EU)

Mandatory clearing

• f standardized

derivatives through central counterparties

▪ Dodd–Frank VII ▪ EMIR ▪ MIFID II

Minimum capital, liquidity and leverage requirements

▪ Basel III ▪ Swiss Finish (TBTF)/G-SIB

McKinsey & Company | 17

Contents

▪ Current state of industry – where are we today? ▪ What is the health of (Swiss) Private Banking? ▪ How to cope with long-term challenges? ▪ Conclusion

McKinsey & Company | 18

Most Private Banks lack scale for their market coverage AuM, CHF billions Complexity

4 long-term challenges for the Private Banking industry

SOURCE: McKinsey Private Banking Survey; expert estimates; Forrester

300 200 Average annual performance of a balanced product

• Avg. TER for

a balanced product 25 Required Size for 50-70 markets 50-70 Mid-sized Swiss PB Product performance Performance after fees fails to match inflation bp 2 1 94 78 21 Stage 3 countries (e.g., UK, Benelux) Stage 2 countries (e.g., Ireland, Baltics) Stage 1 countries (e.g., Russia, Serbia) Share of payments captured through

• nline channel

Percent Digitalization 4 Regulation 3 Impact of MiFID II on profit margins of Western European banks (based on 2010) bp 17 2 5 24 After MiFID II

• 7%

Impact

• n cost

margin Impact on revenue margin Profit margin Private Banking

McKinsey & Company | 19 1 Assumption: bond yield 1.0%, 100% equities performance of 17.2% (50:50 SPI TR/MSCI World TR)

Advisory portfolios with often weak performance

• 5

5 10 15 20 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Performance Share of equities

Efficient market1 DPM mandate Advisory

Share of equity in SAA

• f a DPM mandate

80% of advisory portfolios with perfor- mance worse than DPM 44% of portfolios below SAA equity share range 10% of portfolios above SAA equity share range

Gross performance, 2012, percent

1

PRODUCT PERFORMANCE

SIMULATED BASED ON HISTORIC PORTFOLIO DATA

McKinsey & Company | 20

Evolution of online banking maturing

Percent of total activity

3-5 years 3-5 years Evolution of servicing capabilities Active custom- ers in online banking Investment sales Money transfers Stage 1 Register and activate online banking Stage 2 Accelerate transaction migration Use online bank as primary service channel Stage 3 Use online bank as primary service and investment channel Stage 4 References/ examples 6 27 47 >80 21 78 94 99 >0 30-50 ?

SOURCE: McKinsey/Finalta

DIGITALIZATION

▪ Ireland ▪ Italy ▪ Portugal ▪ Slovakia ▪ Russia ▪ Serbia ▪ Ukraine ▪ Nordics ▪ Benelux ▪ UK ▪ Baltics ▪ Future state

4

McKinsey & Company | 21

Digital wealth management offerings nascent, uptake remains low

SOURCE: Expert interviews; McKinsey analysis

NEW TRENDS emerge – first players experiment with business models Innovative startups create DISRUPTIVE BUSINESS MODELS EARLY ADOPTERS start embracing the new models ADVANCED INCUMBENTS start adapting to the new model MAINSTREAM CUSTOMERS adopt LAGGARD IN- CUMBENTS DIE Advanced incumbents and established “startups” constitute the NEW NORMAL TIPPING POINT TIME DIGITAL WEALTH MANAGEMENT PEER-TO-PEER PAYMENTS RETAIL BANKING, ELECTRONIC PAYMENTS Digital wealth management entrants hampered by

▪

Desire for personal guidance

▪

Lack of brand/insufficient marketing drives strong reluctance of investing with them

DIGITALIZATION

4

McKinsey & Company | 22

Contents

▪ Current state of industry – where are we today? ▪ What is the health of (Swiss) Private Banking? ▪ How to cope with long-term challenges? ▪ Conclusion

McKinsey & Company | 23

Conclusion

From … To … Growth Shot-gun approach Focused growth in 5-10 markets Cost Delaying costs True savings driven by front-to-back producti- vity increases Products Supermarket Clear value proposition and value for money Strategy Stuck in the middle Specialist, capture scale or exit Digitalization Transaction Multi-channel advisory model