The small private-banking industry in Switzerland urgently needs to consolidate, given the impact of regulation, capital requirements and weak profitability of the over-banked sector. The unpegging of the CHF to the euro complicates the M&A outlook.
Small Swiss private banks will likely have to cut costs with the CHF unpegging from the euro. The bad news is the shock move by the Swiss National Bank (SNB) could complicate M&A among Swiss private banks given the macro uncertainty, market volatility and a lack of clarity over valuations, according to industry players.
A wave of consolidation and asset sales between Swiss private banks – small, medium and foreign-owned – began last year in earnest and was expected to continue this year and next as institutions grappled with the need to cut costs due to enhanced regulation and capital requirements.
Ray Soudah, founder and CEO of MilleniumAssociates, an M&A and corporate advisory firm based in Switzerland and the UK, says: “The private banks are probably going to receive a margin squeeze of between 5% and 15% if the current exchange rate holds. For those who haven’t hedged their forecasted profits, that leaves them little else to do but cut costs or consolidate. I’d say that costs will need to cut between 5% and 10% at Swiss banks.
"Because of the unpredictability of profit margins and foreign-exchange moves, in the near term there will be a cooling effect on M&A as valuations will be too uncertain."
The need for asset disposals, mergers and outright closures in the industry is urgent. A report in August by KPMG and the University of St Gallen in Switzerland showed the writing was on the wall for the Swiss private-banking industry, particularly smaller banks. The two institutions assessed the 2013 results of 94 Swiss private banks (excluding Credit Suisse and UBS) totalling SFr1.4 billion in assets under management. Switzerland has 139 private banks in total – down from 182 in 2005.
Return on equity
From 2006, the average return on equity (ROE) among respondents had fallen from 13.9% to 3.3% last year. Large banks fared better than small banks, with the former averaging 4.4% ROEs and the latter around 1.7%. Foreign-owned banks’ ROE was some 60% less than that of Swiss banks.
The reports states US tax provisions have been the largest contributor to the fall in ROE – reducing it by as much as a quarter. There were 11 more banks posting losses in 2013 than in 2012 because of the tax programmes, and nine of these banks had never posted losses before.
Now the exchange-rate shock will leave small banks with no room for manoeuvre, given the jump in their CHF-denominated cost base and diminished export competitiveness. Client wealth and income at Swiss cantonal and commercial banks will be particularly affected, since these institutions typically serve Swiss exporters.
In addition, the debt-servicing capacity of clients with loans in Swiss francs outside of Switzerland with foreign-currency revenues is under pressure. “You have to guess that some clients have lost money and there may be some margin calls” says Soudah. "Will the banks bail out their clients?"
It is not just the Swiss private banks that face pressure, says Soudah, adding: “Surprising central-bank moves like that in Canada [cutting its benchmark interest rate] yesterday and Switzerland last week will inevitably force private banks to up their risk management around leverage and margin trading.”