Europe’s private banks hit by worst year since crisis

Earnings in 2018 tumble 8% due to higher costs and weak investor inflows

Profits for European private banks dropped by the most since the global financial crisis last year as muted investor inflows, weakness in financial markets and rising costs combined to reduce earnings.

Selling banking services and investment products to the growing number of millionaires has long provided the banking industry’s most lucrative profit stream.

However, profits across western Europe’s €6tn private banking sector fell 8 per cent to €13.5bn in 2018 from the record €15.4bn registered the previous year, according to a survey by Mckinsey, the consultancy.

Private banks in western Europe underperformed their US and Asian peers where preliminary data suggest profits increased about 5 per cent last year.

Sid Azad, a partner at Mckinsey, said the fall in profits in Europe, the second annual decline in the past three years, emphasised the need for a “fundamental transformation” of processes and systems.

“Private banks will need to reconfigure their business model to operate in a market with weaker asset growth and decreasing profit margins,” he said.

Just under a third of the 113 banks surveyed by Mckinsey registered net client withdrawals, compared with a quarter in 2017. Switzerland and Monaco, two important markets, have seen no growth in client inflows overall during the five years to 2018.

A failure to control rising costs has proved an intractable problem for private banks in Europe. Cost inflation in the front office — investment management, sales and marketing expenses — has been rising by about 4 per cent annually over the past five years. Back-office costs have also swollen in spite of investments in technology and efforts to automate processes.

Mr Azad said cost control problems could become “substantially worse” unless banks took quick action.

Mckinsey suggested that small and midsized players could cut costs by working together to create a platform for back-office functions, such as know-your-client due diligence.

Mergers and acquisitions among smaller banks could also create more effective competitors to larger rivals.

Private banking in western Europe is highly fragmented and small and midsized players face the biggest challenges as larger rivals have proved more successful in attracting business.

Mr Azad said developments in the quality of services offered to private banking clients had lagged behind improvements made by other industries. Greater use of advanced analytics could help relationship managers to deliver higher quality “bespoke experiences” to clients.

Private banks should also either find partners in private equity and other alternative investments or build these capabilities internally given rising client demand for these strategies.

Exploring alternative partnerships and adapting to issues, such as environmental, governance and social considerations, could help private banks become “better entrenched” in their clients’ lives, said Mr Azad.