Private banks in Europe saw their profits decline in 2019, for the second year in a row, according to a study by McKinsey. Profitability is under pressure due to a combination of rising costs and lack of client growth.
According to the management consultancy, the study shows that private banks in Europe are confronted with structurally weak profit dynamics, growing dissatisfaction among clients and significant operational problems due to working from home.
The findings seem to contrast with the optimistic sounds that have been heard from Luxembourg private bankers. Recently, DeGroof Petercam’s Luxembourg head Kris de Souter and State Streets’ Edoardo Gramuglia both told Investment Officer separately they had seen a substantial rise in profits this year.
According to McKinsey, one in five clients of European private banks have transferred their assets to another provider this year, while as many as one in three clients told their bank they are dissatisfied with the services provided.
The profits of 102 private banks surveyed in Western Europe fell by 1.5% to €13.3 billion in 2019, according to the survey. That’s a 10% decline compared to the record year of 2017 when profits totalled €14.7 billion.
Rising costs
McKinsey partner Sid Azad told the Financial Times that private banks can emerge from this crisis stronger if they change their customer and earnings model. Some 22% of the banks› so-called operational hubs, known as booking centres, are loss-making because of rising (regulatory) costs.
According to Azad, private banks’ costs have been rising twice as fast as revenues since 2007. As a result, the average cost-to-income ratio has risen to 71% in 2019, a record high. According to McKinsey, the reason is that banks are not making sufficient progress in reducing costs. As a result, profits as a percentage of assets under management have fallen to their lowest level in 12 years.
Profitability is under pressure for several reasons. Wealthy clients may have traded more on the stock exchanges in the first half of 2020, but at the same time they have transferred about 3% of their assets from equities to cash, which is not favourable for private banks. At the same time, there is continued pressure on advisory and discretionary fees.
There are 126 private banks active in Luxembourg, only 8 of which are headquartered in the Grand Duchy. Total assets under management of Luxembourg’s private banks have risen by 76% to €395 billion since 2008.