In 2022, assets under management (AUM) for European private banks decreased 7% from the previous year, according to a recent McKinsey report. The decrease also reflects a one-point reduction in net inflows to 3%. Industry profits rose 1.7% to €22bn in 2022, a new peak driven by a relevant rise in net interest margins.
The survey has been conducted annually since 2003 and reviewed the recent financial results of more than 100 institutions. It illustrates how 2021 was a record year, while 2022 was characterised by more volatile markets. The 2010s were a decade of growth in financial markets which boosted the wealth of individuals in many parts of the globe. However, it now seems that overall growth in assets has stalled.
The recent surge in inflation, rising interest rates, geopolitical storms and a slowing global economy have battered the financial markets and private banks. Clients divested and moved into cash, were less active in markets and deleveraged their portfolios.
However, the industry’s structural profitability taking into account interest rate effects has declined as costs increased further last year, revenue margin from invested assets dropped, and the tailwind in revenues from increasing AUM performance vanished. Most private banks struggled to attract new clients following the reduction in inflows.
During the next three years, projected growth in personal financial assets will create more opportunities for private banks. McKinsey expects most growth to come from North America, Asia–Pacific (excluding Japan) and western Europe. Switzerland is still the major financial centre for the sector, with Hong Kong and Singapore catching up quickly. Singapore shows the fastest growth.
Over the longer term, the consultancy suggests, banks should focus on improving their margins in a number of ways. Private banks keen to increase structural profitability in the coming years should take a look at their balance sheet, increasing the industry’s interest in recurring revenues, and focus on cost-effective growth.
In particular, private banks might reconsider their pricing and the level of service proactively rather than relying on automated pricing engines. Banks could often lower their prices for some customers while also automating the advice they receive. Banks can look to expand share in higher-margin alternatives, such as structured products and private markets.
Banks also reported a rapid pace of technology investment. According to McKinsey, banks plan to treble technology spending from 2% of total revenues in 2019 to 6% in 2023, with the private banking arms of universal banks mostly benefiting from synergies with the rest of the bank. Technology investments are usually focused on cloud, data and distributed-ledger technology. Private banks have been more cautious on investments into digital assets, Web 3.0 and the metaverse.
