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

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 | 1

Worse than last year Substantial differences in performance between regions In line with last year Private Banking industry averages Better than last year Western North Switzer- Middle- 2012 Europe America Asia land East Net inflow 2 3 7 2 14 Growth Performance 6 5 3 4 10 Percent AUM growth 8 8 5 17 18 Revenue margin 82 79 82 89 108 Eco- Cost margin 59 52 65 68 40 nomics Bp Profit margin 23 27 17 21 68 McKinsey & Company | 2 SOURCE: McKinsey Private Banking Survey 2013

Private Banking has lost attractiveness – Switzerland and UK hit worse than Western Europe and Asia Western Europe Switzerland Profit pool, indexed Profit pool, indexed 100 100 72 -28% -46% 54 2007 2012 2007 2012 Profit 35 23 39 21 margin Bp Asia UK Profit pool, indexed Profit pool, indexed 100 100 82 -56% -18% 44 2007 2012 2007 2012 Profit 35 17 66 22 margin Bp McKinsey & Company | 3

Decline in profit pool driven by decreasing revenue margins and costs Margins in Swiss Private Banking, bp Slight recovery of revenue margin after bottom in 97 100 2010, decline in 2013 96 89 88 88 87 85 Revenue margin 80 33 39 21 21 22 Profit margin 24 23 Cost margin 68 66 66 64 63 60 62 58 Increase of cost margin in all years, except 2010 and 2013 40 2007 08 09 10 11 12 2013E 60 Cost/income ratio 76 McKinsey & Company | 4 SOURCE: McKinsey Private Banking Survey

Consolidation has started Illustrative example: Foreign banks in Switzerland Market exits of foreign banks through sale and closure # of players (banks and branches of foreign banks) 2007-2013 (not exhaustive) 160 150 Sold 140 Clo- 130 sure 120 1990 2000 07 2012 Traditional Swiss names have also Total been in talks or banks, 625 375 330 297 completed # transactions McKinsey & Company | 5 SOURCE: Swiss Nationalbank, Association of Foreign Banks in Switzerland, Press

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 | 6

Three questions Are the current revenue margins 1 sustainable given further regulatory pressure? 2 Can growth momentum be restored? 3 Can cost pressures be mitigated? McKinsey & Company | 7

SUSTAINABILITY OF REVENUE MARGINS 1 Margins have come under pressure since the financial crisis Revenue margin, bp Switzerland Western Europe APAC ∆ 2007 - 109 2012 110 bp Trend 105 100 97 95 96 89 -8 90 85 -14 82 -27 80 75 2007 08 09 10 11 12 H1 2013E McKinsey & Company | 8 SOURCE: McKinsey Private Banking Survey

SUSTAINABILITY OF REVENUE MARGINS 1 Different forces affecting revenue margins Focus of today ▪ Ban of retrocessions/inducements a ▪ Trend towards lower cost products (especially passive) b Negative ▪ Increasing concentration of wealth (UHNWI with lower c impact margins) ▪ Competition from low cost digital channels ▪ Stronger trading activity ▪ Widening interest spreads Positive ▪ Consolidation and market discipline impact McKinsey & Company | 9

SUSTAINABILITY OF REVENUE MARGINS a Regulatory developments are likely to reduce revenue margins further Revenue margin, bp ROUGH ESTIMATES Potential impact of complete retrocession ban 89 ▪ Compensating -15 to the lost revenues 74-84 -20 from retroces- sions will require 5-10 banks to price 68-73 advice (e.g., through advisory mandates) ▪ Early experiences from other markets (NL, UK) 2012 Loss of Baseline Mitigation Future hint at customers’ revenue retroces- measures revenue base reluctance to pay margin sions for advice ▪ Repricing of discretionary and advisory mandates ▪ Increased custody and infrastructure fees ▪ Higher share of discretionary/advisory mandates ▪ …. McKinsey & Company | 10 SOURCE: McKinsey Private Banking Survey 2013, expert estimates

SUSTAINABILITY OF REVENUE MARGINS b Passive funds show strong growth – equity share slowly recovering Swiss fund market (excludes inst. mandates) xx CAGR 2007-H1 2013 (%) Percent/CHF billion for 100% Change in asset allocation Change in active vs. passive 100% = 683 541 639 628 723 721 1.0 100% = 683 541 639 628 723 721 1.0 Bond 27 27 30 32 34 5.1 34 -2.1 75 76 77 80 29 87 Active 90 Equity 36 34 31 34 0.4 35 Mixed Assets 14 Money 11 -5.2 12 17 Market 11 12 -0.2 21 Real 14 14 11 25 11 24 11 23 11.7 Estate 20 18.5 4 4 13 4 4 10 6 2 Passive 4 4 Alternatives -5.7 7 6 6 5 2007 2008 2010 2011 2012 H1 2007 2008 2010 2011 2012 H1 2013 2013 Shift out of mixed assets and alternatives A clear shift in assets from active to passive towards bonds and real estate funds is visible over the past few years McKinsey & Company | 11 SOURCE: Lipper

LACK OF GROWTH MOMENTUM 2 Net new assets remained low in Switzerland Net new assets and Europe – market effect dominates growth Market performance AuM growth, % Switzerland Western Europe APAC 35 (Ø growth = ~2% p.a.) (Ø growth = ~3% p.a.) (Ø growth = ~9% p.a.) 30 23 25 20 15 9 8 8 10 7 7 7 3 3 5 2 2 2 2 1 1 1 0 0 -1 -5 -10 -15 -20 -25 -30 07 08 09 10 11 12 07 08 09 10 11 12 07 08 09 10 11 12 McKinsey & Company | 12 SOURCE: McKinsey Private Banking Survey

LACK OF GROWTH MOMENTUM 2 Emerging markets with biggest share of wealth creation but USA remains single biggest growth engine Global HNW wealth creation, 2012 to 2016FC, USD trillion 19.1 China 3.8trn India 1.2trn South Korea: 0.5trn Saudi Arabia: 0.4trn Taiwan: 0.5trn 6.8 UAE 0.3trn1 Emerging 11.2 markets Russia: 0.4trn 1.7 1.2 0.8 0.7 USA: 4.2trn Brazil: 0.5trn Japan: 1.1trn North America, Mexico: 0.3trn 5.9 5.9 Japan Argentina: 0.2trn Western Europe 1.8 1.8 0.2 Switzerland 0.2 Total Asia Middle LatAm CEE Africa North Western Switzerland ex JP East America, Europe Japan McKinsey & Company | 13 SOURCE: McKinsey Wealth Pools V13.2

COST PRESSURES 3 Swiss Private Banks suffer of steadily increasing cost base Cost Margin, bp 80 75 70 68 Switzerland 65 65 APAC 59 60 Western Europe 55 2007 08 09 10 11 2012 H1 2013E Cost Income Ratio, % 60 76 63 72 68 79 McKinsey & Company | 14 SOURCE: McKinsey Private Banking Survey

COST PRESSURES 3 Cost margin has been increasing, driven by complexity ESTIMATES and desire to grow Cost margin, Switzerland, bp Required Key drivers of measures to +3% p.a. Payout ratio cost increases gain 5% CIR 15-20% Payout 68 ▪ Aggressive team hiring ▪ Reduce RM ratio ▪ Lower than expected compensation RM 10-15% 58 14 inflows from hiring by 20-25% compensation ▪ Low flex. in RM comp. 11 Front support 1 20 ▪ Increased legal & ▪ Improve 16 compliance/KYC front-to-back requirements ratio by 33% 9 Operations ▪ Regulatory changes 10 ▪ Technological progress Overhead 10 7 IT 10 10 Investment ▪ n/a ▪ n/a management 5 4 2007 2012 1 RM assistants, specialists, real estate, sales and marketing McKinsey & Company | 15 SOURCE: McKinsey Private Banking Survey

COST PRESSURES 3 Regulatory change drives costs in many areas Minimum capital, liquidity and leverage requirements ▪ Basel III ▪ Swiss Finish (TBTF)/G-SIB Automatic data Capital, ex-change Financial ▪ FATCA (US) liquidity, transpar- ▪ OECD/G20 leverage ency Mandatory clearing standards ▪ DAC (EU) of standardized derivatives through Central Soft Private Banking/ central Counter- barriers Banking Trading Market access counterparties parties ▪ Dodd–Frank VII restrictions ▪ MiFID II (EU) ▪ EMIR ▪ Solicitation ▪ MIFID II restrictions Investor- Structure protection Ban on retrocessions, and Capital/liquidity/governance restrictions on advice, product requirements for subsidiaries of liability financial groups ▪ MiFID II (EU) ▪ IHC/C-LAR (US) ▪ RDR (UK) ▪ FSA requirements (UK) ▪ Fidleg and retrocessions (CH) ▪ Ring-fencing (ICB, Liikanen) McKinsey & Company | 16

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 | 17

4 long-term challenges for the Private Banking industry 1 Product performance 2 Complexity Performance after fees fails to match inflation Most Private Banks lack scale for their bp market coverage AuM, CHF billions 300 50-70 200 25 Avg. TER for Average annual Mid-sized Required Size for a balanced performance of a Swiss PB 50-70 markets product balanced product 3 Regulation 4 Digitalization Impact of MiFID II on profit margins of Western Share of payments captured through European banks (based on 2010) online channel bp Percent 94 24 5 78 2 17 -7% 21 Profit Impact on Impact After Stage 1 Stage 2 Stage 3 MiFID II margin revenue on cost countries (e.g., countries (e.g., countries (e.g., margin margin Private Russia, Serbia) Ireland, Baltics) UK, Benelux) Banking McKinsey & Company | 18 SOURCE: McKinsey Private Banking Survey; expert estimates; Forrester