Private banks have kept their position as the most profitable segment in global banking, but worrying signs remain.

This is according to McKinsey’s European Private Banking Report. Its 2019 survey results displayed a decade-long trend of compression in profit margin.

The sector hit a 12-year low of 21 bps of assets under management (AuM), compared to 22 bps in 2018 and 35 bps in 2007. In addition, revenues margins slumped to a low of 73 bps in 2019, compared to 75 bps in 2018 and 96 bps in 2007.

Furthermore, cost-to-income ratios were 71%, the highest level since 2012, and profits declined by 2% (from €13.5bn [$15.5bn] in 2018 to €13.3bn).

Net inflows in 2019 matched 2018 at 2% of AuM, but favourable markets allowed overall AuM growth of 10%.

The report stated: “Between 2015 and 2019, new inflows were positive but relatively low, averaging 2.5% of AuM versus the average 5.8% realised between 2004 and 2008. If market performance since 2007 had been flat, and AuM growth limited to net inflows, profit pools would have fallen by an estimated 18% through 2019, versus the actual 8% drop.”

Relationship manager (RM) productivity remained stable as loading per RM increased to €225m from €218 in the year previous.

On the other hand, revenues per RM were practically unchanged year-on-year from €1.64m to €1.65m.

Private banking profitable under COVID-19?

The report also examines how private banks have coped with COVID-19 in the first quarter of 2020.

It stated: “In 2020, Europe’s private banks made a resilient start after a disappointing 2019, driven by increased trading activity as the crisis took hold. Although AuM fell by 10% as markets dropped, and deposit margins were reduced, banks’ profit pools increased by 7% to €14bn (representing a margin of 23 bps) on an annualised basis. The aggregate
revenue pool increased by 3% to €47bn (a margin of 76 bps), while the cost pool rose 2% to €33bn (a margin of 53 bps).

“However, the surge in brokerage from COVID-19-driven trading activity masked the underlying trend of falling revenues.”