Private Bank M&A Inevitable Amid Cost Pressures, McKinsey Says

  • Pressure from clients, regulators increases cost of services
  • One in six European private banks surveyed are unprofitable

Consolidation in Europe’s private-banking industry is inevitable as pressure from clients and regulators increases costs, McKinsey & Co. said in a study published on Monday.

Pressures on profit margins will force private banks to cut costs and review the number of booking centers they operate, the New York-based consultancy said. The minimum volume of client assets under management required to make a booking location profitable is approaching 10 billion euros ($11.3 billion), according to McKinsey.

Europe’s private banks are spending money on reshaping their businesses to comply with a raft of regulations such as MiFID II. New rules aimed at improving consumer protection include measures such as increased transparency on fees. One in six of the private banks surveyed had a loss in 2014, McKinsey said.

While profit margins at the private-banking divisions of universal banks with a retail arm improved by 4 basis points to 36 basis points last year, the margin at independent onshore firms narrowed to 27 basis points from 32 basis points in 2010. A group of private banks described by McKinsey as “foreign onshore players” struggled with an average profit margin of 9 basis points, according to the study.

A 1 percent increase in net client inflows at banks in offshore centers such as Switzerland, Luxembourg and Monaco lagged the 4 percent advance enjoyed by firms which focus on domestic clients, according to the survey. The average profit margin at offshore private banks dropped to 25 basis points, meaning managers of cross-border wealth in Europe are no longer more profitable than those that prioritize their local market.

A basis point is one hundredth of a percentage point.

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