UBS temporarily loses more than 10 percent of its stock market value despite increased quarterly profits, Julius Baer imposes a hiring freeze, and Credit Suisse loses 1.6 billion francs and its former boss, Thomas Gottstein, in one quarter. And even investor darling Vontobel suffered a decline in virtually every reference metric. What is happening in Swiss banking?

That's quite a lot of bad news to digest in a  single week. But more bad news could be ahead for an industry spoiled by success over the past two years. Finews.com takes a look at six challenges the sector is facing.

1: Previous Profit Drivers Pointing Down

While Swiss wealth management banks were still able to maintain some of their bottom profits, their earnings situation speaks a different language. Faced with shrinking volumes, money outflows, and «deleveraging» among wealthy clientele, banks earned fewer fees. Still, thanks to the turnaround in interest rates from central banks exiting easy money policies, interest income did improve. This was particularly evident at  UBS in particular where net interest income in the Global Wealth Management (GWM) division rose by almost a quarter to $1.27 billion in the second quarter. A princely sum to be sure, but not enough to compensate for a commission income shortfall.

This underscores, once again, that in good times and bad, Swiss private banks are dependent on the movement of assets under management (AuM). Remedies are unlikely anytime soon, especially for self-proclaimed «pure plays» such as Julius Baer, which focuses exclusively on private banking. The sale of discretionary mandates which generate steady fees has been expanding industry-wide, although the margins from those products are now contracting as well.

2: Rough Seas for Fair-Weather Captains

With declines over 20 percent in recent months, various Western stock markets have entered bear market territory, raising the question as to how long the downward trend will last. With the simultaneous reversal of interest rates in leading currencies, the painful return of high inflation, and a new paradigm in global politics, asset managers are essentially at a new starting position. The much-used term «turnaround» may indeed apply to them.

The problem is that leading Swiss bankers, which include hardly any women, have made a career out of a bull market that began in 2009. Managers such as UBS wealth management chief Iqbal Khan created a furor with offers like Lombard loans, which worked splendidly in the low and negative interest rate phase since but are now they are entering new territory. At Credit Suisse, meanwhile, forces from the previous generation are setting the tone, with both the designated new bank CEO Ulrich Koerner and Chairman Axel Lehmann having been ensconced in the profession before the financial crisis and the era of easy money.

3: Sticky Costs

The announcement by Credit Suisse on Wednesday that it would reduce its cost target in the medium term from the current level of around 17 billion to 15.5 billion francs caused a big initial stir. But brutal cost-cutting by CEO-designate Koerner, dubbed «Uli the Knife» by the Anglo-Saxon press in reference to the «Threepenny Opera» character of Mack the Knife, will be anything but, as finews.com analyzed. Reducing costs by a maximum of 10 percent over five years does not sound like much, particularly at a bank that hired more staff in the second quarter and paid retention bonuses to top people.

This shows how costs in the expensive Swiss private banking sector remain «sticky,» as Barclays analysts recently observed. If earnings are on the decline, the banks cannot keep up with their savings, and the already structurally high cost/income ratio deteriorates further. At Credit Suisse, that ratio is now an extreme 130 percent due to the series of losses at the firm.

4. A Brutal Effort is Required

Deutsche Bank announced its second-quarter earnings on the same day as Credit Suisse and the results could not have been more different, with the German bank delivering its best result for the period since 2011. Unlike its Swiss competitor, the largest German bank has its trail of tears behind it, although it was tough going. Up through 2020, Deutsche Bank posted five consecutive years of losses before the turnaround plan of CEO Christian Sewing bore fruit.

To be sure, Credit Suisse and Deutsche Bank are not directly comparable in terms of size or business model, with the former having a more substantial asset management business and a more equity-focused trading business. Still, personnel costs are a central issue, and Sewing has taken action. Under his watch, the bank has shed thousands of jobs. Commerzbank is another crisis-ridden German institution that is now showing signs of improvement since a wave of layoffs there. The formula to be derived from those experiences is that when it comes to restructuring in banking, only brutality will do in the end. As finews.com reported, the strategic review that Koerner is tasked with was short on details of its cost-cutting effort and made no mention of job cuts.

5. An End to a Special Status

Deutsche Bank also suffered temporary share price losses on Wednesday after it cut back on its targets. Nevertheless, it shows that in the eyes of some foreign investors, Swiss asset management banks no longer enjoy a special status. The same Barclays analysts who recommended the shares of UBS and CS for sale in mid-July, now prefer the stocks of major European and British banks, favoring the stocks Natwest, HSBC, Société Générale, and ABN Amro.

It also shows that Morgan Stanley, the Wall Street bank most focused on wealth management, has consistently outperformed UBS on the stock market over the past five years. One possible conclusion might be: When it comes to private banking, Switzerland is no longer necessarily the first choice.

6. Switzerland Surpassed as Number One

Recent studies also support this conclusion. The Boston Consulting Group (BCG) recently warned that the Swiss offshore financial center is in danger of being dethroned. As early as next year, Hong Kong could replace Switzerland as the largest booking center for cross-border funds, with Singapore on the verge of challenging the Swiss bankers for second place.

Overall, Switzerland falls from the pedestal of the world's largest wealth locations, with domestic and foreign assets totaling a combined $4.1 trillion, this study adds. In the future, the Swiss financial center will rank fourth behind the USA, Hong Kong, and the UK.

The BCG estimates are based on the assumption that the political rifts in the world will deepen and that assets will no longer move around the globe as freely as before. Banks with a local presence in growth markets such as Asia or the US will therefore enjoy an advantage. For the Swiss private banks, this would leave Europe as the main area of focus, a region that is considered to be relatively weak in terms of asset growth.

While Swiss blue-chip banks such as UBS, Credit Suisse, and Julius Baer have long been globally positioned, there too is a catch. As the Ukraine war shows, sanctions are used as «weaponized finance» in a multipolar world and have the result that entire markets can freeze overnight for the Swiss banks.