A call for radical transformation in Western European private banking

| Report

For the year 2016, the aggregate profit pool earned from managing the assets of high-net-worth clients decreased for the first time since 2009—down 10 percent from 2015—as a result of limited AUM growth (3 percent) and a reduction in profit margin (a drop of 3 basis points versus 2015, making for a 13 percent decrease) (Exhibit). Banks’ cost-management actions did not compensate for the significant drop in revenue margins: due to the low interest rate environment and reduced brokerage activity, revenue margins fell 4 bps versus 2015, the largest drop since 2008.

Western Europe's private banking profit pools

These results for 2016—based on McKinsey’s annual Private Banking Survey—are a wake-up call for private banks in Western Europe. Business models will require significant changes to cope with a number of adverse market trends: macroeconomic uncertainty and market volatility; regulations that increase transparency requirements; demands from clients for more added value from their financial intermediaries; and the accelerating impact of digital products and services.

The combined impact of these trends is still uncertain, but given their speed, magnitude, and pressure on earnings, Western European private banks will have to be prepared to move beyond marginal improvements. The region’s most successful private banks have focused on the following areas to generate higher and sustainable levels of profits:

  • A clear value proposition and delivery model for each client segment
  • An omnichannel offer for hybrid customers and, for some firms, digital initiatives for selected markets
  • Transformation of front-line practices to defend and expand the revenue base
  • Zero-based rethinking of cost structures and operating models
  • Improved organizational health through rigorous performance measurement.

The effort required will vary depending on each institution’s starting point, but restoring and sustaining growth and profitability will demand decisive action over the next two to three years.