European private banking: Resilient models for uncertain times

The arrival of the COVID-19 pandemic called for new ways of doing business—remote service for clients and working at a distance for most bank functions. As in other industries, banks suddenly redrew their technology plans, raising spending levels and accelerating the adoption of advanced methodologies.

The need to realign operating models to this superior level of technology has intersected with a reversal in private banking economics. For the preceding decade, the industry enjoyed the tailwind of rising financial markets, supported by favorable governmental policies and low interest rates, and achieved a long string of record highs in assets under management (AUM), revenues, and profits.

The favorable operating environment has shifted, however, putting at risk the growth private banks had achieved and gradually reducing their profitability. Firms therefore need to reexamine their operating models, taking advantage of new technologies, while preparing to navigate an uncertain macroeconomic outlook and further changes in client needs.

McKinsey’s 2022 survey of European private banks1—the latest in a series that has been conducted annually since 2003—reviews the recent financial results of over 100 institutions, gathering details on the surprisingly strong results that led to a record year for 2021 and the rapid adjustments to the more volatile markets that characterized the first half of 2022.

Based on the surveys taken between 2017 and 2021, we have also identified a set of business and operating factors shared by top-performing institutions. These six factors are related to the profitability of products and client segments and the management of relationship managers (RMs), costs, and operating scale. Institutions that successfully exploit these factors enjoy significantly greater profit than banks that do not. Banks can navigate in these uncertain times by focusing on improving resilience through these factors with a strategy that will depend, as always, on each bank’s current position.

Whether European private banks follow new approaches or stick to established models, all will need to undertake transformations. The current challenges of volatile markets and the longer-term changes in how to best serve clients call for nothing less.

Uncertain times: An acceleration of change in private banking

The private banking industry in Western Europe has evolved in numerous ways over the last decade, including a decline in brokerage and retrocession revenue margins brought on by new regulation,2 and growth in net new business—for example, from investors based in Asia.

Today, Europe’s private banks are facing upheavals in the economic, political, and technological environments even as customer needs are shifting. The most severe disruption in the political environment has been associated with Russia’s invasion of Ukraine. In the financial markets, rising inflation and interest rates have coincided with corporate profits falling because of the political unrest and disruption in the global business equilibrium. Meanwhile, the remote-working and client services challenges of the COVID-19 pandemic are spurring banks to invest in an overhaul of their operating technologies.

Over the last 24 months, private banks have responded to these challenges in numerous ways. For example, many have expanded their technology, anticipating that the investment requirements will be outweighed by the potential to preserve revenues and profits in a period of falling markets and rising costs. More broadly, we are seeing substantial changes in banks’ financial fundamentals and in their operating models.

Financial fundamentals show banks under pressure

Together, these changes are reshaping private banks’ existing AUM base and client preferences regarding new investments, with impacts on banks’ financial statements. The global combined corporate and private balance sheet has ballooned in the last 20 years, from net worth and liabilities of €450 trillion in 2000 to €1,530 trillion in 2020.3The rise and rise of the global balance sheet: How productively are we using our wealth?,” McKinsey Global Institute, November 15, 2021. These record levels pushed AUM and revenues of Europe’s private banks to three successive record years in 2019, 2020, and 2021. But the recent surge of inflation, rising interest rates, geopolitical storms, and a slowing global economy have battered the financial markets and indicate a turning point for private banks.

Our pulse check of industry AUM at midyear 2022 shows that after rising 12 percent in 2021 on positive net flows and market performance, European private banks’ managed assets declined 11 percent in the first half of 2022 to €9.2 trillion. Falls in AUM values of 13 percent were partly offset by 2 percent in net new money from clients (Exhibit 1).

1
After record highs in 2021, European private banking profits declined in 2022.

Banks’ total revenues increased by one percentage point for the first half of 2022, raising the aggregate revenue margin earned by one basis point. Absolute revenues increased due to a deposit margin higher by 8 basis points (despite lower lending volumes), which compensated for the reduction in AUM, and despite a small decline in the proportion of AUM in mandates.

Equities as a share of AUM dropped two percentage points, to 32 percent. Cash and equivalents grew by three percentage points, while fixed income was stable.

Against the small revenue gain, aggregate costs were up 4 percent, raising the industry’s cost-to-income ratio to 71 percent from 69 percent in 2021. The net result is a decline in the industry’s net profit pool of about 5 percent, to an annualized figure of €20.3 billion.

Looking ahead to 2022’s full-year results, it is unclear whether profit pools will fall below record-high 2021 levels. Rising interest rates are net positive for European private banks; however, the size of the impact depends on each bank’s currency exposure and loan-to-deposit ratio.

Operating models are evolving

Private banks’ operating models have undergone a steady evolution through a push for scalability to achieve overall cost reductions from 2017 through 2021—a cumulative 0.8 percent in the mid-office and 2.0 percent in the back office despite spending to meet new regulations and catching up on digitization. But over the last 24 months, a majority of private banks have announced substantial investments into their operating models to build out their technology and environmental, social, and governance (ESG) frameworks, including a series of overlaps between the two.

Global regulatory developments in ESG, which aim to standardize disclosures, marketing, and investment processes, require changes to banks’ core processes. ESG-oriented products are gaining share overall; ESG mutual funds are already attracting more than 50 percent of new product inflows on mutual funds and are expected to account for more than 30 percent of mutual fund AUM in 2023, according to our survey (see sidebar, “The integration of ESG into European private banking”). However, private banks’ approach to ESG investing and advisory is still maturing, and further inflows to ESG-related products are likely—including on mandates, where few ESG offerings exist today.

Banks also report a rapid pace of technology investment. According to our survey, banks plan to triple technology spend from 2 percent of total revenues in 2019 to 6 percent in 2023. (In our experience, the increase among private banking arms of universal banks has been more moderate; these banks tend to benefit from synergies with the rest of the bank but also need to meet other investment priorities.) These investments are aimed at catching up on cloud, data, and distributed-ledger technology, where private banks typically lag the technology leaders in financial services. Private banks have been more cautious on investments into digital assets, Web3, and the metaverse, where they have focused thus far on trials and pilot projects.

Mastering the changes

Private banks face a quandary. Firms need to recalibrate their financials to reflect higher interest income and lower recurring and brokerage income at a moment when many banks’ strategic plans call for expanding spending to revamp their operating models and technology capabilities.

To manage these dual imperatives, we recommend a two-step approach. First, banks should develop a resilient framework for profit growth. Second, they should align on a strategic direction and desired future operating and business model—one that evolves logically from the current position defined by client profiles and bank resources. Such a strategy should ensure that the aspiration and the path to change are feasible and would result in the desired business outcome.

A resilient framework for profit growth

In our surveys of Europe’s private banks, covering over 100 institutions from 2017 to 2021, we have observed more than 50 factors that have an impact on profit growth. Of these many factors, six stand out as having the biggest impact (Exhibit 2). While these factors are well known, the significant difference in impact underlines their importance and the lack of programmatic application across the industry.

2
Six factors closely align with profit outperformance in European private banking.
  1. Investment performance. Private banks that delivered superior investment performance to clients saw their profits grow faster than average. Between 2017 and 2021, private banks in the top quartile of investment performance—those that averaged annual portfolio returns of about 6 percent, versus about 3 percent for the European industry average—increased their absolute profits by 13 percent per year, versus the 1 percent industry average.
  2. Mandate penetration. Banks in the top quartile for mandate penetration manage about 80 percent of client AUM within mandates and saw corresponding profit growth of 7 percent, due to higher inherent fees. In particular, banks with a majority of AUM in advisory mandates had the strongest growth in profits.
  3. Growth in the high-net-worth (HNW) segment. Private banks that have strengthened their positions in the HNW market and expanded net flows have outpaced the industry in overall profit growth. During the last five years, banks ranking in the top quartile of growth in HNW clients raised their AUM for this segment by 10 percent per year, versus an industry average of 4 percent. Consequently, they grew absolute profits by 6 percent annually, against an industry average of 1 percent. Private banks successful in this segment often choose a tailored approach to specific communities.
  4. Scale. Scale at the booking center level continues to rank as an important factor in profitability. Over the last five years, banks’ booking centers managing more than €30 billion in client AUM saw profits grow by over 6 percent per year, versus 1 percent for banks with subscale centers.
  5. Relationship manager productivity. Private banks that were able to substantially increase the productivity of their RMs realized 12 percent annual growth in AUM per RM, versus 5 percent for the industry. These top-quartile banks saw annual profit growth that was three percentage points faster than the industry. At the other extreme, banks that simply relied on expanding the size of their RM networks without concomitant increases in productivity suffered profit contraction—a drop of 3 percent annually, as their numbers of RMs expanded 7 percent.
  6. Cost management. Control over costs remains a key factor in profitability. Our survey confirms that top-performing private banks recognize the importance of continuous spend management and develop ongoing cost reduction plans for the short and medium terms. Banks in the top quartile for cost management reduced costs by 11 percent annually over the five years, with a corresponding increase in profits of 4 percent.

The importance of these six factors will not surprise anyone familiar with the private banking sector. They are evergreen fundamentals. However, intuitive though they may be, excelling in these areas is not easy and requires great discipline. Few banks can lead across all six factors. Doing so requires a holistic transformation that combines managerial and leadership actions with granular plans for people development.

Setting the strategic direction

To achieve success in the fundamental factors that lead to outperformance in private banking, most banks will need to start at the strategic drawing board. But given the current headwinds, now is, in some ways, an opportune time for rethinking strategy. Great leaps vis-à-vis competitors are always difficult but may stand a greater chance of success in times of industry challenge.

As private banks debate their strategic direction, they must start with a clear sense of their current position—whether it be in terms of client segments, state of technology, or economics. Large, global private banks are the most likely to embark on significant strategic changes, simply because they can invest more in their business models and operating models (including some disruptive trial-and-error ideas). Smaller private banks, whose smaller budgets limit their options, will need to link any changes more closely with today’s operating model and undertake trial-and-error projects in a more targeted way, focusing on their current or future competitive advantage.

Small and medium-size private banks: Make clear choices. For relatively small and medium-size private banks, the ability to provide bespoke services and products for on- and offshore HNW client relationships remains the strategic core. This proposition helps preserve margin premiums to balance the relatively higher cost of the operating model.

Small and medium-size private banks need to set their investment priorities on a few areas of differentiation—whether tailoring products to niches and affinity groups or providing bespoke advice in more complex setups (for example, cross-border advice). These banks cannot afford to build extensive platforms, so they should differentiate by having RMs focus on lead generation and client serve with distinctive insights.

  • Segment focus. Because most small and medium-size banks lack the capacity to invest large amounts into a scalable advisory and investment engine, they should avoid trying to serve a broad range of client segments. Instead, they should narrow their focus to HNW and the lower tier of ultra-high-net-worth (UHNW) clients.
  • Channels. These banks should also focus RMs on distinct face-to-face or remote advisory, using basic self-service digital capabilities, such as e-banking, for simpler transactions. This approach will allow them to focus their resources on providing a differentiated experience for clients, whether through content, quality of advice, or other means.
  • Offering. As smaller private banks are often the second or third banking relationship for their clients, they should strengthen their capabilities for structuring wealth and cash flows for families or across networks of accounts, as well as their investment services for wealth held at the bank. Investment offerings should be backed by an open product architecture that matches the bank’s own products with products from third-party providers that serve specific clients’ needs.
  • Technology. Usually, smaller banks have kept IT in-house. But as technology investment needs increase, the best path may involve external, standardized, or fully outsourced solutions. In particular, smaller banks should consider externally sourcing applications that do not lend themselves to differentiation.
  • Operating model. As with technology, smaller private banks should consider outsourcing elements of the operating model—for example, payment processing.

Private banking arms of universal banks: Emphasize the integrated global proposition. The private banking divisions of large universal banks can make greater investments in technology than their small and medium-size peers. However, universal banks still need to make technology portfolio choices for their various banking businesses, so they do face limits on how much they can invest.

The portfolio context lends itself to synergies across businesses. For example, a proposition for affluent clients could later move these clients into private banking. Another example of synergy would be a holistic wealth management coverage model in close collaboration with the corporate bank.

  • Segment focus. Private banking arms of large universal banks need to offer a single proposition for all wealth segments, as opposed to multiple offerings for specific subsegments. The proposition should focus on affluent and lower-HNW clients moving up from retail segments, as well as UHNW clients referred by the corporate banking arms.
  • Channels. The banking arms should develop a basic omnichannel experience that offers a combination of self-directed transaction functionalities from their retail and corporate banks and more sophisticated, offline advisory for wealthy clients. An omnichannel design could call for adapting self-directed digital experiences from retail and corporate banking and combining them with simple digitally enabled capabilities for face-to-face and remote private banking interaction. To differentiate their offerings from those of large private banks, the private banking arms of universal banks can digitally combine their broad range of products and services, offering the depth and sophistication of an omnichannel, investment-led advisory interaction.
  • Offering. Private banking arms of universal banks are often their clients’ primary banking relationship. Clients therefore are likely to be looking for a full suite of products, including transactions, investments, lending, and financial planning. To differentiate their services from pure-play private banks, firms should consider investing in more sophisticated lending and comprehensive wealth and provisional planning, to support clients’ entrepreneurial ambitions.
  • Technology. Currently, most of the banks in this category develop their IT in-house and share proprietary applications with retail and corporate banking. Beyond core functions, however, we recommend investments in wealth-specific tools for clients and RMs. Banks of this type should make careful make-or-buy decisions on tools specific to wealth management.
  • Operating model. Private banks in this category can leverage other parts of their banks to create synergies in operations. Tasks that are specific to wealth management, such as more complex know-your-customer (KYC) or anti-money-laundering (AML) checks, can be either performed in-house or outsourced—the decision should be based on the bank’s existing technology model.

Large private banks: Further develop scale. Large private banks generally have a broad coverage of client segments and geographic markets, which confers an advantage in continuing growth and expanding scale. These banks need to balance shorter-term growth against selected longer-term aspirations on channels, products, or technology platforms. As part of strategic considerations, banks should conduct regular portfolio reviews to sharpen focus, simplify operations, and direct investment to the most promising areas. Programmatic M&A of clearly defined client portfolios or geographic markets can help in this regard.

  • Segment focus. Large private banks can choose to focus on several segments—for example, HNW or UHNW; first, second, or third-generation wealth; and specific subcommunities at market level. Their challenge is to choose specific segments for which they can build segment-specific, differentiated, and scalable propositions.
  • Channels. Large banks should offer clients an omnichannel advisory experience, with clients self-selecting different channels and servicing modes. Private banks can preserve the premium experience while reducing the cost to serve. To build this omnichannel experience, banks need to combine standardized transactional and communication functionalities with differentiating product and service capabilities. In addition, they should build a client data model that enables scalable, personal interactions across channels.
  • Offering. The offering should be differentiated across client segments to allow for scaling affluent and HNW segments, as well as catering to complex UHNW clients. Prioritized access to sought-after asset classes is a differentiator, which large banks can achieve through partnerships with alternative asset managers. Unlike smaller banks, these banks can choose to manufacture parts of the product shelf in-house.
  • Technology. Large private banks have the means to modernize parts of their technology stack (e.g., by choosing a standard platform and applications) and achieve cost efficiency. As part of the same process, banks should consider outsourcing technology for nondifferentiating, specialized tools for specific regions, such as KYC or tax reporting for specific geographies. However, banks should invest in a proprietary and differentiating technology and data to support their omnichannel offerings. Wealth managers must bear in mind the need to develop, attract, and retain technology talent; with many banks competing for the same talent, offshore and nearshore locations may be part of the solution.
  • Operating model. To retain strict control over costs while laying the groundwork for continued innovation, large private banks should offshore or nearshore their service centers if they have not done so already.

Beyond these archetypes, innovative and disruptive private banking models will continue to emerge. We expect some of these new arrivals to achieve a foothold in the market, but they will likely remain on the margins of the private banking industry. The bigger risk for disruption comes from within the industry—that is, from larger players making significant investments or pursuing M&A or partnerships with fintechs and deploying innovative technology at large.

HNW clients will continue to diversify their wealth across three to five service relationships, and growth from existing HNW clients will likely still accrue to incumbents. In addition, the existing stock of wealth at incumbent players remains sticky and will see minimal runoff over the next decade. Private banks, especially larger ones, can consider collaborating with innovative players to integrate those firms’ services into their own offering. They can even consider acquisitions that take advantage of technology companies’ decreasing valuations.

Ultimately, the strategic choices also depend on a bank’s strategic conviction, change capacity, and implementation risk capacity.


Europe’s private banks must approach today’s evolving and volatile environment with the strongest proposition possible, to attract and retain clients looking for better wealth solutions. Investment offerings should be reevaluated with scenarios that include higher inflation and interest rates and the possibility of local or global recession. Banks should reassess and sharpen their segment focus, directing selling and retention efforts to the client groups it has the strengths to serve best. And given the growing importance of investing via ESG principles, banks should continue to develop dedicated offerings.

In addition, optimal delivery across technology and operations is essential. Each type of private bank needs to build out a platform to suit its model of relationship management, whether high-touch with conventional RMs or omnichannel services that integrate and promote the use of all account and transaction functions.

Fortunately, private banks have a proven set of metrics for guiding their efforts and monitoring revenue growth and profitability. These six variables show the effectiveness of client relationships, products, and the size and scope of the bank, based on their track record of association with banks posting superior profit growth.

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