OREANDA-NEWS. Fitch Ratings has concluded its periodic review of Swiss private banks, which comprises three large independent wealth and asset managers.

We expect cost control and consolidation to remain a feature of the private banking sector, as the introduction of automatic exchange of information and the drive to digitalise processes to improve operational efficiency will add to typically high cost bases. In 2015, revenue generation was challenged by a slowdown in wealth accumulation, partly explained by stagnant or declining equity and bond markets, resulting in slower net new money growth across our sample of private banking peers compared with 2014.

Our rating actions include affirmations for Banque Pictet & Cie SA's (Banque Pictet) and Compagnie Lombard Odier SCmA's (Lombard Odier) Long-Term Issuer Default Ratings (IDRs) at 'AA-' with Stable Outlook. We have maintained EFG International's (EFGInt) Long-Term IDR of 'A' on Rating Watch Negative, reflecting our view that the bank's capitalisation could be materially weaker once the acquisition of BSI Bank AG is completed, likely in 4Q16.

The high ratings of the Swiss private banks reflect their strong company profiles and their willingness to take on little on-balance sheet credit risk. As low interest rates put pressure on net interest margins, the banks have taken measures, including loan growth and lengthening maturities in their securities portfolios, to offset the negative impact of low-yielding assets.

We do not expect this to materially increase credit risk as the vast majority of the investment securities are highly-rated, liquid sovereign and supranational bonds. Loan growth among Fitch-rated Swiss private banks relates to Lombard lending, conservatively collateralised by securities portfolios and extended to private banking clients as an ancillary service.

We view positively the Swiss private banks' ability to generate strong and stable profits from recurring fee income. However, low client activity can affect wealth management earnings, in particular for banks that derive a high share of earnings from transactional revenues. Reputation, advisory mandate penetration and scale also play a role, as private banks with a larger base of assets under management, including the three Fitch-rated banks, typically withstand gross margin erosion more successfully. We expect net new money growth to remain challenging for 2016, notably in Latin America due to nascent voluntary disclosure programmes and Asia Pacific, where inflows can be volatile.

Settlements reached with the US Department of Justice on US tax matters in 2015 have removed material contingent liabilities for Lombard Odier and EFGInt. Pictet has yet to reach a settlement, but we expect it to be able to absorb any potential fine from the investigation due to its strong earnings capacity and sound capitalisation. We view operational risk as one of the more relevant risks for Swiss private banks. This is because large operational incidents and the added challenges posed by the forthcoming implementation of automatic exchange of information in certain jurisdictions could have a detrimental impact on their franchise value.