There is an expanding gap between the profitability of Switzerland’s largest and smallest banks, while the industry as a whole is struggling to curb costs and nearly a quarter of banks were in the red last year, a report by KPMG and the University of St Gallen has revealed.

At a time when the Swiss banking industry has been under attack over its secrecy laws, the report will stir debate on whether Switzerland, home to over $2.0 trillion of offshore wealth, will see further consolidation of the banking sector, with some wealth flowing overseas to rival jurisdictions such as London and Singapore.

The study showed that local private banks, aided by improved stock market performance, increased assets under management overall, as well as revenue and earnings. But the results also show that the environment is tough for many firms, such as those with less than SFr5 billion ($5.36 billion) of AuM. “The percentage of institutions operating at a loss is stagnating,” the report, called Performance of Swiss Private Banks 2013, said.

Overall returns on equity – one measure of performance – rose to 4.0 per cent in 2012, but this is far below a figure taking full account of risk, which should be around 8 to 10 per cent, depending on the type of bank, the report said. At 6.9 per cent, RoE for large institutions is way above the 3.1 per cent figure for smaller ones.

“The efforts of banks that proactively adjusted their business model appear to be paying off, and they were able to improve their performance even in a difficult environment. The wheat has begun to separate from the chaff in this respect.”

Last year, some 23 per cent of banks made a loss, with all of them in the small and medium-sized categories. Many of these firms had made losses over the preceding four years but these could be absorbed due to a large equity cushion and shareholders still seem willing to accept this, the report said.

The main driver of higher assets under management has been the rise in global equity markets, lifting AuM by an average of 4 per cent last year. But the figure masks a contrast: more than half of the banks lost client assets, and only 20 per cent of institutions attracted more than 10 per cent in fresh money.

On the cost side, the average cost/income ratio for all banks was at 80 per cent; large banks cut their ratios to 71 per cent from 77 per cent, while small banks have ratios at 82 per cent, the survey found.

Finally, the report said the number of private banks contracted in number by 13 in 2012 to 148, with liquidations and merger and acquisitions explaining the shrinkage.