European private banks continued to attract net inflows of client money last year, even as the mutual fund industry haemorrhaged cash, according to an annual survey conducted by McKinsey, the consultancy.

Net inflows totalled 3 per cent of starting assets, down from 7 per cent in 2007, with even Swiss banks attracting money in spite of “unprecedented regulatory pressure” on the “offshore” private banking industry.

However, all of the net new money went to the private banking arms of universal banks, many of which benefited from a perception of being “too big to fail”, rather than specialist private banks.

In spite of the inflows, the continent’s assets under management still fell 15 per cent due to market losses, taking the industry back to 2005 levels. McKinsey warned that the pain was far from over, with net inflows falling to zero in the last quarter of 2008 and remaining sluggish in the first quarter of this year.

Industry profits plunged from €10.5bn (£9.1bn, $14.8bn) in 2007 to €6.1bn last year, below the level of 2003, with profit margins sliding from 35 to 26 basis points of assets under management and the cost-income ratio rising from 64 per cent to 71 per cent.

McKinsey warned of significant industry-wide cost-cutting to come – only a third of banks reduced their cost base in 2008.

“The majority of bank chief executives are saying they do not see profitability coming back soon, forcing them to act on the economics and not just brush away these things as just another cycle,” said Frederic Vandenberghe, author of the survey. “The extent of the economic pressure is unprecedented and much of the cost-cutting is ongoing or to come.”

Mr Vandenberghe added that “the poor performance of some portfolios has shattered the trust in [private] banks”. This lack of trust has manifested itself in a shift away from higher margin managed assets; discretionary mandates have fallen from 24 per cent of assets to 22 per cent and the share held in mutual funds has fallen from 29 per cent to 25 per cent.

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