Surveys

Change Your Traditional Model, Swiss Banks Warned

Jackie Bennion, Deputy Editor, 10 January 2020

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Under the weight of low to negative interest rates, Swiss managers report how they view the revenue bleed such rates cause and what can be done. The comments add to calls along similar lines from the Swiss Bankers Association in 2019.

If 2020 has begun with a relief rally, in optimism at least, a survey of managers released yesterday by EY, aka Ernst & Young, might temper enthusiasm. Looking specifically at the Swiss banking sector, the consultancy firm said that the market “has deteriorated significantly,” with retail banking feeling the most pain.

The question across the sector has been how do you solve a problem of pervasive negative interest rates and extraordinarily flat yield curves. The report canvassed 100 managers on these issues in November concluding that traditional Swiss business models have largely reached their limits, and banks will need to tap into new sources of revenue and double down on meeting customer needs.

“Low interest rates, low volatility and substantial uncertainty” are the conditions in which Swiss banks are currently operating, said Patrick Schwaller, managing partner in audit financial services at EY in Switzerland.

In both the interest margin business and in commissions, banks are increasingly facing vanishing margins and little let up in geopolitical uncertainty and sluggish economic growth.

Not surprisingly, about a third of banks surveyed expect profits to fall in the near term (this figure has increased from 22 per cent and 16 per cent respectively of recipients feeling this way in the two previous years).

“Sentiment among retail banks in particular has suffered a remarkable decline,” Olaf Toepfer, head of banking and capital markets at EY Switzerland said, with banks increasingly looking at how to pass on negative interest rates to more of their customers. In 2015, 70 per cent of banks categorically ruled this out. By last November’s survey that figure had dropped to 21 per cent, with more than half of banks now saying that they would like to reduce the threshold for applying negative interest to customers.

“Negative interest rates are already a reality for high net worth private customers. How much longer can banks protect small savers?” Schwaller said.

While EY acknowledged that Swiss banks have remained relatively resilient to low-margin pressures, their traditional business models are now “fundamentally” in question. “This is particularly true for the cantonal and regional banks with their strong focus on domestic and interest margin business,” Schwaller said.

“A total of 83 per cent of those surveyed believe that they will need to tap into new sources of revenue in the future in order to maintain their earnings power,” he said.

EY is not alone in bemoaning the impact of negative interest rates. Last year, the Swiss Bankers Association said negative official Swiss rates (-0.75 per cent) were not just hitting bank margins, but causing inflated real estate prices. Several banks, such as Credit Suisse and UBS, have adjusted their fees because of the rates.  

(Separately, WealthBriefing is joining EPAM, provider of product development and software engineering, at a cocktail reception in Geneva on 30 January at the newly-branded Fairmont Grand Hotel. To register, click on this link.)

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