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Change Your Traditional Model, Swiss Banks Warned

Jackie Bennion

10 January 2020

If 2020 has begun with a relief rally, in optimism at least, a survey of managers released yesterday by , 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 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.)


But how?
Cost is one area in the near term, with close to half of recipients marking this as a priority for the next 12 months - the highest figure for the last three years. Reviewing banking sector compensation is likely to play its part, with almost three-quarters of those surveyed saying that compensation in the sector will be lower in the future. What this does for attracting and retaining talent raises more questions for the industry.

Where wealth managers are pinning revenue hopes is in the growth of sustainable investing and the role that active managers can play in navigating ESG opportunities, which the last year has shown comes in many shades of green, and greenwashing.

EY said Swiss banks largely agree that sustainable investing has gone beyond the hype, with more than half saying they expect to play “a significant role” in fighting climate change, with more than two-thirds set to increase their range of sustainable investments products.

Reality gap
Despite this, EY found that sustainability practices don’t follow through into banks’ advisory and investment processes or their reporting. Fewer than a third of those surveyed (30 per cent) have made sustainability a compulsory part of their reporting and just 9 per cent said that they inform customers about the ESG scores of their portfolios in regular reporting.

For inward investment, sustainability has traction, but it “does not currently play an important role in loan financing by banks,” Schwaller said. Just 19 per cent of Swiss banks surveyed reported taking ESG factors into consideration when lending, and only 25 per cent said they had any intention of accounting for ESG in the future.