Switzerland’s stability is core to banks’ future success given current volatilities and banks remain upbeat
Despite the global financial and debt crisis and other challenges, Swiss banks remain confident with an upbeat outlook. According to the «Ernst & Young Bank Barometer 2013», banks are relying on their strengths. The Swiss Private Banking sector is exposed to the greatest competitive pressures facing banks in Switzerland: with regulatory requirements increasing, consolidation is increasingly likely. While respondent banks are taking in their stride Germany’s recent rejection of the withholding tax agreement signed with Switzerland, the Swiss Federal Supreme Court’s ruling on retrocessions and trailer fees in Switzerland, as well as more stringent European regulations in this area, necessitates a fundamental rethink of fee models.
Zurich, January 10, 2013 – Some 20 percent of the 120 banks (excluding the two largest banks) surveyed in December 2012 for the Ernst & Young Bank Barometer 2013 assessed their current business performance as positive (versus 15 percent the previous year), with 58 (62) percent rating their business performance as somewhat positive and only 22 (23) percent experiencing a significant fall in operating income. The banks surveyed also continued to rate their future prospects positively: as in the previous year, 70 percent expect their business to develop positively or somewhat positively in 2013. While the majority anticipates declining remuneration for employees and shareholders, they do not expect wide-spread job redundancies in the months ahead. At first glance, this unchanged positive assessment is surprising. The results of the survey reveal the continuing high importance and relative strength of Switzerland as a financial center. Swiss banks to date have withstood the effects of the global financial and debt crisis relatively well and the viewpoint of three quarters of the banks is that they have actually been strengthened by the financial crisis. «In fact, it is precisely in uncertain times that there is a strong demand for the security and stability that characterizes Switzerland and the Swiss financial system», says Patrick Schwaller, Partner and Head of Swiss Bank Barometer at Ernst & Young.
Support for the policies of the Swiss National Bank
The generally positive assessment of future prospects is also linked to the somewhat more optimistic assessment of developments in the financial markets. The majority of the banks surveyed believed that the global financial markets will remain unchanged or will develop positively; only 25 (58) percent of respondents think the financial markets will deteriorate. The Swiss National Bank's policies continue to enjoy very strong support in the banking sector. 87 (89) percent of the surveyed banks view the introduction and defense of the minimum exchange rate for the Swiss Franc against the Euro as positive or somewhat positive. «The various stability mechanisms decided, initiated and already partially implemented by the central banks and states are having an effect with some easing of tension within financial markets», says Patrick Schwaller.
Private banking under pressure
Private banking is currently facing the strongest competitive pressures. 60 (35) percent of the banks surveyed identified private banking as the business sector facing the greatest challenges and fiercest competition. Only 10 (40) percent consider retail banking to be experiencing strong competitive pressures. Expectations of consolidation in the banking sector have again increased: 92 (88) percent think that there will be mergers or takeovers within four years at the latest and expect consolidation in private banking to occur even sooner. «Private banking is in a phase of fundamental repositioning and is at the same time struggling with declining income and rising costs. For this reason, the effect on competitive pressure is increasing», says Iqbal Khan, Partner and Head of Banking & Capital Markets at Ernst & Young Switzerland.
Tax agreements taken in stride
Respondents banks are divided on developments concerning banking secrecy and withholding tax agreements: half of those surveyed believe the consequences for Switzerland as a financial center will be positive or somewhat positive, while the other half believes they will be negative. A more unified viewpoint by the banks is displayed with respect to Germany’s rejection of the withholding tax agreement it signed with Switzerland, with 72 percent of banks surveyed viewing Germany’s rejection as positive or somewhat positive. «The reasons behind this remarkable finding are also due in part to banks being able to avoid the costs of implementation and the resulting immediate outflow of client assets. This is especially true for small and medium-sized private banks, as well as banks with a focus on the domestic Swiss market», Patrick Schwaller says.
Declared money strategy and increased due diligence obligations
Despite Germany’s rejection of the withholding tax agreement, some banks have already begun to implement relevant measures. Some 21 percent of the banks surveyed have already implemented a declared money strategy, 12 percent have extended their existing due diligence obligations to include potential tax offenses, and six percent have increased their investments in data security. On the other hand, a majority of the banks surveyed (61 percent) see no pressing need to implement immediate measures following the rejection of the withholding tax agreement by Germany. «Switzerland's adoption of the OECD standard for administrative assistance for tax purposes as per Art. 26 of the OECD model tax convention and a further expansion of tax due diligence for higher tax risk business relationships mean that banks already have strategic concepts for the future», says Iqbal Khan, Partner and Head of Banking & Capital Markets.
Overheating in the real-estate market – more restrictive credit offering expected
A growing majority of 77 (65) percent of the banks surveyed are of the opinion that there are currently signs of a bubble developing in the real-estate market and that this development has gathered pace in recent months. A stable majority of 53 (59) percent of banks therefore think that credit issuance will become more restrictive in the future. The majority of banks think that over the next six to 12 months, they will see the need for impairment allowances and provisions to cover for defaults in the loans business to remain relatively stable, while 42 (60) anticipate an increasing need for impairment allowances.
Increasing transparency in remuneration mechanisms
The Swiss Federal Tribunal's groundbreaking ruling on retrocessions and trailer fees will have major consequences: a majority of banks surveyed (77 percent) think that banks will be faced with significant claims for restitution, particularly in the case of the asset management business and to a lesser degree for the investment advisory sector. Some 70 percent think that the current distribution fee models will eventually disappear, while 74 percent expect a fundamental increase in transparency regarding remuneration mechanisms. The majority of banks do not, however, believe that the price of bank services will fall in the long run; only a third expect the increased transparency to lead to lower prices. «Along with many other issues, the financial industry is confronted with the major challenge of finding a new way to deal with inherent conflicts of interest and new remuneration models capable of achieving long-term acceptance», says Iqbal Khan.
Information about the survey
The third annual Ernst & Young Bank Barometer, is based on a survey of 120 managers (executive board members) of various banks across Switzerland, but excluding the major banks. Of the banks surveyed, 36 percent are private banks, 28 percent are foreign banks, 26 percent are regional banks and 10 percent are cantonal banks; 73 percent of the banks are based in the German-speaking part of Switzerland, 22 percent from Western Switzerland (i.e. Geneva area) and 5 percent from Ticino. The telephone survey was conducted in December 2012 on behalf of Ernst & Young by an independent market research institute (Valid Research of Bielefeld, Germany).
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