Structural change is coming – focus on costs and efficiency
- 87% of Swiss banks see the onset of structural change
- Their response is to cut costs and increase efficiency
- 95% of banks see negative interest rates as having serious consequences
- Many are threatened by competition from outside the banking sector
- Two-thirds of them are not making full use of the potential offered by digitalization
ZURICH, 5 JANUARY 2017 ‒ The financial sector in Switzerland is facing fundamental structural change: in a study conducted by EY, 87% of the banks questioned said they expected change and upheavals in the value chain. At the same time, margins in conventional banking business are under pressure and falling profitability is becoming a fundamental problem. Out of the 120 banks questioned by EY for its Bank Barometer 2017, 92% expect returns to keep on diminishing. So far, banks have responded to these challenges in the traditional way – by taking steps to increase efficiency and cut costs. They are not yet giving priority to realigning their strategies, business models and processes to take account of their customers’ changing needs.
Despite structural changes and problems with profitability, most Swiss banks still take a positive view of the way their business is going. In total, 80% (compared with 81% last year) say that they have achieved good operating results over the past twelve months, and 68% (last year’s figure was 75%) still expect good results in the current year. “Given the many and varied challenges – some of them fundamental – that the banking sector in Switzerland is facing, the largely positive assessment expressed by Swiss banks comes as a surprise,” says Patrick Schwaller, EY Switzerland’s Managing Partner Assurance, Financial Services. “So far, banks are showing themselves to be quite resilient, but there is evidence of a disturbing opposite trend: of the banks who responded to the study, one-third take an increasingly gloomy view of the way their business is going to develop, and some of them see serious losses ahead.”
Negative interest rates have far-reaching consequences
Banks are worried about negative interest rates: 95% of them see their persistence as having serious consequences. They see profitability going down, the prospect of long-term problems for pension providers and the risk of bubbles in several asset classes rising. “It’s worth noting that negative interest rates not only reduce revenue potential but also distort the steering of capital, which is a factor in production. That can make for misallocations of capital and liquidity – and the consequences of that cannot as yet be projected,” warns Olaf Toepfer, EY Switzerland’s Head of Banking.
The rollout of negative interest rates in private client business is planned by 35% of Swiss banks (last year’s figure was 30%), but they envisage doing this only on credit balances above a certain level or in the event of the Swiss National Bank cutting interest rates still further. This course of action is already being contemplated by 60% of the cantonal banks (20% in the previous year’s study). “So far, only a few banks in Switzerland have brought in negative interest rates in private client business. One reason for their holding back on this is the fear that negative interest rates would prompt clients to take their money elsewhere. But the evidence that the cantonal banks are changing their way of thinking about this shows that many banks are less and less willing to bear the additional costs resulting from negative interest rates on their own,” says Patrick Schwaller.
Unrecognized potential of digitalization
Digitalization is the driver for structural change. To date, though, only a minority of Swiss banks have a clear view of the former’s full potential. 64% of them (67% in the previous study) think their core business will stay as it is and see digitalization primarily as an additional sales channel. “What we’re seeing now is only the tip of the iceberg: digitalization will have a profound impact on strategies, business models and business processes. It won’t just add to distribution channels, but will present fundamental challenges as regards the banks’ interactions with their clients and the way they cooperate in value-generating networks. Digitalization is already making it easier for competitors from outside the sector to get into the market; customer loyalty has been diminishing for years, and digitalization may well make them even less inclined to stay with a particular bank,” explains Olaf Toepfer.
Competition from outside the sector is for real
Competitors from outside the banking sector are beginning to put Swiss banks under pressure. More than two-thirds of them see their position on the market at risk from new technologies, IT companies and the services offered by non-bank providers. “For a long time, the banks didn’t take the risk of competition from outside seriously. The fact of the matter, though, is that providers who are not banks are starting to come onto the market and to compete against banks in offering selected elements of the value chain. That’s made easier for them by the pace of technological change and the regulatory requirements expected to be applied to Open Banking. That makes competition tougher and pushes margins down,” says Patrick Schwaller.
Layoffs and branch closures not enough to address structural change
Both the exacerbated problems with profitability and the onset of structural change are obliging banks to concentrate even more on costs and efficiency. Those that contributed to the study see these issues as the most important in the current year, having for a long time past put risk and regulation at the top of their priority lists. The ways in which they are attempting to improve the situation include such traditional approaches as cutting staff numbers and pruning the branch network: 15% of banks (as against 11% last year) are planning to reduce headcount by 5% or more; among the private banks, who are especially hard hit by structural change, the figure goes as high as 26% (10% last year). At the same time, 95% (85% last year) of the banks responding expect the number of bank branches to be reduced considerably by 2020; they have already closed down some 640 of them between 2000 and 2015.
“If banks are to keep their options for action open, then strategic and operational efficiency needs to be improved. Tactical cost-cutting measures won’t improve efficiency in the longer term, though. Structural changes to the business model are the key to doing that. They need to apply thinking derived from industrialization to their own value chain and make use of the opportunities change presents; increased efficiency will have to be the way the banks finance the further development of their business models,” says Olaf Toepfer.
New money inflows make up for asset outflows
Despite the imminent implementation of the Automatic Exchange of Information (AEOI), 71% of the banks questioned (66% last year) said they had seen no significant outflows of foreign clients’ funds over the past twelve months. There is evidence of the private banks being much more relaxed: 74% of them (compared with 53% last year) reported no significant outflows of foreign assets. “Banks are still managing to draw new assets in,” comments Patrick Schwaller. “They’re benefiting from the worldwide increase in wealth and the marketability of Switzerland’s advantages – stability and security. However, the new assets under management are generating returns lower than what we used to see.”
Lending policy becoming more expansive
The banks want to build up their lending business: 66% (last year: 55%) of them expect their lending policies to stay as they are over the next twelve months or become more expansive. That figure is the highest for five years and covers lending not only to SMEs but also for the construction of real property. Under present conditions, lending has become a more attractive line of business than trading and investment, where the transaction volume is down.
Despite low interest rates, the banks are holding fast to the current rules on mortgage lending. 85% of the banks said they would not adjust the imputed mortgage interest rate, which is used as the basis for calculating the affordability of home purchase. “There is at present no support for any cut to the imputed mortgage interest rate; there are banks that won’t do it, and the regulator won’t allow it. By keeping it as it is, the banks are helping to prevent a real estate bubble and also protecting themselves against the possibility of defaults if interest rates rise over the longer term,” comments Olaf Toepfer.
About the study
The EY Bank Barometer is based on a survey of 120 managers (executive board members) of various banks throughout Switzerland. The questions were also put to managers working for the two big banks within Switzerland; their views have been drawn on in the general evaluations but have not been included in the evaluations by type of bank. Of the banks surveyed, 34% are regional banks, 27% are private banks, 23% are foreign banks and 16% are cantonal banks; 74% of the banks are based in the German-speaking part of Switzerland, 19% in Western Switzerland and 7% in Ticino. The telephone survey was conducted in November 2016 on behalf of EY by the independent market research institute Valid Research of Bielefeld, Germany.
- EY Bank Barometer 2017(7.7 MB)
- Press release(62 KB)
- Portrait Patrick Schwaller
- Portrait Olaf Toepfer
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