EY Bank Barometer 2016 ‒ core business back in the frame

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Having for years concentrated their resources on resolving legacy burdens and implementing new regulations, Switzerland's banks are now focusing on strategic reorientation and developing core business. However, transforming business models is a major challenge in what is a volatile, uncertain and complex marketplace. As the EY Bank Barometer 2016 shows, not all companies will make the structural leap required: observers are expecting the number of banks to contract, while branch networks are set to undergo further streamlining.

Zurich, 7 January, 2016 – Partnerships with non-banks; new markets and internationalization; outsourcing and offshoring – these three topics are the ones most often cited by banks when asked about current core tasks. Strategic reorientation, profitable earnings growth and improvements in efficiency are the focus of attention. In the opinion of the 120 banking institutions queried for the EY Bank Barometer 2016 (not including the two biggest banks), coping with regulatory requirements has dropped from top spot to sixth place in terms of relevance. "Meeting statutory requirements and improving efficiency are just not enough to ensure long-term survival. A sustainable improvement in added value is crucial. So, once again, the focus is on what really matters, and that's the needs of our customers," says Patrick Schwaller, Managing Partner FSO Assurance at EY Switzerland, summing up the results of the survey.

More staff needed in the short term
In a challenging economic environment, the banks have again posted satisfactory results, with 81% (previous year 88%) of the companies surveyed rating their current operational business as positive or fairly positive. The outlook for the future was, however, a little more cautious, with 75% (84%) of companies expecting results to improve over the next 12 months. The banks are recognizing that structural change comes at a price and calls for targeted investment. This is reflected in growing staff requirements: 33% (24%) of the banks said that they intended to create new jobs in the next 12 months, the highest figure for five years. However, "the trend toward more personnel will not continue for long. On the contrary, sourcing and structural efficiency drives will see jobs outsourced or eliminated altogether in the medium term due to increasing automation," says Olaf Toepfer, Partner and Head of Banking & Capital Markets at EY Switzerland. And it is true that the banks are pressing ahead with the industrialization and sourcing of business processes, with 89% (92%) of those surveyed reckoning that the two topics will become more relevant over the next few years.

Untapped digitization potential
In many sectors of industry, digitization is the key driver of change, and the banks have certainly also recognized the long-term potential of this new technology. That said, only a third of the banks questioned currently have a digitization strategy. And only 27% believe that technological progress will fundamentally change the financial industry. A majority of 67% reckons that digitization will manifest itself merely in additional sales channels. "The banks certainly recognize its long-term potential, but there is evidently still uncertainty as to how digitization will actually add value to the finance industry. And many banks may still lack the imagination, the ideas and the initiatives to introduce structural innovation at the core of the value chain," says Marco Amato, Partner Wealth & Asset Management at EY Switzerland.

Competition from outside the sector posing a new threat
The banks are beginning to take the competition from outside the sector seriously. For the first time in the survey's history, a majority of the financial institutions queried (56% compared with 44% in the previous year) considered their market position to be under threat from external providers. And it is major technology and telecom firms rather than FinTech start-ups that are attracting all the attention. Not only do these companies have the expertise and the infrastructure to turn the increasingly important raw materials of data and information into profits, but they also possess the financial means necessary to surmount the lofty entry barriers into the regulated financial industry.

"The new market players are more than capable of making inroads into significant segments of the banking industry. The challenge for the banks is not only to defend the client interface, but also to identify innovative ways to exploit its potential. Besides intelligent digital strategies, we're probably going to have to enhance the customer experience in the branches," says Patrick Schwaller.

The structural transformation is accelerating
The process of consolidation within the Swiss financial industry is gaining momentum. Of the banks surveyed, 86% (79%) assume that there will be substantially fewer banking institutions in Switzerland by 2020. Branch networks will be streamlined too, with 85% (76%) expecting a significant reduction in numbers. "Since 2010, over 60 institutions have disappeared from the Swiss banking market and more than 200 branches have closed their doors. And it is expected that dozens more banks will fail to survive the structural progression, as they will be unable to find the energy needed to develop. As legacy burdens are resolved, existing takeover uncertainties will diminish and this will serve to speed up the consolidation process still further over the next two years," says Olaf Toepfer.

Interest rates – a double negative
The SNB's interest and exchange rate decisions are putting the banks under pressure. The negative interest rates are the bigger challenge, as they tend to squeeze margins and make it more difficult for banks to manage their balance sheets. Moreover, in the current climate, it is becoming an increasing challenge to interpret accurately the key financial models that were essentially developed for a positive interest rate environment. Ultimately, negative interest rates also hamper investment opportunities and tend to reduce the propensity of customers to engage in transactions.
"The negative interest rates are giving out the wrong signals in terms of capital and liquidity, and this may ultimately lead to the misallocation of resources, with long-term consequences that are difficult to predict," warns Patrick Schwaller. Notwithstanding these challenges, 70% of the banks queried stated that they are not as yet planning to pass on the negative interest rates to their private customers. "And not without reason: doing so would merely exacerbate the effect of this undesirable trend," adds Schwaller.

Increasing risk associated with SME loans
The abandonment of the Swiss franc's floor against the euro is having an increasing impact on the banks' credit risk. No less than 45% of the banks in the survey expected an increase in impairments and provisions in commercial banking business (corporate clients) over the coming 12 months. Many banks believe that the strong franc will have an increasingly detrimental effect on Switzerland's attractiveness as a business location, and that export-oriented SMEs will increasingly struggle to service their loans. That said, it does not appear that banks are intending to restrict lending to SMEs.

AEOI behind schedule
The Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOI) is on its way. The time-frame for implementing AEOI is tight, given that client data for 2017 has to be reported to all the participating foreign authorities. But a quarter of the banks surveyed had yet to launch a project in this regard. Besides cost factors, the main bone of contention for the banking institutions in question is the lack of any coherent implementation guidelines and interpretations to date.

Still no significant asset outflows
The trend toward greater fiscal transparency continues unabated. That said, 66% (69%) of the banks claim that they have yet to record significant outflows of assets, and the percentage of private banks making the claim is lower still at 53%. "Many banks are evidently in a position to largely offset any outflows with inflows of new money. As before, the Swiss banking industry appears to be adept at acquiring substantial volumes of new money. Particularly at times of heightened volatility and uncertainty, the safety and stability of Switzerland as a banking center is in strong demand," says Marco Amato.

About the study
The EY Bank Barometer is based on a survey of 120 managers (executive board members) of various banks across Switzerland, but not including the two major banks. Of the banking institutions queried, 39% were private banks, 29% were regional banks, 20% were foreign banks, and 12% were cantonal banks. In terms of geography, 76% of the banks are based in the German-speaking part of Switzerland, 20% in western Switzerland and 4% in Ticino. The telephone survey was conducted in November 2015 on behalf of EY by the independent market research institute Valid Research of Bielefeld, Germany.


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EY’s organization is represented in Switzerland by Ernst & Young Ltd, Basel, with ten offices across Switzerland, and in Liechtenstein by Ernst & Young AG, Vaduz. In this publication, “EY” and “we” refer to Ernst & Young Ltd, Basel, a member firm of Ernst & Young Global Limited