Swiss retail banks still protecting savers from effects of ongoing negative interest rates for now

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  • Interest margins of Swiss retail banks have been declining since 2007
  • Individuals are still being largely protected from the effects of negative interest rates, but other client groups are already being directly affected
  • As long as negative interest rates are not charged to savers across the board, mortgage borrowers are unable to benefit from significantly lower interest rates

ZURICH, 21 SEPTEMBER 2016 – The negative interest rate environment is resulting in further margin erosion for retail banks: according to the findings of an analysis of 348 banks in Switzerland by advisory firm EY, the difference between the client interest rate and the market interest rate (median interest rate, i.e., half of banks are above or below this figure) for Swiss retail banks fell by a further five basis points from the previous year to 117 basis points in 2015. This is more or less in line with the average decline seen each year since 2007.

EY - Steady decline in interest rate margins since 2007
Steady decline in interest rate margins since 2007

Results of the first half-year reveal further drop in margins
The trend seen in recent years has so far continued on into 2016. According to an analysis of interim balance sheets, the interest margins of banks in turn fell by three basis points from the previous year in the first half of 2016.

Interest rates constant for mortgage business
The analysis also shows that, since the negative interest rate was introduced, the interest rates of new mortgage loans with a term of between five and seven years are only slightly lower. Mortgage borrowers have therefore been unable to benefit from the low interest rates on the capital markets. The reason for this is that retail banks have been unable to reduce their refinancing costs, since no comprehensive negative interest rates are charged to savings.

“Both the loan and mortgage conditions and the interest rates for savings have been decoupled from the capital market interest rate: the interest rates for loans and savings are now both higher than market interest allows,” explains Dr. Roger Stettler, retail banking specialist at EY Switzerland.

EY - Trends seen regarding the interest margin for mortgages with a term of between five and seven years, the 12-month LIBOR rate and Swiss 5-year bonds since September 2014
Trends seen regarding the interest margin for mortgages with a term of between five and seven years, the 12-month LIBOR rate and Swiss 5-year bonds since September 2014

Retail clients currently protected from negative interest rates
As the most important lender in Switzerland, retail banks refinance their loans primarily through client deposits. In Switzerland, few client groups are currently being charged negative interest rates – as yet only institutional investors and larger companies. Only one bank is currently charging its retail clients for deposits. In practice, it has been found that the introduction of negative interest rates follows a logical approach and takes place in stages. To start off with, these are introduced for internationally focused institutional clients. These are followed by national institutional clients (e.g., pension funds) and then major corporations and private clients with very high account balances. Retail clients are the last to be affected.

“Banks expect retail clients to be extremely sensitive to the onward charging of negative interest rates. Negative interest rates are not expected to be passed on to savers as a wider group, at least in the short term. Private clients with very high cash assets will be affected within a short amount of time, however, especially if the SNP reduces the negative interest rate further,” says Roger Stettler.

Increasing competition from insurance companies
The higher interest rates in the Swiss mortgage business when compared with the capital market are leading to increased activity by non-banks. Insurance companies and pension funds are particularly worth noting in this respect, as their share in the mortgage market declined in the 1990s and 2000s. The increased activity among insurance companies and pension funds is putting pressure on the market price and may increase pressure on banks to pass negative interest rates on to retail clients.

Roger Stettler sums up the trend: “As long as interest rates in Switzerland do not increase, the mortgage market will continue to be attractive. This is why there is increasing competition for banks from insurance companies and pension funds. Increasing pressure may force banks to pass negative interest rates on to savers in order to remain competitive with regard to mortgages.”

Higher liquidity requirements increase pressure on margins
The decline in interest rate margins has been fuelled further in recent years by rising liquidity requirements and costs for hedging the risk of interest rate changes. Since banks are now required to maintain a liquidity reserve that must consist of high-quality liquid assets and, owing to a lack of Swiss francs, this mainly consists of liquid assets in the form of central bank reserves, the decline in interest rate margins has become even more pronounced since the regulatory liquidity buffer was established.

Negative returns – a global phenomenon
Thanks to the central banks’ efforts to increase economic activity, negative interest rates where terms are between 2 and 15 years are now the order of the day not only in Switzerland but also in 15 European states. In Switzerland, all government bonds – even those with a term of 30 years – are now recording a negative return. It is too early to conclusively assess the intended result of this policy. In Switzerland, however, experience has shown that negative interest rates do not necessarily lead to falling interest rates for loans.

EY “Interest margin analysis 2016”: For the purpose of this analysis, the assurance and advisory firm EY reviewed the balance sheets of 348 Swiss retail banks for the years 2003 to 2015 as well as the interim balance sheets for Swiss retail banks as at 30 June 2016.


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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.