7 minute read 7 Jan 2021
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Banking Barometer 2021 – Resilience

Authors
Patrick Schwaller

Managing Partner Audit Financial Services | Switzerland

Reliable and trusted business partner. Gets things done. Pragmatic. Enjoys mountaineering.

Olaf Toepfer

Banking & Capital Markets Leader | Switzerland

Transformation leader. Passionate about shaping the banking industry of tomorrow. Father of three kids.

Timo D’Ambrosio

Director Audit Financial Services | Switzerland

Reliable and passionate auditor. Specialized in Retail Banking. Gets things done. Loves to play tennis.

7 minute read 7 Jan 2021

According to the survey, Swiss banks are resilient to the consequences of the coronavirus pandemic and are optimistic about the future.

In brief

  • The banks have so far coped well with the coronavirus crisis, especially as they have strengthened their capital base since 2008 and the structure of their loan books is healthy.
  • The bedding in of the negative interest rate environment is exacerbating structural earnings problems. Negative interest rates are becoming more likely for private customers as a result.
  • The coronavirus pandemic has led to an unexpected acceleration in digitalization, which is helping to provide new perspectives on costs and innovation.

Global economy in a state of emergency – banks show themselves to be resilient

The global economy has been in a state of emergency since the outbreak of the coronavirus pandemic at the start of 2020. Only determined intervention by governments and central banks prevented a collapse. In the lending business, the crisis led to an increase in credit risks in individual sectors, but significant loan defaults have so far been avoided due to the comprehensive government rescue measures. At the same time, the surge in crisis-induced volatility led to more trading by customers and investors again, boosting banks’ trading and commission business. Swiss banks entered the coronavirus crisis from a position of strength.

Operational business performance

53%

of the banks surveyed rate their business performance in the past year as positive

The multi-year ‘fitness regime’ in place since the 2008 financial crisis has paid off and banks have shown themselves to be highly resilient during this crisis. Since that time banks have reduced risks and further strengthened their capital and liquidity buffers. It is therefore hardly surprising that the banks have so far coped well with the endurance test posed by the coronavirus pandemic: solid results, no system outages, a largely smooth transition to working from home and no negative headlines. The banks have also proven deft and dependable in dealing with the deluge of corporate customers brought about by state-subsidized loans programs, which they themselves proactively helped to shape. In short, the banks have made an important contribution to overcoming the crisis and, unlike in the financial crisis in 2008, have been part of the solution not the problem. 

The multi-year fitness regime in place since the 2008 financial crisis has paid off and banks have shown themselves to be highly resilient during this crisis
Patrick Schwaller
Managing Partner Audit Financial Services | Switzerland

No panic in spite of expected loan defaults

Despite this good start, the banks agree that the economic consequences of the coronavirus pandemic will leave some scars. 75% of the banks surveyed fear that there will be a sharp increase in impairments in the short term, especially in the lending business with SMEs (previous year: 12%). Skepticism has also increased to a small degree in the residential finance business. For example, 36% of banks expect loan defaults to increase in the coming six to twelve months (previous year: 7%). Given these expectations, it is unsurprising that only 59% of the banks surveyed, which is 8 percentage points less than a year ago, still expect positive business performance in the short term (previous year: 67%).

In the long run, however, the banks are not panicking about the risk of loan defaults. 52% and 44% of the institutions surveyed forecast unchanged impairments in the long term in the residential construction financing business and the SME lending business respectively, and it appears they expect the period of increased loan defaults to be on the short side. This is mainly due to the healthy structure of the banks’ loan books, which consist mainly of mortgage loans. The banks are also confident about the resilience of Swiss SMEs. 83% of the banks expect SMEs to recover from the crisis within the next two to three years.

Are negative interest rates for private customers inevitable?

Normalization of monetary policy has become a distant prospect with central banks continuing to expand the money supply as a result of the coronavirus crisis. The vast majority of the banks (82%) believe interest rates in Switzerland will still be very low in 10 years’ time. The prospect that low/negative interest rates may persist for several more years is exacerbating the structural earnings difficulties of banks and the margin erosion in the important interest income business that has been going on for several years now. The higher-interest paying loans and financial assets from the past are gradually expiring without there being anything to adequately replace them. This also applies to investors who are leaving funds from the repayments of maturing bonds in their bank accounts for the time being due to the lack of alternatives, further exacerbating the banks’ earnings problems.

Negative interest rates

11%

of the banks surveyed categorically ruling out passing on negative interest rates.

Given these developments, it is unsurprising that by now only 11% of the banks surveyed categorically rule out passing on negative interest rates to private customers. Last year it was 21%, while five years ago the figure was as high as 70%. Charging negative interest on customer balances is therefore no longer taboo, especially for customers who do not use any other revenue-generating services for the bank apart from plain account management.

For the time being, the talk about the threshold for negative interest rates has somewhat calmed down this year and 50% of banks – about the same amount as last year – say they intend to lower this bar. One reason is that the SNB is increasing the exemption threshold for paying negative interest. Another is that, in the wake of the coronavirus pandemic, the banks have deliberately shown restraint in passing on negative interest, presumably also for reputational reasons. But due to the increasing pressure on the banks’ revenues and earnings, it appears this will be a only momentary state of affairs.

The prospect that negative interest rates may persist for several more years is exacerbating the structural earnings difficulties of banks and the margin erosion in the important interest income business that has been going on for several years now.
Patrick Schwaller
Managing Partner Audit Financial Services | Switzerland

Coronavirus crisis providing new perspectives on costs and innovation

As everyone knows, in every crisis lies an opportunity. For instance, the coronavirus pandemic has led to an unexpected acceleration in the digitalization of business models and processes. The banks had to switch to working from home in a very short time and, thanks to the investment they have made in IT in recent years, they have mastered this challenge quite successfully and without any significant problems. Bank customers have also increasingly used digital channels to conduct their banking transactions, which has ultimately led to online and mobile banking being much more widely accepted today than before the crisis.

These experiences have brought new perspectives on costs and innovation, which can be of service given the challenges lying ahead. With the threat of loan defaults, gradual margin erosion in the lending and investment businesses, ongoing competition from challenger banks and FinTechs, and a largely saturated domestic market, it is unsurprising that the banks want to focus primarily on cost cutting (at 46%, it is the most frequently mentioned issue in focus) over the next six to twelve months. It is therefore only natural that jobs are increasingly being moved from the expensive centers to the cheaper periphery or to employees’ home, at the same time as the existing office real estate and branch networks are being reviewed.

But savings alone will not be enough to ensure the banks still have the ability to create value in the future.
Olaf Toepfer
Banking & Capital Markets Leader | Switzerland

But savings alone will not be enough to ensure the banks still have the ability to create value in the future. The banks do not therefore only want to focus on the costs side. 44% of the banks cited the topic of “innovation and growth” as the second most important area to focus on. To continue with the expansion of digital channels and to take adequate account of changing customer needs, further investments in innovation are needed, on top of cost-cutting measures.

Sustainability is also gaining importance in the lending business

The topic of sustainability has shifted increasingly into the focus of investors and customers in recent years. There is no stopping the “green wave” in 2020 either, and it has now reached the banks’ lending business. Where last year, 56% of banks said they would not consider sustainability/ESG factors when lending to commercial customers, this year there has been a significant shift in opinion. and only 27% of banks still want to ignore ESG criteria when lending. This significant decrease over the course of just one year underlines the urgency of adequately integrating ESG into the banks’ lending business.

Summary

The banks have so far coped well with the challenges of the coronavirus pandemic and are showing resilience. Even though the banks fear increased loan defaults in the short term, they are quite positive about the future.

The anticipated long-term bedding in of negative interest rates as a result of the coronavirus crisis is increasing the pressure banks have been under for some time on the earnings side. The trend toward the increased charging of negative interest rates on customer balances should therefore continue.

About this article

Authors
Patrick Schwaller

Managing Partner Audit Financial Services | Switzerland

Reliable and trusted business partner. Gets things done. Pragmatic. Enjoys mountaineering.

Olaf Toepfer

Banking & Capital Markets Leader | Switzerland

Transformation leader. Passionate about shaping the banking industry of tomorrow. Father of three kids.

Timo D’Ambrosio

Director Audit Financial Services | Switzerland

Reliable and passionate auditor. Specialized in Retail Banking. Gets things done. Loves to play tennis.