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.