- Global economy in a state of emergency – banks showing resilience
- Despite expected loan defaults – business outlook only bleak in the short term
- Interest rates remain low – trend toward negative interest rates for private customers intact
- Sustainability becomes much more important in the lending business
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.
Banks proving robust thanks to fitness regime
Swiss banks entered the coronavirus crisis from a position of strength. “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,” explains Patrick Schwaller, Managing Partner, Audit Financial Services at EY Switzerland. 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. Regardless of the current challenges posed by the coronavirus crisis, more than half of the banks surveyed (53%) still rate their business performance in recent months as positive.
No panic despite expected loan defaults – business outlook only bleak for the short term
“Despite this good starting position, the banks agree that the economic consequences of the coronavirus pandemic will leave some scars,” says Olaf Toepfer, Head of Banking & Capital Markets at EY Switzerland.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%). Scepticism 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,” notes Timo D’Ambrosio, Director Audit Financial Services at EY Switzerland. In the residential construction financing business, 52% and in the SME lending business 44% of the banks forecast unchanged impairments in the long term 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,” Schwaller observes.
Interest rates remain low and pressure on margins is intact – as is the trend toward negative interest rates for private clients
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 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,” adds Schwaller.
Even if the Swiss National Bank’s (SNB) increases in the exemption threshold for negative interest rates alleviates the strain on the banks slightly, it comes as no surprise that only 11% of the banks surveyed now 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. No banking group is immune from the trend where negative interest rates are increasingly being passed on as only 14% (regional banks) and 6% (cantonal banks) of retail banks categorically say they will not.
Banks not expecting additional regulatory relief
The Swiss government was quick to respond when the coronavirus pandemic struck and, along with the banks, launched a comprehensive SME loan program with the aim of ensuring companies could access credit and bridge liquidity bottlenecks caused by the crisis. The SNB and Swiss Financial Market Supervisory Authority (FINMA) have also supported this loan program. To give the banks a little more leeway in their lending, they agreed a number of measures or regulatory reliefs. The main ones are the removal of the countercyclical buffer and the increase in the negative interest exemption threshold at the SNB.
“But hardly any of the banks are expecting any further relaxation of the regulations,” Schwaller continues. Half of the banks surveyed (56%) are not anticipating any additional pandemic-related regulatory impact. 38% even think the reins will be tightened again in the future.
Coronavirus crisis providing new insights on costs and innovation
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,” remarks Schwaller. 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 almost half of the banks (46%) want to focus primarily on cost cutting 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’ homes, 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 continue creating value in the future,” warns Toepfer. The banks are well aware of this, with 44% citing “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 and there was no stopping the “green wave” in 2020 either. “The topic of sustainability has now reached the banks’ lending business too,” notes Toepfer. Where 56% of banks confirmed last year that they do not take sustainability/ESG (environmental, social and governance) factors into account when granting loans to commercial customers, the latest EY survey registered a significant shift in opinion. 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.
Information on the study
The EY Bank Barometer is based on a survey of 100 managers (executive board members) of various banks throughout Switzerland. The Swiss units of the two big banks were also surveyed. 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, 31 percent are private banks, 30 percent are foreign banks, 21 percent are regional banks, and 18 percent are cantonal banks. 67 percent of the banks are based in the German-speaking part of Switzerland, 24 percent in Western Switzerland, and 9 percent in Ticino. The survey was conducted in November 2020. The data are collected and analyzed by EY in Switzerland.
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