Declining Optimism at Swiss Banks
Of the 120 banks surveyed in December 2011 for the Ernst & Young Bank Barometer 2012 (not including the two major banks), just 15% (prior year: 52%) consider their current business development to be positive. 62% (40%) report a somewhat positive trend, while just under a quarter admit that business is developing negatively.
Private and foreign banks were less confident in their assessment of business development, with around 40% complaining of a deterioration. However, future prospects remain good despite declining optimism: 71% (92%) assume that business will develop positively or somewhat positively in 2012.
Summarizing the results of the study, Iqbal Khan, Leader Banking & Capital Markets at Ernst & Young says: “Banks are probably now being more realistic in their assessment of prospects compared to the far more optimistic views a year ago. Even though opinions are more modest, we can see that Swiss banks have fared well in the global financial crisis and European debt crisis so far.”
Retail banking under growing pressure from low interest rates
Competition is particularly fierce in retail banking. 40% (22%) of respondents ranked this area as the toughest in terms of competition.
This assessment of traditional deposit-taking and lending activities is not only shared by the regional and cantonal banks, but more and more by private and foreign banks as well.
“Banks increasingly face major challenges in their core business in light of persistently low interest rates and the resulting squeeze on interest margins. This will be compounded by tighter capital adequacy and liquidity regulations, which will see competition heating up not only in the lending business but also in deposit-taking, i.e., activities with clients and savings. The battle for deposits will become increasingly significant if interest rates go up,” says Patrick Schwaller, Bank Barometer Leader at Ernst & Young.
Just under 60% (29%) of those polled reckon with an increased need for write-downs and provisions to cover default risks from the lending business in the next six to twelve months. This is probably also one of the reasons why a 59% (28%) majority of banks expect a comparatively more restrictive lending policy for 2012.
Private banking with falling margins – less confidence about tax treaties
Competition remains tough in private banking. Private and foreign banks continue to see competition focused in their core business as a result of the new rules and declining margins faced by the industry.
“Adjusting business models and implementing regulatory changes is associated with additional costs which the banks struggle to pass on. Besides, the industry is also feeling the effects of falling revenue,” says Patrick Schwaller.
There is less confidence about developments in banking secrecy as well as withholding tax. 46% (73%) of the banks still anticipate a positive or somewhat positive impact for Switzerland as a banking center.
“This more cautious assessment reflects ongoing uncertainty as to the exact content of the treaties on the one hand, and the additional internal and external costs associated with implementing them on the other,” says Hans-Joachim Jaeger, Partner Financial Services at Ernst & Young. Despite dwindling euphoria, an 89% majority of banks surveyed do not believe that there will be a dangerous drain of client assets as a result of the tax treaties in the long term.
The three most important issues identified by the banks for the next three months were compliance, especially codes of conduct, interest risk management and credit risk management. These issues overtook regulation of cross-border activities, tax treaties and tax transparency as the most-cited topics of the prior-year study.
“The significance of codes of conduct has to be understood in the context of the FINMA distribution report 2010 and the weakness it identifies in client protection. Given the future regulatory measures set out, it is likely that there will be more formal examinations of suitability and appropriateness in investment advisory services. The focus on interest and credit risk management is due to above-average growth in the lending business in recent years and consistently low interest rates,” says Iqbal Khan.
No hopes for recovery on the financial markets
Many banks remain concerned about the financial crisis. Respondents cited low interest rates, political and regulatory pressure and a lack of investor confidence leading to increased passiveness as the main negative consequences. However, just 20% (8%) of the banks surveyed felt that their own position had been weakened by the financial crisis. In fact, 44% (55%) believe that they have been strengthened; this view was represented particularly strongly by the cantonal banks.
Regarding measures to tackle the “too big to fail” issue, 33% of respondents call for stricter capital adequacy requirements and 27% suggest separating investment banks from retail banks; prohibiting investment banking and introducing financial transaction tax were deemed unsuitable approaches, however.
An 89% majority of banks take a positive or somewhat positive view of the Swiss National Bank’s policy of setting a floor for the euro exchange rate. 58% (13%) of respondents forecast a negative or somewhat negative development for the global financial markets, while just 18% (63%) expect a somewhat positive development.
Ernst & Young’s Bank Barometer, now in its second year, is based on a survey of 120 executives (members of the executive board) of various banks throughout Switzerland, not including the major banks. The survey sample breaks down into 35% private banks, 15% foreign banks, 35% regional banks and 15% cantonal banks. German-speaking Switzerland accounted for 85% of the banks, while 10% were from French-speaking Switzerland and 8% from Ticino. The telephone survey was conducted in December 2011 on behalf of Ernst & Young by an independent market research institute (Valid Research, Bielefeld).