The banks and their employees are meeting the corona crisis with good fitness. (Image: Shutterstock.com/oneinchpunch)
In a world in a state of emergency, Swiss banks show resilience. Even if there are expected loan defaults, the business outlook will only dim in the short term, as the 2021 banking barometer from EY Switzerland shows.
“The years of fitness since the financial crisis in 2008 has paid off and the banks have shown a high level of resilience during this crisis,” explains Patrick Schwaller, Managing Partner, Audit Financial Services at EY Switzerland. Since then, the banks have reduced risks and further expanded their capital and liquidity buffers. So it is not surprising that the financial institutions have so far mastered the endurance test triggered by the corona pandemic well. Regardless of the current challenges posed by the Corona crisis, more than half of the banks surveyed (53%) still rate their business development in the past few months as positive in the current banking barometer.
Don’t panic despite expected loan defaults
“Despite this good starting position, the banks agree that the economic consequences of the corona pandemic will not pass them by”, says Olaf Toepfer, Head of Banking & Capital Markets at EY Switzerland. A majority of 75% of the banks surveyed fear that there will be a sharp rise in value adjustments in the short term, especially in the lending business with SMEs (previous year: 12%). Skepticism has also increased somewhat in the home finance business. 36% of the banks expect increasing loan defaults in the next six to twelve months (previous year: 7%). Only 59% of the banks surveyed, 8 percentage points less than a year ago, expect positive business development in the short term (previous year: 67%).
In the housing finance business, 52% and in the SME lending business 44% of the banks expect no change in value adjustments. Obviously you only expect a short-term phase of increased loan defaults. This is mainly due to the healthy structure of the banks’ loan books, which mainly consist of mortgage loans. In addition, the banks are convinced of the resilience of Swiss SMEs: 83% of banks expect SMEs to recover from the crisis within the next two to three years.
Low interest rates: The pressure on margins continues
A normalization of monetary policy has become a long way off with the additional expansion of the money supply by the central banks as a result of the Corona crisis. At 82%, the vast majority of banks believe that interest rates in Switzerland will still be very low in ten years. Schwaller points out that this prospect is exacerbating the banks’ structural earnings problems and the erosion of margins in the important interest business that has been going on for several years.
Even if the increases in the allowance for negative interest rates made by the Swiss National Bank (SNB) alleviate the burden on banks somewhat, it is not unexpected that only 11% of the banks surveyed now categorically rule out the passing on of negative interest rates to private customers. Last year it was 21% and five years ago it was even 70%. Debiting customer credit balances with negative interest is therefore no longer a taboo – especially for customers who do not use any other income-generating services for the bank in addition to pure account management. The trend towards increased passing on of negative interest rates is no longer stopping at any banking group, because even among retail banks, only 14% (regional banks) and 6% (cantonal banks) categorically reject this.
No further regulatory relief for lending expected
After the outbreak of the corona pandemic, the federal government reacted quickly and, together with the banks, launched a comprehensive SME loan program with the aim of ensuring that companies have access to loans to bridge liquidity bottlenecks caused by the crisis. The SNB and the Swiss Financial Market Supervisory Authority (FINMA) also supported this credit program. In order to give the banks a little more leeway in their lending, they have decided on a number of measures and regulatory easing, in particular the lifting of the countercyclical buffer and the increase of the negative interest allowance at the SNB. “However, hardly any bank expects further loosening of regulation,” says Schwaller. While half of the banks surveyed (56%) do not expect any further pandemic-related effects on regulation, 38% expect that the reins will even be tightened again in the future.
Corona crisis: a new look at costs and innovations
The corona pandemic has led, among other things, to an unexpected acceleration in the digitization of business models and processes. The banks had to switch to working from home in a very short time and, thanks to the IT investments made in recent years, they have mastered this challenge successfully and without significant problems. In addition, bank customers have increasingly done their banking business via digital channels, which ultimately has led to online and mobile banking enjoying a much wider acceptance today than before the crisis.
“These experiences enable new perspectives on costs and innovation, which can be helpful in light of the challenges ahead,” notes Schwaller. Impending loan defaults, ongoing margin erosion in the credit and investment business, ongoing competition from challenger banks and fintech companies, a largely saturated domestic market – in view of these developments, it is hardly surprising that, at 46%, almost half of the banks will focus on the next six want to focus primarily on cost reductions up to twelve months. It is therefore obvious that jobs from the expensive centers will increasingly be moved to the more affordable periphery or to the households of the employees, while the existing office properties and branch networks will be checked at the same time.
With 44%, the banks name the topic “innovation and growth” as the second most important focus topic. In order to advance the expansion of digital channels and to adequately take into account the changed customer needs, further investments in innovations are necessary – at the same time as the cost-cutting measures, according to EY.
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