EY Banking Barometer 2020 - In the Grip of Monetary Policy
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EY Banking Barometer 2020 In the Grip of Monetary Policy
Table of contents
Editorial 3
1. Study design 4
2. Key messages 6
3. Market environment 10
4. Operating business development 17
5. Negative interest rates 24
6. Financial market regulation 29
7. Lending business 34
8. Structural change and FinTech 40
9. Priorities for 2020 52
10. Outlook – Banking in 7 to 10 years 58
11. Sustainability 67
12. Customer survey 79
Appendix 84
2 | EY Banking Barometer 2020 | In the Grip of Monetary Policy
Editorial
Low interest rates, low volatility and high uncertainty: such is the environment cur-
rently facing Swiss banks, in a nutshell. This brings with it a number of challenges,
as margins in the lending business come under ever greater pressure and banks are
having to grant ever more loans to stabilize their interest income. Banks are increas-
ingly being confronted with disappearing margins in the commission business as
well. Expansive monetary policy and negative interest rates have resulted in various
asset classes being overvalued and risks being undervalued. In addition, uncertain- Patrick Schwaller
ties stoked by trade tensions, geopolitical developments and emerging concerns
Managing Partner
about the economy are feeding doubts on the part of investors and bank customers Audit Financial Services
– with corresponding adverse repercussions on banks’ earnings.
Alongside this very challenging environment – which so far has seen banks prove
themselves to be relatively resilient – banks are having to contend with a swelling
tide of structural change in the financial industry. This is manifesting itself not only
in new market players such as technology firms and platforms disrupting banks’
traditional value chains, but also in shifting patterns of customer behaviour.
How are Swiss banks responding to these challenges? How do they assess their
short-term and long-term outlook? Should private customers prepare themselves for
banks to start applying negative interest rates to their account deposits? What will
be banks’ strategic focus in the year ahead? These questions aside, this year we also
surveyed banks about our focal topic “sustainable investing.” Do banks think this Olaf Toepfer
is just hype? Do banks believe they can make a decisive contribution to combating Partner
climate change? How firmly is the topic of sustainability already integrated into their Leader Banking & Capital Markets
existing advisory processes?
The EY Banking Barometer 2020 goes in search of answers to these and other
questions. We hope you enjoy reading this publication and look forward to a lively
discussion with you.
Timo D’Ambrosio
Senior Manager
Audit Financial Services
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 3
Study
1
design
4 | EY Banking Barometer 2020 | In the Grip of Monetary Policy
Study design
• Survey by EY in November 2019
• Survey of 100 banks in Switzerland1
• 10th edition since 2010
2019: 79 %
2018: 69 %
2019: 14 %
2018: 24 %
2019: 7 %
2018: 7 %
Breakdown of survey sample
Bank size by
Type of bank 2019 2018 2019 2018
customer assets
Private banks2 28 % 33 % Under 5 billion francs 69 % 46 %
Banks under foreign control 17 % 28 % Between 5 and 1 billion francs 7% 14 %
Regional banks 38 % 18 % Between 10 and 50 billion francs 17 % 26 %
Cantonal banks 17 % 21 % Over 50 billion francs 7% 14 %
1
The questions were also put to the two big banks in Switzerland and included in the general evaluations but not the evaluations by type of bank
2
Including investment banks
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 5
2
Key
messages
6 | EY Banking Barometer 2020 | In the Grip of Monetary Policy
1 Low interest rates, low volatility, high uncertainty
Low interest rates, low volatility and are generating lower revenue than they
high uncertainty: such is the environ- used to in the past. It is of particular
ment currently facing Swiss banks, in cause for concern here that consistent,
a nutshell. This brings with it a number disciplined risk management is currently
of challenges, as margins in the lending not being satisfactorily rewarded, while
business come under ever greater pres- inadequate risk management is not hav-
sure and banks are having to issue more ing any major adverse consequences.
and more loans in order to stabilize
their interest income. In the commission Against this backdrop, there is the
business as well, banks are increasingly danger that banks have forgotten how to
having to contend with disappearing manage credit risks and handle potential
margins, while geopolitical uncertainties credit defaults across the breadth of
and emerging concerns about the econo- their financing business, and a degree of
my are depressing activity on the part of comfort has set in.
investors and bank customers.
Expansive monetary policy and negative
interest rates have resulted in various
asset classes being overvalued, and risks
being undervalued. Given the low inter-
est rate environment coupled with low
risk premiums and low volatility, banks
2 Gloomy business outlook – negative interest rates
for small savers as well?
In the all-important interest margin further out, with a total of 27% of banks just over one quarter (28%) expecting
business, banks rely on a normal yield (previous year: 13%) forecasting declin- impairments to increase in the medium
curve that exhibits significant differ- ing revenues in the long term. In the term.
ences between short-term and long- case of the cantonal and regional banks,
term interest rates. Contrary to the which are focused primarily on the lend- The pressure on margins in the inter-
expectations of most banking institu- ing business, this crisis of confidence is est income business is forcing banks
tions outlined in last year’s survey, any even more pronounced. increasingly to pass on negative interest
normalization in monetary policy has rates to their customers. Whereas in
faded into the distance. Banks will find This picture is supported by the fact 2015 70% of the banks surveyed cat-
themselves confronted with negative that considerably more banks than the egorically ruled out passing on neg-
interest rates and exceptionally flat previous year – 47% of cantonal banks ative interest rates, the figure is now
yield curves for some time to come, and 70% of regional banks – anticipate only 21%. In addition, more than one
which is placing an even tighter squeeze rising impairments in the SME lending half of banks (55%) – up significantly
on interest margins and is clouding business in the medium to long run. on last year’s figure of 33% – say they
the business outlook for the banking Only in the short term are banks still would like to lower the threshold from
community. When looking to the short relaxed about the future. This trend is which they would like to apply negative
and medium-term future, around one being driven primarily by the economic interest rates to customer deposits. The
third of banks (previous year: 22% and concerns that have bubbled up in recent question begs itself for how long banks
16%, respectively) expect their operat- months. Banks remain relatively relaxed can spare small savers from the effects
ing results to decline. This scepticism concerning the situation on the real es- of these negative interest rates.
diminishes only negligibly when viewed tate lending markets, however, with only
EY Bankenbarometer 2020 | Im Sog der Geldpolitik | 7
3 Traditional business models are being pushed to their
limits – stronger customer focus is needed
It is undoubtedly too early to usher in future banks will have to tap into new by setting up (networked) platforms
the end of the traditional business mod- sources of income if they do not want to have created new ecosystems for their
els. Swiss banks have proven themselves lose their earning power. customers.
to be relatively resilient in recent years
in the face of a challenging market envi- But how can they do this? The majority
ronment. However, it cannot be denied of banks (60%) agree that the greatest
that the ongoing expansive monetary lever for profitable income growth is
policy adopted by the central banks and improved customer focus. However,
the associated low or negative interest only one quarter of banks believe that
environment pose a tremendous chal- the key to boosting profitable income
lenge for banks and raise fundamental lies in product-centric measures such as
questions concerning their business bundling different services (19%). This
models – especially for cantonal and re- assessment suggests that in the future
gional banks, which are focused heavily banks will align their activities more
on the domestic market and the interest closely to customer needs or customer
margin business. This insight now also demands and away from the product
seems to have taken hold among most range they offer. This business model is
banks, with a total of 83% of those sur- strongly reminiscent of the kind adopt-
veyed expressing the opinion that in the ed by large technology firms, which
4 Before the focus switches to new business models, in the
short term belts will be tightened another couple of notches
But before banks can set about rethink- this fact. The structural change is also
ing and realigning their business models, manifesting itself in the fact that banks
in the short term it seems they will be have never perceived the threat from
turning their attention to measures to competitors from outside the sector as
improve cost efficiency. Indeed, 39% of highly as this year, with a total of 79% of
banks (previous year: 32%) say the topic the banks surveyed perceiving their mar-
of costs will be their top priority over ket position as under threat from these
the next twelve months – the highest new providers. This notwithstanding, the
figure in the last three years. This is majority of banks (61%) think that they
also reflected in banks’ responses when will ultimately emerge victorious from
asked about remuneration in the bank- the wave of digitalization.
ing sector going forward, with almost
three-quarters of the organizations
surveyed (71%) expecting remuneration
in the financial industry to trend down-
wards in the future.
Banks are increasingly cognisant that
a fundamental structural change has
begun in the Swiss financial services
segment; 88% are now convinced of
8 | EY Bankenbarometer 2020 | Im Sog der Geldpolitik
5 The topic of sustainability at the banks has so far only
played a bigger role in investment – not in lending
The topic of sustainable investing has has no significance as of yet. Only a
shifted increasingly into the focus of minority (19%) of the banks surveyed say
investors and customers in recent years. that they take ESG factors into account
There is fundamental consensus among in their lending, and only 25% say that
banks that this topic is not just hype, they will take account of these criteria in
and a definite trend toward sustainable the future.
investing will manifest itself over the
long term (81%). What is more, more The topic of sustainability will challenge
than one half of banks (55%) are of the the financial service industry to its core
opinion that they can make a decisive in the foreseeable future. All organiza-
contribution to fighting climate change. tions at all levels will need to address the
It comes as no surprise, therefore, that topic and quickly build up the expertise
70% of banks intend to expand their they need. During this phase of trans-
offering of sustainable investments formation, those organizations that take
going forward, not least in order to the lead will reap the benefits ahead of
benefit from growing customer demand. the curve.
While these survey findings suggest that
banks have woken up to the topic of sus-
tainable investing, it is evident that this
insight has not been integrated across
the board into their advisory and invest-
ment processes or reporting setups.
Accordingly, the topic of sustainability is
a mandatory component of the advisory
process at less than one third of banks
(30%), and just 9% of banks say they
update their customers on sustainability
topics (ESG scores) as part of regular
reporting. In the case of loan financing
by banks, the topic of “sustainability”
EY Bankenbarometer 2020 | Im Sog der Geldpolitik | 9
“
Low interest rates, low volatility and high uncertainty: such is
the environment currently facing Swiss banks, in a nutshell. This
constitutes a very challenging environment for banks overall.
Patrick Schwaller
Managing Partner
Audit Financial Services
3
Market
environment for
banks
10 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyMonetary policy is keeping the markets on edge
Interest rates Stock markets
in % Indexed, 1.1.2000 = 100
6.9 300
6.4
5.9
5.4 250
4.9
4.4
200
3.9
3.4
2.9
150
2.4
1.9
1.4 100
0.9
0.4
-0.1 50
-0.6
-1.1
-1.6 0
00
04
06
08
00
04
06
08
02
02
12
12
20 8
20 8
16
10
14
16
10
14
19
19
1
1
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
LIBOR EUR 3M MSCI WORLD
LIBOR USD 3M MSCI SWITZERLAND
LIBOR JPY 3M MSCI USA
LIBOR CHF 3M MSCI EUROPE
CHF 10 y Swiss Bonds
Source:SNB, MSCI
More than ten years have passed since pansive monetary policy pursued by the charge for purchases of all kinds. The
the outbreak of the last financial and central banks had its intended effect and important controlling and allocation
economic crisis and the financial system brought the financial system back from function played by interest rates has
was bailed out by the community of the brink of collapse. The unwanted, been rendered disabled for some time
states and the central banks. Yet there long-term consequences of the policy of now, as evidenced among other things
is still no normalization in sight. In cheap money can, however, no longer by the historically low volatility on the
fact, quite the opposite: the unwanted be ignored: inflated asset prices, record financial markets. It is almost as if not
consequences of the rescue measures levels of national and corporate debt, only capital, but also risks no longer
are becoming clearer and clearer with growing threat to retirement provision, have a price.
each passing year. Interest rates have increased risk exposure when investing
been at absolute lows for several years due to a lack of investment alternatives,
now, and in many countries they have misallocation of capital in unproduc-
even been negative for some time. The tive economic sectors, to name but a
real estate and securities markets, few. Capital has lost its price. Saving
meanwhile, know only one direction: up. no longer reaps any rewards, and loan
During the financial crisis, the ultra-ex- financing is available practically free of
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 11Economic Policy
Uncertainty Index Volatility
Indexed, 1.1.2000 = 100
400 350
350 300
300
250
250
200
200
150
150
100
100
50 50
0 0
00
04
00
06
08
04
06
08
02
02
8
12
12
20 8
18
16
20 6
10
14
10
14
19
19
20 7
1
1
1
9
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
19
VSMI ®
EURO STOXX 50® Volatility (VSTOXX®)
Cboe Volatility Index® (VIX®)
Source: Davis, Steven J. (Policyuncertainty.com), SIX, STOXX, Cboe
The consequences of the ultra-expan- At the end of 2018 the stage seemed to banks as reported in last year’s survey.
sive monetary policy can also be seen in be set for the Fed to take advantage of The central banks have squandered
the rising levels of national debt of the the favourable economic environment the opportunity to normalize monetary
world’s major economies, with global and initiate a normalization of monetary policy and going forward there is barely
debt up by more than USD 100 trillion policy. Since then the tide has turned any scope for further monetary policy
or approximately 70% since the begin- once more. Both the Fed and the ECB re- initiatives to respond in any meaningful
ning of 2007 to USD 250 trillion. The acted to initial signs of economic cooling way to the next economic slowdown, the
emerging economies paint an even more in 2019 with renewed rate cuts. The ECB first signs of which are already emerging
sobering picture (up 267%). Yet even in also felt compelled to launch a new pack- in some economic sectors.
the industrialized nations debt has been age of measures to stimulate inflation.
accelerating at a dizzying pace. In the With the growth dynamics of the global The market environment for banks is
face of these developments, if and when economy having continually weakened being shaped not only by elevated trade
interest levels eventually do normalize, in recent months and economic growth tensions, but also by geopolitical uncer-
this could have serious ramifications forecasts – especially for Europe and the tainties. Even though the two sides in
for some highly indebted regions and emerging economies – becoming more the USA-China trade dispute have moved
countries, possibly leaving many of them and more pessimistic, any normalization closer of late, the situation remains
unable to afford the higher interest pay- in monetary policy still seems a long way precarious and harbours unpredictable
ments that become due. off, contrary to the expectations of most medium and long-term risks for the glob-
12 | EY Banking Barometer 2020 | In the Grip of Monetary Policy300
250
200
150
100
50
18
19
17
20
20
20
VSMI ®
EURO STOXX 50® Volatility (VSTOXX®)
Cboe Volatility Index® (VIX®)
Source: SIX, STOXX, Cboe
al economy. What is more, the reper- ments by 68%. This has caused Interest holdings of foreign private customers,
cussions of the impending Brexit remain margins to contract considerably.1 It can which have decreased significantly since
unclear, and tensions in the Gulf region be concluded overall that while banks 2000 by CHF 484 billion or 49% from
have escalated demonstrably in the past are still making as much money in the CHF 997 billion to just CHF 513 billion.
few months. interest margin business as they were
back in 2000, they are having to grant 1
While in 2007 this was still 1.80%, it has since fallen
While Swiss banks have managed to more and more loans in order to achieve to 1.17% (Source: SNB)
post relatively stable business results the same result.
in recent years and have proven them-
selves to be resilient in a difficult market The performance of the commission
environment, it cannot be denied that and service income business paints an
the margins in the traditional banking even less rosy picture. While securities
business continue to be squeezed and holdings have increased by just under
are falling in multi-year comparison. 60% since 2000 to CHF 5,849 billion,
This is affecting not only the lending and income from commission and service
interest margin business, but also the fee activities has declined by CHF 6.9
second pillar of the Swiss banking indus- billion or 24% to CHF 22.0 billion. There
try: the commission and service income are multiple reasons for the erosion of
business. margins in the commission and service
income business. On the one hand,
Interest income has been kept largely more and more players are entering the
stable since 2000 and amounted to CHF market (also from outside the industry)
23.5 billion in 2018. However, this has who are enticing customers with more
only been possible by simultaneously favourable conditions. On the other, the
expanding volumes for the balance sheet period under review saw the increased
items of mortgage receivables, amounts tax regularization of assets held at Swiss
due from customers and financial invest- banks. This has especially affected the
previously very high-margin securities
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 13Interest rates and Result from
lending volume commission business
in CHF billion in CHF billion
Lending volume Result from interest operations Securities holdings Result from commission business
in CHF billion in CHF billion in CHF billion in CHF billion
2'000 30 7'000 40
1'800
6'000 35
25
1'600
30
1'400 5'000
20
25
1'200
4'000
1'000 15 20
3'000
800
15
10
600 2'000
10
400
5
1'000
5
200
0 0 0 0
00
20 4
00
06
08
09
20 4
20 5
06
08
09
20 5
02
20 3
20 7
02
20 3
20 7
01
01
13
12
13
12
15
15
18
18
16
10
16
11
14
10
11
14
17
17
0
0
0
0
0
0
0
0
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Mortgages Securities holdings
Amounts due from customers Result from commission business
Financial assets
Gross result from interest operations
Source: SNB
It can be said in summary that Swiss • It is an intrinsic part of a bank’s busi- • The uncertainties stoked by increased
banks are having to operate in an in- ness model to assume and manage trade tensions, geopolitical develop-
creasingly challenging environment: one risks, which is compensated in return ments and emerging concerns about
of low interest rates, low volatility and through corresponding risk premiums, the economy are feeding doubts on the
high uncertainty. to name just one example. The expan- part of investors and bank customers.
sive monetary policy has, however, Security appears to be the top priori-
• In the traditional banking business, resulted in a tendency to underesti- ty, and in such an environment Swiss
what banks need is a normal yield mate risks, as evidenced by today’s banks generally benefit from increased
curve with positive interest rates in historically low risk premiums and very inflows of new money. Nevertheless,
order to generate an interest margin low market volatility. Given these low banks can only earn something from
from the lending and deposit business. risk premiums and low volatility, banks this extra customer money that is com-
When the yield curve is flatter and are earning less. What gives particular ing in if it is managed and invested. Ad-
interest rates are negative, compound- cause for concern is that consistent, ditional savings deposits, by contrast,
ed with a lack of acceptance to pass on disciplined risk management is current- are not generating any income for
negative interest rates and apply these ly not being satisfactorily rewarded, banks given the current interest rate
to customer deposits on a broad basis, while inadequate risk management is environment and are being actively
it is impossible to make a profit from not having any major adverse conse- avoided by more and more institutions.
the interest income business in the quences, since the prevailing ultra-ex-
long run. pansive monetary policy seems to be
eliminating many of the inherent risks –
or is at least papering over the cracks.
14 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyEY Banking Barometer 2020 | In the Grip of Monetary Policy | 15
16 | EY Banking Barometer 2020 | In the Grip of Monetary Policy
“
When asked about their outlook for the future, Swiss banks
seems to be suffering from a notable crisis of confidence – especially
retail banks.
Olaf Toepfer
Partner
Leader Banking & Capital Markets
4
Operating
business
development
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 17Banks are experiencing more and more headwind
«How would you assess the current development of your operating business
(over the past 6 to 12 months)?»
2019
4% 3% 100%
16%
7% 90%
1%
19% 80%
2018
17%
70%
25%
60%
50%
40%
30%
20%
10%
56%
52% 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Positive (increase in operating income of over 10%)
Somewhat positive (increase in operating income of up to 10%)
Somewhat negative (decrease in operating income of up to 10%)
Negative (decrease in operating income of 10% to 25%)
Very negative (decrease in operating income of over 25%)
Since this study began, Swiss banks have ber 2019, according to SNB data. This
never been so dissatisfied with business value was even lower in August 2019, In the first ten months of 2019, banks were able to
2
increase their mortgage volume by 2.7%, compared
performance than they were last year. at 1.19%. Since banks have been unable with the average annual growth rate during the
In spite of this, overall satisfaction is to expand their mortgage volumes as period from 2000 to 2018 of 4.4%.
still at a relatively high level. As many much as they have done in the past due
For example, the interest rate for new ten-year fixed
3
as one third of banks (32%) rate current to saturation trends in the market and mortgages was 3.7% at the end of 2007, according
business performance as negative (pre- prevailing regulatory provisions2, this to SNB data.
vious year: 25%), while 3% of the banks development has left its mark on banks’
surveyed rate the course of business income statements. Added to this, many
as very negative (decline in operating older fixed mortgages held with banks –
income of more than 25%). which it had been possible to conclude at
higher interest conditions – are currently
This development can primarily be reaching their term.3 New mortgages,
explained by interest rate trends, with by contrast, have lower interest rates,
the average interest rate granted for which is squeezing the interest margin
new ten-year fixed mortgages con- even further.
tracting from an already low 1.63% at
the end of 2018 to an even lower level
of around 1.26% at the end of Novem-
18 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyGloomy outlook for the future
«What kind of development do you expect in your organization’s operating business?»
2% 3% 4% 1% 3%
13%
15%
19%
24%
31% 27%
62%
65%
63% 51%
51%
58%
22% 25%
18% 19%
9%
15%
2019 2018 2019 2018 2019 2018
Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years)
Positive (increase in operating income of over 10%) Negative (decrease in operating income of 10% to 25%)
Somewhat positive (increase in operating income of up to 10%) Very negative (decrease in operating income of over 25%)
Somewhat negative (decrease in operating income of up to 10%)
Scepticism concerning future business negatively than they did a year ago. pered by low interest rates, low volatility
performance at Swiss banks is grow- The reasons for this downturn in mood and high uncertainty – with no discernible
ing. Whilst last year banks were largely are clear: concerns about the economy end in sight.
optimistic for all planning horizons (short, increased worldwide last year. The bur-
medium and long term), this year has seen geoning hope toward the end of last year Alongside these macroeconomic and
a significant shift in mood. Accordingly, of a paradigm shift in the monetary policy geopolitical challenges, banks need to
around one third of banks expect their op- pursued by the major central banks, and in respond with an ever-greater sense of
erating income to decrease in the short to turn of a pivot in interest rates in the not- urgency to the structural change under
medium term, up 11 percentage points to too-distant future, has vanished into thin way in the financial industry.
33% in the short term, and 15 percentage air. What is more, geopolitical risks have
points to 31% in medium term (previous escalated appreciably. The simmering
year (22% and 16%, respectively). This trade dispute between the USA and China
scepticism diminishes only negligibly when harbours unforeseeable consequences,
viewed further out, with a total of 27% of the repercussions of the impending Brexit
banks (previous year: 13%) forecasting remain uncertain, and new fuel has been
declining revenues in the long term. added to the tensions in the Gulf region
in the past few months. All in all, it can
The results of the survey show that banks be said that Swiss banks are having to
assess their business outlook much more contend with a difficult environment ham-
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 19Negative interest rates are killing the mood at retail banks
«What kind of development do you expect in your organization’s operating business?»
Cantonal banks The individual banking groups already
6% 6% exhibited a very disparate view last year
20% 25% 25% of their prospects for the future. Where-
44%
56%
44% as there was healthy optimism among
foreign and private banks operating
80% 70% 65% primarily in the asset management busi-
56% 50% ness, when it came to the regional and
38%
cantonal banks, the mood was a lot more
5% 10%
sceptical. These two camps grew even
2019 2018 2019 2018 2019 2018 further apart this year, with the cantonal
Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years) and regional banks suffering a massive
crisis of confidence. Their outlook has
Regional banks clouded considerably for all planning
5% 6% 10% 6% 5% 11%
horizons, but especially over the medium
22% 17% term. Fewer and fewer regional banks
45% are positive about the future: only 50%
60%
60% in the short term (previous year: 72%,
83%
66% 77%
down 22 percentage points), 30% in the
50% medium term (previous year: 77%, down
25% 30%
47 percentage points) and 35% in the
6% 5% 5% 6% long term (previous year: 89%, down
2019 2018 2019 2018 2019 2018 54 percentage points). The picture is
Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years) similar among cantonal banks, where
– depending on the planning horizon –
only between 38% and 56% of the banks
Positive (increase in operating surveyed are looking to the future with
income of over 10%) optimism. The declines versus the previ-
ous year range between 24 percentage
Somewhat positive (increase in
operating income of up to 10%) points (short term) and 37 percentage
points (medium term).
Somewhat negative (decrease in
operating income of up to 10%)
Negative (decrease in operating
income of 10% to 25%)
Very negative (decrease in operating
income of over 25%)
20 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyPrivate banks and foreign banks, by Banks under foreign control
contrast, are similarly optimistic as 3% 4% 3% 4%
7% 7%
they were a year ago. In the medium to 17% 15%
long term, only isolated banks expect 48%
68% 60%
their operating results to fall (3% and 71%
63% 59%
4%, respectively, for foreign banks and
12% or 8%, respectively, for private
45%
banks). Accordingly, the medium and 22% 29% 22%
36%
17%
long-term outlook of this banking group
has brightened further compared to last 2019 2018 2019 2018 2019 2018
year, while the short-term outlook has Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years)
deteriorated slightly.
Private banks
What is the reason for these wildly dif- 3%
12% 15% 8% 12%
fering assessments concerning their fu- 28% 21%
ture prospects? Among the cantonal and
56%
regional banks, the overriding concern 60% 50% 59%
52%
seems to be that there is no end in sight 60%
to the prevailing low interest rate envi-
ronment, which is pushing the business 24% 28% 35% 36% 29%
12%
models of these banks to their limits.
Foreign and private banks, meanwhile, 2019 2018 2019 2018 2019 2018
have already undergone a far-reaching Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years)
transformation in recent years as they
have restructured their cross-border
asset management in line with new tax Positive (increase in operating
laws, and feel well equipped for the income of over 10%)
future given their negligible dependence
Somewhat positive (increase in
on the interest margin business. operating income of up to 10%)
Somewhat negative (decrease in
operating income of up to 10%)
Negative (decrease in operating
income of 10% to 25%)
Very negative (decrease in operating
income of over 25%)
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 21Investment business still top priority
«In which business segment do you expect the biggest growth potential for your
organization?»
Credit business Investment business (investment Trading business Asset management Other
advice, portfolio management)
2019 4% 56% 4% 24% 12%
Private banks
2018 11% 55% 6% 17% 11%
Banks under 2019 24% 53% 10% 10% 3%
foreign control 2018 26% 56% 11% 7%
2019 40% 55% 5%
Regional banks
2018 39% 55% 6%
2019 24% 52% 6% 6% 12%
Cantonal banks
2018 30% 60% 5% 5%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2019
ous year: 7%, up 4 percentage points). commission and service fee activities
6% The lending business, by contrast, was up slightly by 1.2% to CHF 22.0
7% 22% seems to be declining in importance, billion, income from interest rates fell
11%
7% 24% with just 22% of banks (previous year: by 1.8% to CHF 23.5 billion. The interest
2018
24%) saying that the lending business income business is still the major source
6%
is the greatest driver of growth. Among of income for Swiss banks; however, its
7%
the cantonal banks in particular (24%), lead over the commission and service
a shift can be observed away from the income business has contracted to now
lending business as the primary growth just CHF 1.5 billion.
driver (previous year: 30%, down 6 per-
centage points). It is difficult to predict how successful
this shifted focus on the investment
This result hardly comes as a surprise: business will be. The growth potential
56%
the lending business has lost a lot of its of the investment business in the Swiss
54%
appeal in recent years, as low interest market is structurally limited and the
rates continue to squeeze the interest combined growth ambitions of all banks
As in the previous year, the majority of margin and the market is pushed to the likely outstrip the effective potential of
banks – 54% – perceive their greatest point of saturation on the back of the the Swiss domestic market. A glance
potential for growth to be in the invest- preceding massive increase in volumes. at the volumes of foreign assets un-
ment business (investment advice and This is forcing many banks to ramp up der management at Swiss banks for
portfolio management; previous year: their focus on the investment business private customers shows that these
56%). 11% of banks are turning to asset as can already be seen in banks’ 2018 have almost halved (49%) so far this
management to generate growth (previ- operating results. While income from millennium, down from CHF 997 billion
22 | EY Banking Barometer 2020 | In the Grip of Monetary Policyin 2000 to CHF 513 billion at the end of
2018. Adjusted for (positive) exchange
rate developments4, this decline would
likely be even more dramatic. It is also
assumed that new technologies and
business models will further exacerbate
the competitive situation.
For example, the MSCI World stock market index
4
increased almost three-fold during the same period.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 23“
Negative interest rates are already a reality for wealthy private
customers – how long can banks continue to protect small savers
from negative interest rates?
Patrick Schwaller
Managing Partner
Audit Financial Services
5
Negative
interest
rates
24 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyIt is becoming the norm to pass on negative interest rates...
«Does your organization intend to introduce negative interest rates in the private
customer business?»
2019
100%
21% 90%
21%
31%
2018 80%
34%
70%
60%
50%
40%
30%
32%
26% 20%
13%
10%
22% 0%
2015 2016 2017 2018 2019
No, under no circumstances
Yes, but only for balances in excess of CHF 100,000
Yes, but only for balances in excess of CHF 1 million
Yes, but only if the SNB increases the negative interest rate further (e.g., to -1.5%)
The share of Swiss banks that can rates for affluents has risen markedly
envision passing on negative interest from 24% last year to 56% today. 24%
rates to private customers increases of private banks, slightly more than the
with each year that the low interest rate previous year, categorically rule out
environment persists. Whereas in 2015 passing on negative interest rates to
70% of the banks surveyed categorically private customers (previous year: 18%).
ruled out passing on negative interest
rates, the figure is now only 21%. This This year’s survey shows that the
constitutes a further year-on-year de- persistent unsatisfactory interest rate
cline of 13 percentage points (previous situation is now also forcing regional
year: 34%). banks to rethink their stance on this
matter, with just 67% of regional banks
The customer segment of so-called categorically ruling out passing on neg-
affluents – that is, customers with net ative interest rates last year, compared
assets totalling over CHF 100,000 – has with just 20% now. The picture is similar
been especially hard hit by this devel- at the cantonal banks, where as recently
opment, as a glance at the responses as last year one quarter categorically
of the private banks reveals. Indeed, excluded taking such a step; this year,
the share of private banks that could this figure declined by a further 7 per-
envision passing on negative interest centage points to just 18%.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 25...but how long will small savers be spared?
«Does your organization intend to reduce the minimum balance for passing on
negative interest rates to your customers?»
Effective November 1, 2019, the SNB Until now, only corporate customers and No
increased the allowances in excess of very wealthy private customers have Probably not
which banks have to pay negative inter- been asked to dip into their pockets to
Probably
est on the monies deposited in their cof- offset this shortfall. However if, with
Yes 2019
fers, mitigating somewhat the pressure each year that passes, banks want to
on banks caused by the negative interest reduce the threshold more and more, it
15%
rate environment. In spite of this positive would seem only a matter of time until 11% 19%
measure for banks, this year more than the first (less wealthy) private customers 2018
one half of banks (55%) – a considerable have to pay negative interest, especially 30%
increase of 22 percentage points on last if aside from their cash savings they do
year’s figure of 33% – say they would have any other products that are profit-
22%
like to lower the threshold from which able for the bank.
they would like to apply negative interest
rates to customer deposits.
Calculated on a simplified basis as “SNB income
5
26%
from negative interest rates” divided by the
For a long time, the idea of charging cumulative income of Swiss banks for 2018. 40%
negative interest on customer deposits 37%
was taboo. But with each year that low
interest rates persist, the pressure on
banks to pass on negative interest rates
to customers increases. A look at the
SNB’s operating figures confirms this
picture: in each of the past two years,
banks had to pay around CHF 2.0 billion
to the SNB in negative interest rates –
equivalent to almost one fifth of bank’s
cumulative annual profits.5
2019 11% 33% 28% 28%
Private banks
2018 44% 33% 19% 4%
Banks under 2019 30% 25% 30% 15%
foreign control 2018 25% 35% 15% 25%
2019 14% 29% 43% 14%
Regional banks
2018 17% 58% 8% 17%
2019 19% 19% 62%
Cantonal banks
2018 21% 29% 50%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
26 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyPure savings customers no longer welcome
«Do you agree with the following statement? Given the current interest
rate environment, having relationships with pure savings customers is less
interesting / attractive for our bank.»
The negative interest rate environment management, issuing payment cards or investment markets, implementing this
that has prevailed for several years now executing foreign currency transactions. seemingly straightforward strategy will
means that customer relationships with According to this study, however, this be no easy task, however. What is more,
pure savings customers can no longer will likely just be a temporary band- this strategy harbours suitability risks
be maintained at a profit. It is hardly aid (see p. xy for more information ). if banks fail to carry out a detailed and
surprising, therefore, that as many Another strategy to boost revenue is to extensive suitability and adequacy test
as two thirds of the banks surveyed persuade customers to invest more of for their customers in advance.
(68%) are not very well disposed toward the assets “parked” in savings accounts
savings customers at the present time. in funds or securities. Against the back-
This is especially true at private banks drop of increasing uncertainties on the
(84%). But at the majority of cantonal
banks (59%) and regional banks (55%) as
well, savings customers – in particular,
opportunistic savings customers – are no
longer being welcomed with open arms.
The adverse effects of negative interest 11%
rates are making their presence felt
here: banks are starting to ask them-
selves how they can avoid attracting 31%
additional, purely opportunistic deposit
business and what kind of incentives I entirely disagree
21%
they can offer to encourage existing sav- I partly disagree
ings customers to expand and develop I partly agree
their business relationship. I agree
Swiss banks are looking for ways out of
the difficulties caused by the currently
low interest rates. The primary initiatives
are to introduce new fees for account 37%
Private banks 8% 8% 28% 56%
Banks under 15% 19% 33% 33%
foreign control
Regional banks 20% 25% 40% 15%
Cantonal banks 41% 47% 12%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 2728 | EY Banking Barometer 2020 | In the Grip of Monetary Policy
“
It is somewhat ironic that the regulatory measures introduced
by the central banks to manage the last financial crisis have been
identified as the likely cause for a possible next crisis.
Patrick Schwaller
Managing Partner
Audit Financial Services
6
Financial market
regulation
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 29Balanced regulation – more scepticism concerning equity capital
regulations
«In which of the following areas have Swiss regulations potentially gone too far
and therefore resulted in negative impacts?»
Yes Probably Probably not No
2019 17% 29% 39% 15%
Data Protection
2018 15% 39% 37% 9%
2019 7% 31% 45% 17%
Market conduct
2018 11% 30% 47% 11%
rules 2017 2% 31% 53% 14%
2019 10% 31% 46% 13%
Derivative trading 2018 11% 25% 54% 10%
2017 18% 31% 42% 9%
2019 2% 8% 55% 35%
Cybercrime 2018 2% 18% 63% 17%
2017 2% 20% 51% 27%
2019 19% 36% 34% 11%
Funds regulation 2018 16% 44% 37% 3%
2017 20% 42% 32% 6%
2019 12% 30% 46% 12%
KYC 2018 10% 31% 39% 20%
2017 14% 27% 46% 13%
2019 6% 30% 47% 17%
Tax transparency 2018 10% 26% 46% 18%
2017 15% 32% 40% 13%
2019 35% 30% 22% 13%
Investor
2018 31% 36% 27% 6%
protection 2017 34% 37% 26% 3%
2019 27% 32% 28% 13%
Liquidity 2018 22% 33% 30% 15%
2017 18% 44% 26% 12%
2019 16% 31% 27% 26%
Capital 2018 8% 29% 38% 25%
2017 8% 35% 38% 19%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
More than ten years ago, the outbreak Implementing these new regulations “Liquidity” (up 4 percentage points) and
of the financial and economic crisis sent generated substantial costs for banks. “Derivatives trading” (up 5 percentage
devastating shockwaves throughout the In spite of these financially undesirable points).
global economy and world of finance. In spillover effects, banks fundamentally
response to the financial crisis, reg- acknowledged the sense and purpose of The Swiss authorities stepped up the
ulators worldwide and in Switzerland the new regulations. Nevertheless, the capital regulations for systemically
tightened the regulatory reins. There survey reveals rising scepticism on the relevant banks another notch in Novem-
were three main objectives: more part of banks versus the previous year ber 2019 when they adopted the final
capital, more liquidity and contingency concerning key areas of regulation such capital rules. Switzerland now has one of
plans for systemically relevant banks. as “Capital” (up 10 percentage points), the most stringent capital regimes in the
30 | EY Banking Barometer 2020 | In the Grip of Monetary Policyworld, something the country’s major in question is correspondingly strong.
international banks in particular think Once this initial phase is complete, costs
puts them at a decisive disadvantage to gradually start to fall again, which usu-
their foreign competitors, since procur- ally results in broader acceptance of the
ing additional risk capital such as bail-in regulation at the companies affected.
bonds generates high additional costs.
Swiss big banks have to hold more cap-
ital and have higher capital costs than
their global peers.
On the other hand, a contrary trend
can be observed on the topic of “Data
protection”: whereas last year more
than one half of banks (54%) said they
thought there was a tendency toward
over-regulation in this area, this year
this figure was just 46%. This is a pattern
frequently seen when new regulations
are introduced. In the initial analysis
and implementation phase (including
also investments in new IT systems),
compliance costs are comparatively high
and criticism of the regulatory project
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 31Banks appear unfazed in spite of the Federal Supreme Court
ruling in respect of administrative assistance with France
«Are you concerned that the Federal Supreme Court’s decision of July 2019
could have negative effects on your bank and its business model?»
3% intended and thus could undermine the
12% “principle of speciality.” In view of these
circumstances, the Swiss Bankers Asso-
ciation acknowledged the ruling “with
great scepticism.”
Yes
Probably It may come as a surprise, therefore,
Probably not that only 15% of the banks surveyed
fear that the Federal Supreme Court
30% No
ruling on providing customer data to
55% the French tax authorities will have
negative repercussions for their bank.
What comes as no surprise, however,
is that private banks, which are more
firmly anchored in cross-border banking,
are more concerned than cantonal and
regional banks, which are focused on the
The Federal Supreme Court ruled in trative assistance an illegitimate fishing domestic market. Accordingly, 21% of
July 2019 that the Swiss Federal Tax expedition. The decision by the Federal private banks perceive negative reper-
Administration must provide, through Supreme Court was perceived by many cussions for their bank, while as far as
administrative assistance channels, the people as a judgment against the Swiss the regional banks are concerned, not
names and further information concern- financial centre that could pave the way one single bank thinks it will be affected
ing over 40,000 French banking custom- for more and more unsubstantiated by this Federal Supreme Court ruling.
ers to the French tax authorities. This requests for information. In addition,
overturned the lower-court ruling by the multiple observers perceived the danger
Federal Administrative Court, which had that the data surrendered could be used
deemed the French request for adminis- for ends other than the tax purposes
Private banks 21% 38% 41%
Banks under
3% 17% 21% 59%
foreign control
Regional banks 32% 68%
Cantonal banks 12% 6% 35% 47%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
32 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyMonetary policy proving the major cause for concern
«What do you see as the greatest danger that may cause a next financial crisis?»
2019
1% 1% 11%
6%
1% 4% Massive price decline in the real estate market
4% 11%
4%
2018
4% Liquidity crisis
7% Stock market crash
7%
Economic downturn
10% Geopolitical crisis
8% Long-term consequences from the expansionary monetary policy
33% Cyber attacks
Collapse of major financial market infrastructures
49%
None
12%
27% Other
2019 4% 4% 13% 8% 21% 42% 4% 4%
Private banks
2018 14% 11% 26% 34% 3% 9% 3%
Banks under 2019 3% 10% 3% 21% 46% 14% 3%
foreign control 2018 4% 4% 15% 36% 33% 4% 4%
2019 35% 5% 60%
Regional banks
2018 32% 6% 28% 28% 6%
2019 12% 6% 24% 52% 6%
Cantonal banks
2018 20% 5% 5% 15% 35% 10% 10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
For some time now, an increasing num- ultra-expansive monetary policy. This is a Gulf region bubbling up again, this figure
ber of not only economists and market significant increase in comparison to the is lower than might have been expected.
players, but also leaders of industry, previous year, up 16 percentage points. Banks’ assessment of the dangers posed
have been warning about the potentially It is somewhat ironic that the regulatory by the real estate market has remained
disastrous consequences of the sustained measures introduced to manage the last virtually unchanged versus last year.
ultra-expansive monetary policy being financial crisis have been identified as the Slightly more than one tenth (11%) of the
pursued by the central banks. The infla- likely cause for a possible next crisis. banks surveyed perceive the greatest risk
tion in asset prices, skyrocketing levels in a collapse in prices on the real estate
of debt, a lack of structural pressure Concerns about the consequences of the markets, while 8% put the ramifications of
in some areas of the economy and the current monetary policy seem to be over- an economic downturn at the top of the
widening wealth gap are some of the riding the other risk areas, with just 12% list of potential dangers.
most frequently cited warning signals. of banks naming geopolitical uncertain-
Given these circumstances, it is hardly ties as the greatest risk. With the trade
surprising that almost one half of Swiss dispute between the USA and China, on
banks (49%) believe the greatest risk for a the one hand, and Europe, on the other,
possible ensuing financial crisis lies in the still far from resolved, and tensions in the
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 33“
The scenarios for economic performance continue to deteriorate. Yet
banks remain cautiously optimistic. If banks want to come out on
top of the next economic downturn, they need to initiate the right
steps in risk management sooner rather than later.
Olaf Topefer
Partner
Leader Banking & Capital Markets
7
Lending
business
34 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyIs housing financing showing signs of saturation?
«How do you expect the lending policy of Swiss banks in the residential property
segment to develop in the next 6 to 12 months?»
2019
3% 2% 7% 100%
1% 6% 90%
2018 80%
70%
60%
38%
50%
41%
55% 40%
47% 30%
20%
10%
0%
2015 2016 2017 2018 2019
Become more restrictive
Become somewhat more restrictive
Remain unchanged
Become somewhat more expansionary
Become more expansionary
Swiss banks have massively expand- restrictive lending policy for residential
ed their mortgage lending business in property financing going forward (pre-
recent years, and over the course of vious year: 44%). The reasons for this
2018 broke the symbolic barrier of CHF more cautious approach are the gradual
1,000 billion in mortgages lent for the saturation that is setting in on the real
first time. This trend was driven pri- estate market coupled with stricter regu-
marily by the Raiffeisen banks and the latory conditions governing the financ-
cantonal banks, which have expanded ing of investment properties.
their mortgage lending volumes by a
staggering 203% and 105%, respectively, The share of banks that want to adopt
since 2000. a more expansionary lending policy in
the future is still very low at 5%, albeit
In the last two years, however, the up slightly on the previous year’s figure
appetite for new residential property of 1%.
financing has waned slightly. While 47%
of banks (previous year: 55%) intend to
continue the lending policy they have
adopted in recent years, 48% of banks
currently anticipate pursuing a more
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 35No credit defaults expected in the medium term
«What level of risk provisioning (impairment losses and provisions) do you expect you
will need to cover your housing financing business in the short / medium / long term?»
The vast majority of Swiss banks are Where is this added confidence coming office properties – coupled with increas-
completely unconcerned about the from? The greatest risk to the upwards ing unemployment could develop into
level of risk provisions needed to cover trend of real estate prices is a marked a serious problem for banks. Yet even
housing financing. In the short term, just rise in interest rates, which in all likeli- though economic momentum in Switzer-
7% of the banks surveyed anticipate a hood would lead to lower prices. Howev- land lost some of its steam last year, the
rising need for impairment allowances, er, such an interest rate hike has been majority of economists assess the risk of
another 6 percentage points less than in pushed to the back burner in recent a broad-based and far-reaching reces-
the previous year. This brighter out- months in the wake of the Fed’s about- sion as small for the time being. These
look on the part of banks is even more face on monetary policy. Toward the end trends have obviously led Swiss banks to
pronounced in the medium term, with of last year, the successive interest rate believe that they are once again increas-
only 28% (previous year: 39%, down 11 increases by the US Fed were interpret- ingly on the safe side.
percentage points) expecting a great- ed as a sign that the ultra-expansive
er risk provisioning requirement. This monetary policy would soon be coming
extremely positive assessment is also to an end. As 2019 progressed, howev-
gradually starting to trickle through into er, these hopes went up in smoke, and
banks’ long-term outlook: only slightly instead the Fed made three preventive
more than one half of banks (59%) think rate cuts of 25 basis points each. Anoth-
that impairment losses will increase in er variable that could pose a substantial
the long term, once again a sizeable risk for the real estate market would
decrease on last year’s result (previous be a severe economic downturn. Rising
year: 69%, down 10 percentage points). vacancies – especially on the market for
100% 5% 1% 1% 1%
6%
90%
31%
80% 40%
70% 60%
71%
60% 82%
87%
50%
40% 64%
55%
30%
20% 38%
27%
10%
13%
7% 1% 1% 4% 5%
0%
2019 2018 2019 2018 2019 2018
Short term (6-12 months) Medium term (1-3 years) Long term (> 3 years)
Less
Unchanged
Greater
Much greater
36 | EY Banking Barometer 2020 | In the Grip of Monetary PolicyMortgages with negative interest rates remain taboo
«Looking from today’s perspective, it seems realistic that our organization will
offer mortgage loans with negative interest rates in the future.»
1%
16%
Private banks 5% 5% 90%
Banks under 9% 91%
foreign control
Regional banks 41% 59%
Cantonal banks 12% 88%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
83%
Yes
Yes, but only in individual cases for Private Banking or for institutional customers
No
It sounds like a dream come true for bor- caused a stir when two cantonal banks
rowers: take out debt and be given extra revealed that under certain circumstanc-
money on top. This scenario, which until es or in isolated cases they were issuing
just a few years ago would have seemed negative-rate mortgages to (institution-
completely absurd, is already reality al/commercial) large customers.
in at least a few European countries.
For example, Jyske Bank, Denmark’s Faced with this development, the ques-
third-largest bank, this year granted the tion begs itself as to whether going for-
first mortgage worldwide with a negative ward Switzerland will see negative-rate
interest rate. In addition, in November mortgages on a broader nationwide
2019, the state-owned development front. Swiss banks currently have a very
bank Kreditanstalt für Wiederaufbau clear stance on this matter: 83% of the
(KfW), based in Germany, announced at organizations surveyed say it is unreal-
an event that the following year it would istic that they will issue mortgages with
like to start issuing promotional loans negative interest. Nonetheless, 16%
with negative interest rates. In an initial state they would consider it in individual
phase, this credit offering will be geared cases for private banking customers or
exclusively to banks and companies, but institutional customers. Only one bank
later will be extended to private custom- expects to offer negative-rate mortgag-
ers as well. Here in Switzerland, a survey es in the future.
of cantonal banks published by Tamedia
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 37You can also read
