EY Banking Barometer 2020 - In the Grip of Monetary Policy

 
 
EY Banking Barometer 2020 - In the Grip of Monetary Policy
EY Banking
Barometer
2020
In the Grip of
Monetary Policy
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
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
EY Banking Barometer 2020 - In the Grip of Monetary Policy
Study
                         1

                                                     design

4   | EY Banking Barometer 2020 | In the Grip of Monetary Policy
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
EY Banking Barometer 2020 - In the Grip of Monetary Policy
2
                   Key
                               messages

6   | EY Banking Barometer 2020 | In the Grip of Monetary Policy
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
EY Banking Barometer 2020 - In the Grip of Monetary Policy
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
EY Banking Barometer 2020 - In the Grip of Monetary Policy
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
EY Banking Barometer 2020 - In the Grip of Monetary Policy
“
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 Policy
Monetary 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 |   11
Economic 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 Policy
300

                                               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 |       13
Interest 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 Policy
EY 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 |   17
Banks 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 Policy
Gloomy 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 |   19
Negative 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 Policy
Private 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 |   21
Investment 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 Policy
in 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 Policy
It 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 Policy
Pure 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 |   27
28   | 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 |   29
Balanced 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 Policy
world, 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 |   31
Banks 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 Policy
Monetary 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 Policy
Is 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 |   35
No 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 Policy
Mortgages 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 |   37
You can also read
Next part ... Cancel