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The online magazine of the Swiss Bankers Association
2017/09/21 09:45:00 GMT+2

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Checking in on the banks

Checking in on the banks

Despite the costs of regulation, negative interest rates, margin pressure, political and legal uncertainties as well as structural change, the banks in Switzerland are reporting solid development. This is one of the findings of the Banking Barometer 2017.

Every year, the Swiss Bankers Association’s (SBA) Banking Barometer analyses the economic trends in the banking industry in Switzerland and interprets the reasons behind any changes. A recent blog post by the SBA on this subject stated that the banks in Switzerland require the best possible framework conditions in order to improve in the current environment and in international comparison, but also if they wish to remain competitive in future. A closer look at the numbers proves the accuracy of this claim, even if the banks are by all means showing solid development.

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The Swiss banking sector

The Swiss banking sector comprises a wide variety of banking institutions with differing business models and a broad range of services. At the end of 2016, there were 261 banks operating in Switzerland, which is five less than in the previous year. This reflects the ongoing trend towards bank consolidation, although to a lesser degree than in recent years.

Negative interest rates impact the interest-earning Business

In 2016, aggregate operating net income was CHF 62.5 bn (-3.2%), marking the first decline since 2012. In the balance sheets, net income from the interest-earning business amounted to CHF 24.1 bn, thus making the largest contribution to total net income despite the low interest rate environment. Negative interest rates, however, are putting a strain on the interest margin business, and the banks in Switzerland paid CHF 1,523.2 m in negative interest rates to the SNB in 2016. The situation is likely to be similar for 2017, as negative interest rates of CHF 970 m have already been paid to the SNB in the first half of the year. Although the economic climate has improved somewhat in Europe and the political risks have generally decreased since the elections in France, uncertainties still remain, and as a result, so does continued expansive monetary policy.

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Decline in the commission, services and trading business

Net income from the commission and services business fell by 6.7 percent in 2016. Although commissions were in some cases raised because of the negative interest rates, pressure on margins continued to rise. Due to the uncertainties, stock exchange transactions and trading activity declined. Net income from the trading business fell by almost 28 percent in 2016. It is possible that the trend in 2017 will go in the opposite direction. The positive sentiment in stock markets, among other things driven by the election outcome in France, boosted trading volumes in the first half of 2017 (+5.3% compared to the same period in the previous year).

The declines were in part compensated for by the strong rise in other ordinary net income (+27.9%). This increase is likely a result of the improved economic environment in Switzerland as well as the successful handling of the “Frankenschock” in 2015.

Profit trend stable

In 2016, 226 of the 261 banks in Switzerland reported an annual profit. Their total annual profit amounted to CHF 11.8 bn and was therefore CHF 7.8 bn lower than in the previous year. It should be noted, however, that the high extraordinary income generated by a big bank resulting from a group-internal divestiture totalling CHF 10.7 billion had a major impact on the previous year’s result. When compared to 2013 (CHF 10.5 bn) and 2014 (CHF 7.4 bn), the profit trend for 2016 was stable.

Low interest rate environment impacts balance sheets

There was a substantial change in the breakdown of assets between 2007 and 2016. Liquid assets and the banks’ sight deposits held at the SNB in particular experienced a strong increase. This is primarily attributable on the one hand to the SNB’s interventions to counteract the strong Swiss franc and on the other hand, to the limited opportunity costs for liquidity holdings due to the low interest rates, which is why the banks deposited high amounts of liquidity on the sight deposit accounts held at the SNB.
Domestic and foreign mortgage loans also rose continuously between 2007 and 2016 (+41.8%, from CHF 682.3 bn to CHF 967.5 bn). This is also due to the persistently low interest rates and the resulting strong demand for real estate. Of particular note in this segment is the high proportion of first mortgages (over 92%), which among other things, indicates that mortgages are being granted with caution.

Mortgage volumes rose once again in 2017 (+1.2% as at May 2017) and a reversal of this trend is not in sight. Notwithstanding the unfavourable environment, the banks in Switzerland continue to fulfil their function as financing partners and lenders to the full extent.

Banks reduce risk-weighted positions

What should also be highlighted is the continuous decline in loans to banks since 2007 (2007: CHF 1,013.6 bn, 2016: CHF 270.3 bn), as well as in liabilities to banks (-55.8% since 2007). Among other factors, this trend is a result of the higher capital ratios required by regulation and reflects the banks’ ongoing strategic efforts to reduce their risk-weighted positions.

Cautiously optimistic sentiment in the labour market

The economic environment and structural change is also reflected in the staff levels at the banks in Switzerland. At the end of 2016, around 1,660 (-1.6%) fewer people were employed than in the previous year. An annual survey conducted by the SBA shows that staff levels fell a further percentage point in the first half of 2017. However, according to the survey, the banks expect staff levels to remain flat for the second half of 2017. According to the “Arbeitgeber Banken Monitor” published by the Employers Association of Banks in Switzerland, the banks’ expectations for the medium-term are cautiously optimistic. A number of indicators currently point to a stabilisation: jobs are being created primarily in IT, customer advisory services, research and product development. In contrast, the back office is likely to undergo further downsizing.

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Swiss financial centre remains global leader

At the end of 2016, the banks in Switzerland managed total assets of CHF 6,650.8 bn, which is CHF 83.0 bn more than in the previous year. This positive trend has also continued into 2017. In the first half of the year, assets under management at the banks increased by 4.2 percent. This rise is attributable on one hand to the moderately positive economic trend and on the other hand, to a certain currency effect, primarily arising from the euro exchange rate. Switzerland therefore remains the leader in the global cross-border wealth management business – ahead of competing financial centres such as the United Kingdom, Hong Kong and Singapore. However, Switzerland is in intense competition with financial centres around the world. Asian financial centres in particular are experiencing stronger growth in the cross-border wealth management business than Switzerland. If Switzerland wishes to continue to assert itself vis-à-vis the rapidly growing financial centres in Asia and other competing financial centres with higher growth forecasts, Swiss private banking should, in addition to fostering attractive locational factors, also further promote innovation, for example in the digital banking segment.

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