EY Banking Barometer 2020 In the Grip of Monetary Policy Table of contents
Editorial 3
1. Study design 4
2. Key messages 6
3. Market environment 10
4. Operating business development 17
5. Negative interest rates 24
6. Financial market regulation 29
7. Lending business 34
8. Structural change and FinTech 40
9. Priorities for 2020 52
10. Outlook – Banking in 7 to 10 years 58
11. Sustainability 67
12. Customer survey 79
Appendix 84
2 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Editorial
Low interest rates, low volatility and high uncertainty: such is the environment cur- rently facing Swiss banks, in a nutshell. This brings with it a number of challenges, as margins in the lending business come under ever greater pressure and banks are having to grant ever more loans to stabilize their interest income. Banks are increas- ingly being confronted with disappearing margins in the commission business as well. Expansive monetary policy and negative interest rates have resulted in various asset classes being overvalued and risks being undervalued. In addition, uncertain- Patrick Schwaller ties stoked by trade tensions, geopolitical developments and emerging concerns Managing Partner about the economy are feeding doubts on the part of investors and bank customers Audit Financial Services – with corresponding adverse repercussions on banks’ earnings.
Alongside this very challenging environment – which so far has seen banks prove themselves to be relatively resilient – banks are having to contend with a swelling tide of structural change in the financial industry. This is manifesting itself not only in new market players such as technology firms and platforms disrupting banks’ traditional value chains, but also in shifting patterns of customer behaviour.
How are Swiss banks responding to these challenges? How do they assess their short-term and long-term outlook? Should private customers prepare themselves for banks to start applying negative interest rates to their account deposits? What will be banks’ strategic focus in the year ahead? These questions aside, this year we also surveyed banks about our focal topic “sustainable investing.” Do banks think this Olaf Toepfer is just hype? Do banks believe they can make a decisive contribution to combating Partner climate change? How firmly is the topic of sustainability already integrated into their Leader Banking & Capital Markets existing advisory processes?
The EY Banking Barometer 2020 goes in search of answers to these and other questions. We hope you enjoy reading this publication and look forward to a lively discussion with you.
Timo D’Ambrosio Senior Manager Audit Financial Services
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 3 1Study design
4 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Study design
• Survey by EY in November 2019 • Survey of 100 banks in Switzerland1 • 10th edition since 2010
2019: 79 % 2018: 69 %
2019: 14 % 2018: 24 %
2019: 7 % 2018: 7 %
Breakdown of survey sample
Bank size by Type of bank 2019 2018 2019 2018 customer assets
Private banks2 28 % 33 % Under 5 billion francs 69 % 46 %
Banks under foreign control 17 % 28 % Between 5 and 1 billion francs 7 % 14 %
Regional banks 38 % 18 % Between 10 and 50 billion francs 17 % 26 %
Cantonal banks 17 % 21 % Over 50 billion francs 7 % 14 %
1 The questions were also put to the two big banks in Switzerland and included in the general evaluations but not the evaluations by type of bank 2 Including investment banks
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 5 2Key messages
6 | EY Banking Barometer 2020 | In the Grip of Monetary Policy 1 Low interest rates, low volatility, high uncertainty
Low interest rates, low volatility and are generating lower revenue than they high uncertainty: such is the environ- used to in the past. It is of particular ment currently facing Swiss banks, in cause for concern here that consistent, a nutshell. This brings with it a number disciplined risk management is currently of challenges, as margins in the lending not being satisfactorily rewarded, while business come under ever greater pres- inadequate risk management is not hav- sure and banks are having to issue more ing any major adverse consequences. and more loans in order to stabilize their interest income. In the commission Against this backdrop, there is the business as well, banks are increasingly danger that banks have forgotten how to having to contend with disappearing manage credit risks and handle potential margins, while geopolitical uncertainties credit defaults across the breadth of and emerging concerns about the econo- their financing business, and a degree of my are depressing activity on the part of comfort has set in. investors and bank customers.
Expansive monetary policy and negative interest rates have resulted in various asset classes being overvalued, and risks being undervalued. Given the low inter- est rate environment coupled with low risk premiums and low volatility, banks
Gloomy business outlook – negative interest rates 2 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 Traditional business models are being pushed to their 3 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
Before the focus switches to new business models, in the 4 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 Traditional business models are being pushed to their The topic of sustainability at the banks has so far only limits – stronger customer focus is needed 5 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 Before the focus switches to new business models, in the process at less than one third of banks (30%), and just 9% of banks say they short term belts will be tightened another couple of notches update their customers on sustainability topics (ESG scores) as part of regular reporting. In the case of loan financing by banks, the topic of “sustainability”
EY Bankenbarometer 2020 | Im Sog der Geldpolitik | 9 “Low interest rates, low volatility and high uncertainty: such is the environment currently facing Swiss banks, in a nutshell. This constitutes a very challenging environment for banks overall.
Patrick Schwaller Managing Partner Audit Financial Services
3Market 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
2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019 2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019
LIBOR EUR 3M MSCI WORLD LIBOR USD 3M MSCI SWITZERLAND LIBOR JPY 3M MSCI USA Market 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
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019 2000 2002 2004 2006 2008 2010 2012 2014 2016201720182019
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
2017 2018 2019
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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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
4Operating 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% 2018 80% 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, 2 In the first ten months of 2019, banks were able to 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 3 For example, the interest rate for new ten-year fixed 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% 44% 56% as there was healthy optimism among foreign and private banks operating 80% 70% 65% primarily in the asset management busi- 56% ness, when it came to the regional and 38% 50% 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 horizons, but especially over the medium 5% 6% 10% 6% 5% 11% 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 3% 4% 3% 4% contrast, are similarly optimistic as 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% 59% 4%, respectively, for foreign banks and 63% 12% or 8%, respectively, for private 45% banks). Accordingly, the medium and 29% 36% 17% 22% 22% 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- 35% 36% ronment, which is pushing the business 24% 28% 29% models of these banks to their limits. 12% 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% 2018 24% with just 22% of banks (previous year: by 1.8% to CHF 23.5 billion. The interest 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.
4 For example, the MSCI World stock market index 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
5Negative 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% 2018 31% 80% 34% 70% 60% 50% 40% 30% 26% 32% 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. 5 Calculated on a simplified basis as “SNB income 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 I entirely disagree business and what kind of incentives 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
6Financial 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%
35% 30% 22% 13% Investor 2019 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% 6% 11% 1% 4% Massive price decline in the real estate market 4% 11% 4% Liquidity crisis 4% 2018 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
7Lending 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% 6% 5% 1% 1% 1% 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 Banks remain active in SME financing
«How do you expect the lending policy of Swiss banks in the SME segment to develop in the next 6 to 12 months?»
2019
2% 4% Swiss banks upped their offered limits
16% 7% for business loans to SMEs in 2018 by 17% 4.6% to CHF 441.3 billion.6 The extent 2018 20% to which credit limits had been utilized by companies remained virtually un- changed at end-2018 at 70.3% (previous year: 70.6%).7 This shows that Swiss banks play an important role in SME financing in Switzerland and the lending market for SMEs is functioning well.
It is unlikely that anything will change 76% regarding this picture in the year ahead. 58% While the share of Swiss banks that want to withdraw from SME financing going forward has increased slightly, up from 17% last year to 24% this year, the vast Become more restrictive majority of banks still plan to leave their Become somewhat more restrictive lending policy unchanged (58%) or even Remain unchanged to expand it (18%). This means Swiss Become somewhat more expansionary SMEs will not have to contend with any Become more expansionary bottlenecks in the availability of bor- rowed capital in the future.
6 Source: SNB
7 Source: Own calculations based on SNB data
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2015 2016 2017 2018 2019
38 | EY Banking Barometer 2020 | In the Grip of Monetary Policy There is a risk of impairments in the long term for SME financing
«What level of risk provisioning (impairment losses and provisions) do you expect you will need to cover your SME lending business in the short / medium / long term?»
100% 2% 2% 1% 1%
90% 30% 80% 46% 52% 70% 65%
60% 86% 89% 50%
40% 68%
30% 52% 45%
20% 35%
10% 12% 9% 2% 2% 1% 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
Although the latest economic reports still year: 9%, up 3 percentage points) expect- had to put their capabilities in the area of forecast moderate GDP growth in Swit- ing greater short-term risk provisions from credit risk management to the test in iso- zerland, many economists are starting their corporate financing business. This lated cases since the expansive monetary to become more pessimistic in their picture deteriorates appreciably in the policy and the low/negative interest rate economic outlook. Significant risks would medium to long-term, however, and banks regime pursued by the central banks have arise in particular from the deteriorating seem to be taking the economic risks asso- seemingly eliminated many of the inherent international situation (escalation of the ciated with this seriously: one half of all risks – or have at least papered over the trade conflict, growing tensions in the Gulf banks (47%) already expect rising impair- cracks. More precisely, it is to be hoped region). In addition, there is the risk of a ments in the medium term (previous year: that the banks have not forgotten how to self-accelerating downturn if the mood 35%, up 12 percentage points); in the long manage credit risks and handle potential deteriorates at the end of the economic term, this share rises to as much as 70% credit defaults across the breadth of their cycle, first among companies and then (previous year: 53%, up 17 percentage financing business. among individuals. Given these somewhat points). gloomier economic prospects, the likeli- hood is increasing that writedowns may be Banks are under no illusion that we are needed for SME financing in the long run. probably at the end of the credit cycle and In the short term at least, banks remain that the period without any significant unconcerned about any impairments for credit defaults cannot last forever. In SME financing, with only 12% (previous recent years, however, banks have only
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 39 “Today’s FinTechs are not changing how value is created in banking. However, banks that manage to put customers at the heart of their activities will be the ones that prevail in the long term.
Olaf Toepfer Partner Leader Banking & Capital Markets
8Structural change and FinTech
40 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Banks are increasingly convinced that a structural change is under way
«In your opinion, is a fundamental structural change (sustained transformation of the value chain) already taking place in the Swiss financial services industry?»
Yes The conviction that a fundamental first established organizations have be- Probably structural change has begun in the gun responding to the “freemium” model Probably not Swiss financial industry strengthened adopted by neobanks and have cut their No 2019 again this year. Whereas two years ago prices for standard retail services (e.g. 73% were of this opinion, this year the card and account fees). Concerning the 3% 9% figure was 88%. The most significant customer experience and user-friend- 6% change in perception can be seen at the liness offered to customers, neobanks 2018 30% cantonal banks, where in 2017 one half are also setting new standards and are 19% 31% of cantonal banks were convinced of a raising the expectations of bank cus- structural change, compared with 88% in tomers. These developments mean that this year’s survey. traditional institutions will have to step up investments in their sales channels Indeed, trends are emerging in the and introduce more innovative offerings market which did not exist a few years just to meet these rising expectations. It ago and could trigger structural chang- is highly unlikely, however, that custom- es. Neobanks and marketplaces are ers will be willing to pay more for this
44% frequently cited as an example here, improved customer experience. 58% although the ramped-up collaboration between established banking institutions and technology groups abroad (e.g. Goo- gle and Citi in the USA) is perhaps even more relevant. Even if neobanks do not pose any serious threat to established banks’ core business at the present time, they are already encroaching on their traditional domains and in particular put- ting their margins under pressure. The
2019 46% 46% 8% 2018 26% 53% 15% 6% Private banks 2017 28% 53% 19% 2016 48% 42% 3% 7%
2019 32% 50% 11% 7% Banks under 2018 38% 38% 16% 8% foreign control 2017 29% 47% 21% 3% 2016 33% 63% 4%
2019 10% 80% 10% 2018 28% 44% 22% 6% Regional banks 2017 27% 45% 23% 5% 2016 26% 54% 15% 5%
2019 29% 59% 6% 6% 2018 30% 35% 30% 5% Cantonal banks 2017 14% 36% 36% 14% 2016 33% 50% 17% 0% 20% 40% 60% 80% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 41 Payments a gateway?
«In your opinion, which of the following business areas is most affected by structural change?»
A majority of 63% (previous year: 47%) Interestingly, banks believe that their since the lion’s share of their ability to of the banks surveyed are of the opinion lending business is less severely im- create value stems from the interest that payments are most severely affected pacted by structural change, with just margin business. by structural change. This realization has 10% (previous year: 14%) identifying it continued to take hold in recent years. as the most affected business area. A counterargument to this is that price The finding is hardly surprising, with transparency in the lending business has more and more market players – includ- improved significantly, and the margins ing some from other industries – now on lending to private customers have offering customers alternative methods narrowed by a few basis points each to execute their payments. One example year. This trend is particularly important which is currently not available in Swit- for the cantonal and regional banks, zerland is the Apple Card, a credit card 2019 from Apple and Goldman Sachs. The fact 3% that an investment bank is interested in 6% retail banking and has founded a digital 4% 3% 8% retail bank is something worth noting, 2018 Payments and its collaboration with Apple demon- 13% Deposits strates its ambitions in this customer 9% Lending business segment. Indeed, while there is not a 47% great deal of potential in the payments Investment advice segment to boost added value, it does Asset management 17% 63% offer the opportunity to occupy and Securities trading 10% develop the interface to customers. With None this in mind, the area of payments, with 2% its direct interface to customers and 1% 14% transaction data, holds great strategic relevance for the industry.
2019 53% 13% 13% 13% 8% 2018 32% 3% 9% 24% 26% 3% 3% Private banks 2017 55% 3% 19% 10% 6% 7% 2016 6% 7% 10% 32% 32% 10% 3%
2019 57% 11% 14% 7% 11% Banks under 2018 48% 11% 19% 11% 7% 4% foreign control 2017 47% 12% 29% 12% 2016 18% 15% 26% 41%
2019 70% 20% 5% 5% 2018 61% 27% 6% 6% Regional banks 2017 71% 5% 14% 10% 2016 26% 5% 10% 38% 15% 3% 3%
2019 76% 6% 12% 6% 2018 55% 5% 15% 15% 5% 5% Cantonal banks 2017 50% 14% 7% 29% 2016 11% 6% 11% 39% 28% 5% 0% 20% 40% 60% 80% 100%
42 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Competition is increasing from outside the sector
To what extent do you agree with the following statement? «Competitors from outside the sector (non-banks, FinTech, BigTech) are threatening the market position of banks.»
2019 2% 100% 2% 14% 19% 25% 2018 75% 32%
50%
25%
52% 0% 54% 2012 2013 2014 2015 2016 2017 2018 2019
I entirely disagree I partly disagree I partly agree I agree
The infiltration of providers from outside Until just recently, in conversations with the industry into banks’ traditional bank representatives, it was not uncom- domains can no longer be ignored. When mon to hear that the extraordinarily on the lookout for cheap mortgage fi- high entry barriers in the banking sector nancing, customers are increasingly be- would prohibit non-banks from gaining a ing courted by offerings from insurance foothold in banks’ core business areas. companies or pension funds, and barely These barriers to entry are still there, a day passes where there isn’t a report yet competitors from outside the indus- in the media about some new FinTech or try have become a reality that needs other. It is therefore hardly surprising to be taken seriously. This applies in that banks have never perceived the particular to isolated, clearly delineated threat from competitors from outside sections of the value chain in banking. the sector to be as high as they did this year, with 79% of the banks surveyed overall (previous year: 66%) saying they feel their position in the market is under threat from non-industry providers.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 43 Depending on the business model, the dangers lurk elsewhere
«Which of the following evolving technologies / businesses represents the biggest potential threat for well-established financial institutions?»
Swiss banks perceive the greatest danger systems at the top of their list (38%). The for established financial institutions in picture is different again at private banks: three key developments: marketplaces/ although the assets under management platforms (32%), blockchain (27%) and by roboadvisors in Switzerland are still mobile payment systems (23%). Here, modest and in recent months a wide range 2019 banks believe that the threat posed by of initiatives were halted, respect for sys- mobile payment systems has increased tem-supported investments has increased 7% (previous year: 13%, up 10 percentage yet further and one third of private banks 7% points), while that posed by marketplaces/ think they pose the greatest threat for 2018 13% platforms has slightly decreased (previous their organization (previous year: 24%). 32% 23% year: 37%, down 5 percentage points). 37% The assessment of the potential risk of This survey result reveals, on the one blockchain technology, by contrast, has hand, the high degree of uncertainty remained virtually unchanged (previous when assessing potential threats, with year: 28%, down 1 percentage point). Only banks with a very similar business model 18% of banks perceive the greatest poten- (e.g. cantonal banks and regional banks) 28% 1% tial threat in other developments such as perceiving the dangers as coming from 4% roboadvisors (10%). different directions. While, on the other, 10% 11% it shows that a range of different develop- 27% Something that comes as less of a surprise ments are accorded a high factor of risk: is how wildly bank’s responses differ marketplaces and platforms for brokering when asked which direction a threat could loans and mortgages, blockchain technol- Marketplaces come from. Regional banks see market- ogy for tokenizing assets, and system-sup- Cryptocurrencies places and exchange platforms as the ported investments in private banking and Robo-advisors greatest threat for their business (50%), wealth management. Blockchain while cantonal banks put mobile payment Web based / mobile payments None
2019 25% 33% 25% 17% Private banks 2018 32% 3% 24% 29% 3% 9% 2017 21% 3% 14% 38% 10% 14%
2019 25% 4% 4% 35% 14% 18% Banks under 2018 31% 8% 12% 23% 23% 3% foreign control 2017 9% 3% 18% 32% 26% 12%
2019 50% 20% 30% Regional banks 2018 66% 17% 11% 6% 2017 35% 10% 15% 5% 35%
2019 31% 25% 38% 6% Cantonal banks 2018 25% 5% 40% 20% 10% 2017 14% 7% 22% 29% 14% 14% 0% 20% 40% 60% 80% 100%
44 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Customer proximity and consulting quality are decisive
«In your opinion, which factor will be decisive in order to ensure customer loyalty in the future?»
Like last year, banks are of the opinion 27%) are the decisive factors for ensur- the offering that best suits their needs that proximity to customers (32%, pre- ing customer loyalty. for the operation in question. When vious year: 40 percent) and high quality making payments abroad, they use the of advisory services (26%, previous year: In retail banking, it has become increas- services offered by neobanks to save ingly challenging in view of prevailing money on foreign currency transaction 2019 trends to stay close to customers fees; they maintain their savings account 8% 11% through the entire lifecycle and to build with the bank that pays the highest rate 3% 10% up strong customer loyalty. Customers of interest; they take out their mortgage 9% 10% 2018 expect to be able to conduct straightfor- with the provider that offers the best ward banking transactions from home or interest rate; and they get their pension 7% while on the move; only seldom do they advice from a different institution yet 3% want or need to speak to an advisor in a again. Retaining customers is one of the 11% branch. Physical branches and personal most pressing challenges facing Swiss 32% contact, meanwhile, are still very im- banks. 3% 40% portant for less digitally savvy custom- ers or when dealing with financial issues Customer loyalty is decreasing mark- 27% connected to major life events such as edly, and increasingly it is being disso- commencing studies, buying or selling a ciated from customer satisfaction. For
26% home, or taking retirement. example, a customer may be thoroughly satisfied with their home bank, but Will primary banking relationships that nonetheless they are willing to try out Security / stability of the bank allow banks to foster high customer products from new market players (see Proximity to the client loyalty even exist in the future? Over Section 12 for more information). Since High quality of advisory services the years, the banking relationships of customer loyalty will become more and private customers have become more more critical in the future, banks need to Excellent online offerings and more fragmented. Bank customers consider how they can build this up on a Good value for money relation already use the products and services of systematic and methodical basis. Reputation of the bank a variety of organizations depending on Innovation
2019 13% 21% 41% 8% 17% Private banks 2018 9% 41% 29% 3% 3% 6% 9%
Banks under 2019 11% 30% 26% 11% 11% 11% foreign control 2018 7% 33% 33% 4% 16% 7%
2019 15% 35% 15% 25% 10% Regional banks 2018 11% 55% 16% 6% 6% 6%
2019 6% 40% 18% 6% 12% 18% Cantonal banks 2018 15% 30% 25% 5% 25%
0% 20% 40% 60% 80% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 45 Banks enjoy high customer loyalty
«How do you assess customer loyalty for your organization?»
2019
8%
High level of customer loyalty – competitors’ offers are only taken in exceptional case
39% High level of customer loyalty, however noticeably decreasing – rising uncertainty about our capability to creating customer loyalty
Low level of customer loyalty – customers increasingly taking offers from different providers
53%
Private banks 43% 43% 14%
Banks under 50% 36% 14% foreign control
Regional banks 20% 80%
Cantonal banks 35% 65%
0% 20% 40% 60% 80% 100%
Banks are fundamentally convinced that account maintenance, credit cards, er relationships from existing business they enjoy strong customer loyalty (92%). consumer loans, initial investments in (so-called feeder strategy) which in other However, over one half (53%) believe that passively managed funds, mortgages. regions has led to the upscaling of neo- this trend is declining; cantonal banks Customers are enticed to the respective banks. The question begs itself, however: (65%) and regional banks (80%), in partic- platform with specific value propositions Could next-generation neobanks break ular, are uncertain about their ability to (such as “best deal” or “convenience”) into the core business of established insti- retain customers. and in many cases are won over by the tutions on the back of the proven decline cutting-edge experience. in customer loyalty? 10% This result is hardly surprising as the structural change initially seems to be In the years ahead, we do not anticipate making its presence felt in retail banking. any disruptive shifts in the end-customer The offerings of neobanks and platforms business in Switzerland in terms of bank- are focused primarily on products and ing volumes owing to the emergence of services that appeal to retail custom- new providers. Switzerland lacks the po- ers and wealthy individuals: payments, tential to systematically transfer custom-
46 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Banks need new sources of income
Do you agree with the following statement? «To avoid losing their profitability in the future, banks must develop new sources of income.»
Do banks need new sources of income in their current business model. Only 5% or from to harness this additional source the future so they do not lose their earn- 6%, respectively, believe that it will not of income. These range from product ing power? A total of 83% of the banks be imperative for them to tap into new and service innovations (e.g. growing surveyed are of the opinion that this sources of income in order to safeguard real estate brokerage and management, is the case, with almost one half of all their earnings power. expanding generation management, banks (48%) saying they “entirely agree” managing electronic data) to upgrading with this statement and a further third This situation begs the question as to the business model for retail and mass saying they “partially agree” (35%). which new avenues banks will need to affluents (e.g. digital banking platforms). explore in order to tap into new business Among the cantonal and regional banks, areas and revenue streams. Will they be The interesting thing is, although banks which are geared primarily to the do- able to do this under their own steam or are largely in agreement that their mestic market and the interest margin will they increasingly seek out partner- future business success depends heav- business, the survey findings even give ships with young, innovative FinTechs ily on the outcome of their search for rise to the impression that these banks or technology companies? Banks have alternative revenue streams, until now have doubts about the future viability of plenty of interesting options to choose they have taken only a few initiatives to achieve this goal. Indeed, when evaluat- ing their priorities for the coming 6 to 12 2019 months, this year cost issues are once again in the foreground (see p. 53 to 55 16% 1% for more information).
I entirely disagree
48% I partly disagree I partly agree I agree
35%
Private banks 4% 21% 42% 33%
Banks under 25% 18% 57% foreign control
Regional banks 5% 35% 60%
Cantonal banks 6% 53% 41%
0% 20% 40% 60% 80% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 47 Is customer focus a lever for income growth?
«Which are the two major levers for profitable earnings growth in your organization?» (two answers possible)
2019 Opinions regarding the most import- hypothesis is supported by the fact that 9% 5% ant lever for profitable income growth companies in other industries that had 3% differ widely. If the possible answers aligned their value proposition to under- 4% 17% are separated into categories, howev- standing the wants and needs of their er, the picture is clear: improving the customers have performed above the Customer experience (17%), increasing average. While it is true that what works
19% the conversion rate through better for other industries will not necessarily Customer understanding (13%) and the work for the financial services industry, 13% Systematization of customer acquisition, these insights can be readily transferred 60% development and retention (30%) can to the banking sector. be grouped together in a single cate- gory as a customer-centric lever. The At the present time, understanding what majority of the banks surveyed (60%) makes customers tick and drives their 30% consider improved customer focus to decisions – in other words, “customer be the best lever for profitable income understanding” – has not evolved as growth. Regional banks (75%) and strongly as in other industries, despite cantonal banks (69%), in particular, want the fact that this will likely be a crucial Improving customer experience to place a stronger emphasis on cus- factor for implementing systematization (especially at digital points of contact) tomer interests going forward. Only one in customer development. The majority quarter of banks perceive product-cen- of banks (54%) perceive the greatest po- Increasing conversion rates in sales tric measures such as bundling various tential for growth for their organization through a better understanding of services (19%), increasing charges (4%) in the investment business (see Section customers' needs or developing sustainable investment 4); in this regard, customer understand- solutions (3%) as the key to profitable ing seems to be of decisive importance Streamlining activities income growth. to boost effectiveness in sales. related to customer acquisition, development and retention The importance of customer under- standing will likely grow as the process Improving the range of of structural change progresses. This products and services by pooling various services
Increasing fees
Developing sustainable Private banks 19% 9% 26% 16% 5% 7% 9% 9% investment solutions
Acquiring additional 2% Banks under 15% 9% 24% 23% 17% 8% account managers foreign control 2%
Acquiring other providers (inorganic growth) Regional banks 17% 22% 36% 14% 8% 3%
3% 3% 19% 16% 34% 22% Cantonal banks 3%
0% 20% 40% 60% 80% 100%
48 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Cryptocurrencies – risk or opportunity?
Do you agree with the following statement? «The risks related to cryptocurrencies far outweigh the opportunities.»
It is still too early to derive a clear picture a decisive role, the lion’s share of banks of the risks and opportunities associated (63%) are waiting for the industry to con- with cryptocurrencies at banks. More solidate and are fine-tuning their own risk than half of the banks surveyed (57%) assessment before defining a proprietary assess the risks as greater than the op- strategy for dealing with cryptocurrencies. portunities, although there is no uniform picture across each type of bank. While almost three quarters of regional banks (74%) and two thirds of banks under foreign control (61%) think that the risks outweigh the opportunities, 58% of can- 2019 tonal banks and one half of private banks are of the opposite opinion. 20% 17%
Even though some clearly dominant cryp- tocurrencies have emerged, the future I entirely disagree role of cryptocurrencies in general both I partly disagree in and outside the banking industry is still far from clear. This is due to the fact that I partly agree until now the use of cryptocurrencies has I agree been very limited, and while promising 26% applications have been identified, so far they have not been capitalized upon. 37% Until clear models for the future become discernible where cryptocurrencies play
Private banks 25% 25% 42% 8%
Banks under 18% 21% 36% 25% foreign control
Regional banks 26% 42% 32%
Cantonal banks 24% 34% 24% 18%
0% 20% 40% 60% 80% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 49 Digitalization: Banks see themselves as victors
Do you agree with the following statement? «In the long term, well-established banks will emerge as winners from the wave of digitalization in the financial sector.»
2019
6% 7% The megatrend of digitalization has infil- ber of opportunities available to them, trated almost all aspects of our lives and however. As indicated by a SNB survey the economy over the past two decades. published in August 2019, banks pre- Entire industries such as retail, the media dominantly perceive digitalization as an or tourism have been practically turned opportunity, especially to reduce costs.8 on their head, while many companies that This can be achieved, for example, by 33% were previously global leaders in their closing branches, automating processes field have since been relegated to the or decommissioning IT applications. side lines. Even if such massive upheavals in the financial industry cannot be pre- Nevertheless, banks will not be able 54% dicted due to various factors (regulation, to make the most of the opportunities rigidity in the behaviour of bank custom- undoubtedly offered by digitalization by ers, importance of wealth preservation), focusing on cost saving measures alone. almost all banks (88%) acknowledge that If banks want to emerge as true winners a structural change is under way in the of the wave of digitalization, they will not Swiss financial industry (see page. 41). be able to avoid having to rethink their The majority of banks (61%) are optimistic business models from the perspective I agree about this change and are convinced that of the customer – and to do this with I partly agree the established institutions will emerge as creativity. I partly disagree winners of this development in the long
I entirely disagree run. This conviction is evident across all 8 SNB: Survey on Digitalisation and Fintech at Swiss banking groups. Banks 2019
Digitalization poses a major challenge for traditional banks, since the new technolo- gies allow new providers from outside the sector to penetrate the market, intensify- ing the competition. This tends to lead to falling prices for financial services, with commensurate consequences for banks’ earning power. Banks also have a num-
Private banks 4% 54% 42%
Banks under 14% 54% 18% 14% foreign control
Regional banks 5% 55% 40%
Cantonal banks 59% 35% 6%
0% 20% 40% 60% 80% 100%
50 | EY Banking Barometer 2020 | In the Grip of Monetary Policy EY Banking Barometer 2020 | In the Grip of Monetary Policy | 51 9Priorities 2020
52 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Innovation is important, but focus on costs is more urgent
«Which of the following topics do you expect will dominate the financial services industry over the next 6 to 12 months»
2019 The chief priority for the coming 6 to 12 There is no uniform picture within the 17% months, cited by 44% of banks (previous individual banking groups overall. The 19% year: 49%, down 5 percentage points), cantonal banks are for the most part 2018 remains Growth and innovation. Aside focusing on the topic of Income growth & from this, 39% (previous year: 32%, innovation (71%). By contrast, cost sav- 44% up 7 percentage points) consider Cost ing measures do not figure on their ra- 49% efficiency to be the priority. This is the dar as strongly as among other banking highest figure in the last three years. groups (29%), and regulatory issues are The Regulatory agenda remains the top not cited as a priority by a single organi- priority for 17% percent of banks, almost zation. The regional banks perceive the 32% unchanged on the previous year at 19%. situation somewhat differently: for 50%, 39% Cost saving measures are at the top of With practically all banks of the opinion the list, followed by Income growth & that they need to tap into new sources of innovation (30%). Among private banks income (see p. 47 for more information), and banks under foreign control, the these survey results show that banks picture is predominantly the same as for view income growth as their primary the overall market. objective. Since this cannot be achieved as a matter of course in the current environment, however, in the short term Income growth and innovation they are placing increased emphasis Cost reduction and efficiency gains on reducing costs in order to enhance Risk, compliance and regulation profitability.
2019 36% 44% 20% 2018 50% 35% 15% Private banks 2017 45% 26% 29% 2016 19% 42% 39%
2019 47% 32% 21% Banks under 2018 48% 26% 26% foreign control 2017 44% 21% 35% 2016 26% 33% 41%
2019 30% 50% 20% 2018 39% 50% 11% Regional banks 2017 32% 41% 27% 2016 20% 39% 41%
2019 71% 29% 2018 60% 20% 20% Cantonal banks 2017 50% 21% 29% 2016 44% 39% 17%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 53 Cyber security remains the primary preoccupation
«Which of the following topics and activities do you expect to be of the most importance for the financial industry over the next 6 to 12 months?»
Risk, compliance and regulation 2019 Income growth and innovation 2018 Cost reduction and efficiency gains 2017 2016
1 2 3 4 5 Cybersecurity
Culture / conduct risk / behavior / reputation
Interest rate risk
Credit risk
Operational risk Introduction of alternative reference interest rates (IBOR) Implementation of consumer protection requirements
Solvency
Litigation risk
Investment in advisory enhancements and sales channels Investments in further education and training Big data Transformation and investment in new business models
Establishment of partnerships with non-banks
Development of (new) investment products
Build-up of new business segments
Acquisitions
Tapping new markets, internationalization
Cost reduction
Process optimization and industrialization
Outsourcing and offshoring
54 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Ranking 2019 2018 2017 2016 Cybersecurity 1 1 1 2 Cost reduction 2 5 4 4 Process optimization and industrialization 3 4 2 1 Investment in advisory enhancements and sales channels 4 2 3 6 Culture / conduct risk / behavior / reputation 5 6 6 8 Investments in further education and training 6 3 - - Big data 7 8 - - Transformation and investment in new business models 8 7 5 3 Interest rate risk 9 10 8 7 Establishment of partnerships with non-banks 10 11 7 15 Credit risk 11 9 13 5 Development of (new) investment products 12 19 11 9 Operational risk 13 13 14 10 Introduction of alternative reference interest rates (IBOR) 14 17 - - Build-up of new business segments 15 20 17 16 Outsourcing and offshoring 16 16 10 17 Implementation of consumer protection requirements 17 15 9 13 Solvency 18 12 16 14 Litigation risk 19 18 15 12 Acquisitions 20 14 12 11 Tapping new markets, internationalization 21 21 18 18
Risk, compliance and regulation Income growth and innovation Cost reduction and efficiency gains
The focus on cost considerations is also The realization that banks need to tap These survey results can be interpreted evident in banks’ responses when asked into new sources of income in order to to mean that banks are fundamentally about their specific focal topics for the secure their long-term profitability is happy to address topics relating to inno- coming 6 to 12 months, with two topics taking its time to trickle through into vation and growth and have committed from the area of Cost reduction and effi- their selection of priorities. Even though themselves to these causes because ciency gains among the top three topics, the topics Development of new invest- they accord them high importance. specifically Cost reduction and Process ment products and Build-up of new When it comes to concrete measures, optimizations and industrialization. This business segments have climbed seven however, cost issues take priority since has pushed the two topics Investments and five places to rank 12 and rank 15, these have a greater urgency and seem in advisory and sales channels and respectively, banks’ overall selection of inevitable. Investments in further education out of priorities for the coming year makes it the top three, although as in the past pretty clear that they are less willing to three years the number one spot again deal with a possible transformation of goes to the topic Cyber security. This their business model. means a topic from the area Risk and regulation is still at the top of the list of priorities.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 55 IT expenditure and IT investments over time
«Please indicate the percentage of your respective annual IT costs and IT investments that are attributable to:»
On average, just over half (55%) of and further digitalize the IT landscape annual IT expenditure or IT investments to create added value for customers 24% are channelled into bank’s ongoing op- through new services while simultane- erations (“run the bank”). In multi-year ously optimizing costs. comparison, the percentage share of IT expenditure in ongoing operations has It remains to be seen how much IT costs trended downward, which should leave for ongoing operations can be reduced more funds left over for upgrades to the going forward. That is because as the 55% IT landscape (“change the bank”). process of automation and digitalization continues, ongoing costs for safeguard- 21% In order to increase competitiveness, ing IT security tend to increase. We however, the funds that are most will therefore likely see a shift in costs important are those that are “free” for to cyber security, meaning that costs banks to use to make changes to their for ongoing operations will not neces- IT landscape as they see fit (i.e. they are sarily decrease, but rather they will be not earmarked for legal or regulatory constituted differently. The increased requirements). This share averages 24% outsourcing of IT and security will play a Daily business / operations of the overall IT budget within a range of role here. («run the bank») 21% to 31%, depending on the banking group. This proportion tends to increase Changes («change the bank») due in a long-term comparison, which in the to regulatory or legal requirements today’s highly competitive environment is a trend in the right direction. Those Changes («change the bank»), funds in the IT budget which have not freely initiated by the bank (e.g., already been earmarked for a specific investments for revenue growth purpose are primarily used to automate and / or cost reduction) business processes offering correspond- ing cost-saving potential or to modernize
Private banks 53% 23% 24%
Banks under 54% 24% 22% foreign control
Regional banks 59% 20% 21%
Cantonal banks 52% 17% 31%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
56 | EY Banking Barometer 2020 | In the Grip of Monetary Policy EY Banking Barometer 2020 | In the Grip of Monetary Policy | 57 The values of future generations such as the meaningfulness of work or “social justice are readily compatible with the financial industry. However, banks will have to use all their powers of persuasion if they want to get the younger generations on their side.
Timo D’Ambrosio Senior Manager Audit Financial Services
10Outlook Banking in 7 to 10 years
58 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Regulation is here to stay
Do you agree with the following statement? «There will be substantially more regulation in the Swiss banking sector.»
2019 2% 100% 17%
20% 2018 75% 31% 30%
50%
25%
49% 0% 51% 2012 2013 2014 2015 2016 2017 2018 2019
I entirely disagree I partly disagree I partly agree I agree
In the wake of the financial crisis, banks greater stability and crisis-resilience implementation of ever-more extensive have had to implement a wave of new than they did in pre-crisis times. and detailed regulatory rulebooks is regulations at both the international and initially associated with additional costs national levels. The scope and complex- Even though the volume and scope of for banks, it should be noted that banks ity of the implemented regulatory proj- regulations has increased markedly also benefit from this tight-knit network ects have been considerable at times. since the financial crisis, the vast major- of regulations in that it creates addi- Significantly higher capital and liquidity ity of Swiss banks (68%) do not expect tional barriers to entry for new market requirements, tighter rules in deriva- regulatory requirements to ease in the players. tives trading and new, close-meshed future. This may be due to the fact that investor protection regulations are only financial market regulation is reaction- some of the key measures concerned. ary and the causes of the last financial Many of the most striking weakness- crisis are only addressed when new es that existed prior to the outbreak risks and dangers start to materialize of the financial crisis have now been on the financial markets, which in turn addressed, and the banks now possess then require new regulations. While the
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 59 Banks are starting to believe more strongly in their own resilience
Do you agree with the following statement? «The value add of Swiss banks will be higher in 7 to 10 years.»
2019 13% 41% 38% 8% Private banks 2018 15% 26% 47% 12%
Banks under 2019 11% 39% 39% 11% foreign control 2018 11% 41% 44% 4%
Regional banks 2019 20% 55% 25% 2018 22% 67% 11%
Cantonal banks 2019 6% 29% 59% 6% 2018 25% 65% 10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2019 However, when assessing the banking Nevertheless, Swiss banks are once 12% 8% industry’s ability to create value over- again starting to exhibit more optimism 9% 8% all, it should be considered that banks concerning their ability to create value 2018 are strongly interconnected with other going forward. Of the banks surveyed, industries in economic terms. In 2018, 42% believe that their added value will the additional added value initiated increase in the future. This is a year-on- 29% with other “supply industries” was CHF year increase of 5 percentage points 34% 13.4 billion10. If this figure is taken into (previous year: 37%). Accordingly, account, the effective value creation of banks’ belief in their own resilience the banking industry in a broader sense seems to be holding strong and even corresponds to around 6.9% (previous strengthening in some cases. 46% 54% year: 7.3%).
9 Source: SECO In spite of their improved operating performance in 2018, the long-term 10 BAK Economics AG: The economic importance of the Swiss financial sector – 2019 results, p. 6. outlook for Swiss banks remains rife with challenges. There is no end in sight I agree to the negative interest rate period; the I partly agree erosion of margins has taken hold not I partly disagree only in the interest income business, I entirely disagree but also in the commission and service income business; technological change and digitalization are striking at the core In 2018, Swiss banks generated gross of banks’ traditional business models; added value of around CHF 32.8 billion, new competitors are encroaching on representing 4.9% of the total gross add- various business areas that used to be ed value of Switzerland (previous year: the exclusive arena of banks; and the 4.8%).9 This is a considerable decline in network of regulations is more tight and comparison with the relative share of dense than in almost any other sector. 8.6% at the start of the millennium.
60 | EY Banking Barometer 2020 | In the Grip of Monetary Policy No fee increases in the long term in spite of the low interest rate environment?
Do you agree with the following statement? «The price of banking services will fall.»
I entirely disagree I partly disagree I partly agree I agree
2019 4% 100% 3% 13% 20% 2018 30% 23% 75%
50%
25%
54% 53% 0% 2012 2013 2014 2015 2016 2017 2018 2019
Many banks have increased their fees going forward, with one third of banks banking services, how can banks safe- for banking services in recent months in (30%) already fully convinced that a price guard their profitability in the long term? response to declining income from the collapse is on the horizon for banking It seems only logical against this back- interest rate business. This has primarily services. drop that almost all Swiss banks (83%) affected fees for account management, are convinced they need to harness new issuing payment cards, executing foreign The reasons for this are clear: com- sources of income in the long run (see currency transactions or withdrawing petitors from outside the industry are p. 47 for more information ). Another cash at bank counters. This measure is increasingly pushing their way into the potential way out of this unfortunate only intended to offer short-term relief, traditional domain of banks and attract- predicament would be to increase the ac- however. And while it will go some of the ing customers with low-cost services. In tivity of existing customers by improving way to mitigating the adverse effects of addition, customers are increasingly on the customer experience and customer the negative interest rate environment, the lookout for digital solutions, and they understanding (see p. 48 for more infor- in the long run barely any of the banks don’t want to pay over the odds for these. mation ), combined with the effective and surveyed forecast rising prices for bank- sustainable extraction of value. ing services. Quite the contrary: a total of This trend encapsulates the dilemma cur- 83% of banks (previous year: 74%) expect rently facing banks: if, on the one hand, the prices for banking services to fall. there is no more money to be made in the This is the highest value since this survey interest margin business because interest began, and reflects the growing belief rates are so low and, on the other, there among banks that this trend will continue is no room to raise the prices for other
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 61 Battle for talent rages on
Do you agree with the following statement? «Talent recruitment will become increasingly difficult.»
2019 3% 85% of all banks – on a par with the such as Google or Apple. Secondly, the 1% 12% previous year (86%) – forecast that it ongoing job cuts – driven by the wave 13% 2018 will become increasingly difficult going of consolidation in the industry and the forward for banks to recruit talent. It is rapid downsizing of branch networks 33% 40% noteworthy that the share of banks that – has undermined job security in the entirely agree with this opinion is up banking sector in recent years. And sharply from 33% to 40%. thirdly, banks, just like all employers, are having to find new ways to meet It is becoming increasingly clear that the changing needs of young people in new technologies and digitalization terms of what they want from the world
53% are shaking up professional profiles in of work. Future generations seem to be 45% the banking sector. Take, for example, giving special consideration to aspects the need for tech-savvy professionals, such as the meaningfulness of work, which has risen steadily over the past social justice, sustainability and work-life few years and shows no signs of abat- balance. While these values are readily ing. This trend is placing tremendous compatible with the financial industry, demands on banks’ internal training and banks will have to use all their powers of I entirely disagree continuing education programmes. persuasion if they want to get the young- I partly disagree er generations on their side. I partly agree Banks face particular challenges in I agree recruiting young talents and junior staff, since the appeal of banks on the labour market has diminished in recent years. There are multiple reasons for this: Firstly, the financial crisis has eroded confidence and damaged the reputation of the entire financial industry. Banks are no longer at the top of jobseekers’ lists of the most attractive employ- ers, having been replaced by BigTechs
2019 4% 4% 67% 25% Private banks 2018 15% 56% 29% 2017 9% 31% 35% 25%
2019 7% 14% 39% 39% Banks under 2018 4% 11% 52% 33% foreign control 2017 3% 26% 53% 18%
2019 15% 30% 55% Regional banks 2018 17% 44% 40% 2017 5% 14% 54% 27%
2019 18% 35% 47% Cantonal banks 2018 10% 55% 35% 2017 23% 62% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
62 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Banks wants to tighten their belts when it comes to remuneration
Do you agree with the following statement? «In the medium to long term, remuneration in the financial sector will decrease significantly.»
2019 1% Eroding margins in the core business, 17% stagnating revenue, a prolonged period of severely underperforming stock 28% prices – there are plenty of good reasons why remuneration in the banking sector is on the decline. Banks evidently share this opinion, with almost three-quarters of the organizations surveyed (71%) expecting remuneration in the financial sector to trend downwards in the medi- um to long term.
This forecast is supported by banks’ 54% responses when asked to name specific priorities for the next 6 to 12 months, where this year the topic of cost reduc- tion takes second place (previous year: I entirely disagree fifth place). This is because personnel I partly disagree costs are generally the highest cost item I partly agree in the financial industry. I agree
Private banks 25% 58% 17%
Banks under 4% 36% 49% 11% foreign control
Regional banks 25% 60% 15%
Cantonal banks 24% 47% 29%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 63 64 | EY Banking Barometer 2020 | In the Grip of Monetary Policy EY Banking Barometer 2020 | In the Grip of Monetary Policy | 65 66 | EY Banking Barometer 2020 | In the Grip of Monetary Policy “The ground-up integration of ESG considerations into advisory and investment processes requires a far-reaching transformation process that will impact almost all areas of the banking business.
Mark Veser Senior Manager Sustainability Leader
11Sustain- ability
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 67 Focus: Sustainability
The topic of sustainability, often re- • Firstly, in the past few years there has • In parallel with this, discussions are ferred to as ESG (Environment, Social, been rapidly rising expectation on the swirling about the regulatory require- Governance), has continued to gain in part of the general public that com- ments for banks – especially in the EU importance in the international banking panies need to make a contribution to – concerning the incorporation of ESG environment in recent years. This is addressing societal challenges such as within the context of investment and essentially attributable to three drivers, climate change or to meeting the UN advisory processes, risk management which are outlined below. Sustainable Development Goals. This and the disclosure of non-financial can be observed in developments such targets. In the EU, this includes, for ex- as the ‘climate strike’ and the growing ample, the development of a taxonomy political influence of green parties in that should be considered sustainable various European countries. Banks are economic activity and, based on this, increasingly being expected to make an sustainable investing, or the amend- effective contribution through their ser- ment of regulations such as MiFID II, vices and products. This includes not UCITS and AIFMD or the directive on only offering sustainable investment non-financial reporting, which requires products, but also avoiding problematic the disclosure of relevant ESG key debt funding. Banks have already es- figures. tablished the first international report- ing standards in this area11. Against this backdrop, this year we again surveyed banks on the topic of • Demand for products and services that “Sustainability.” meet these requirements has risen across all asset classes and geograph- The basic takeaway from the survey ical regions in recent years. According is that cantonal and private banks in to the Global Sustainable Investment particular are very receptive to ESG Alliance, the share of sustainable in- issues. Concerning the cantonal banks, vestments in the total volume of assets this can be attributed to public expec- under management is up sharply, with tations, something these institutions almost one half of global sustainable are especially sensitive to compared investments originating from Europe12. with other banking groups in view of A market study by Swiss Sustain- their ownership structure. In the case of able Finance reported an increase in private banks, this can be explained by sustainable investments of over 80% the international nature of their busi- in Switzerland in 201813. Institutional ness, their clientèle and the competitive investors, in particular, expect banks to situation this creates. demonstrate corresponding expertise and product offerings. This is support- Regional banks in Switzerland have ed by the findings of a global study a tendency to be even more cautious by EY, which revealed that 97% of all when it comes to the topic of ESG. The institutional investors factor non-finan- business customers of these banks are cial information into their investment predominantly local SMEs, which at the decisions14. present time are probably less keenly aligned with formalized ESG standards than global companies.
68 | EY Banking Barometer 2020 | In the Grip of Monetary Policy We can say, overall, that banks are Development of sustainable currently focusing their sustainability investments in Switzerland activities on the area of investments, while they have yet to make any target- ed adjustments to their debt financing Volume in CHF billion policies. 800
11 For example, the Principles for Responsible 700 Investments (PRI) or, since fall 2019, the Principles for Responsible Banking, which were launched by 600 130 banks from nearly 50 countries.
12 Global Sustainable Investment Alliance (2019). 500 2018 Global Sustainable Investment Review.
13 Swiss Sustainable Finance (2019). Swiss 400 Sustainable Investment Market Study 2019.
14 EY (2018). Does your nonfinancial reporting tell 300 your value creation story? 200
100
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: SSF
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 69 Majority think they can make a contribution to climate protection
«Banks can make a significant contribution in the fight against climate change.»
2019
A majority of banks (55%) are of the Many people think that the primary 9% 13% opinion they can make an important responsibility first lies with politics to contribution to fighting climate change create the necessary framework for the through their activities. This viewpoint is financial market. held in particular by private banks (74%) and banks under foreign control (57%); in other words, by institutions that are active mainly in the asset management business. These banks likely recognize 36% the momentum offered by the current discussion with respect to their business 42% model and want to take a more active role.
A significant proportion of the banks sur- veyed (45%) remain sceptical, however, and do not really think that banks can make an effective contribution to fighting I agree climate change. This pronounced scepti- cism also reflects the general debate on I partly agree the role and responsibility of the financial I partly disagree market in actively driving the transfor- I entirely disagree mation toward a low-carbon economy.
Private banks 22% 52% 17% 9%
Banks under 11% 46% 39% 4% foreign control
Regional banks 5% 30% 55% 10%
Cantonal banks 12% 35% 35% 18%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
70 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Sustainable investments are not just hype
«Sustainable investment is just a temporary trend that will disappear again.»
2019
2% The lion’s share of banks (81%) are con- requirements in the eurozone, which are
17% vinced that “sustainable investing” will also having a knock-on effect for Swiss be an enduring topic in the medium term banks – especially those that are active and not just a passing fad. This assess- on the European market or manage 35% ment is supported by the global trend European customers. in sustainable investing, which has seen
the share of sustainable investments 15 Global Sustainable Investment Alliance (2019). in total assets under management rise 2018 Global Sustainable Investment Review. markedly in all corners of the globe in recent years15.
Given that only a handful of organi- 46% zations have integrated sustainability criteria into their end-to-end investment process, and not just for isolated specific products and themes, banking insti- tutions are faced with an uphill trans- I agree formation battle in the years ahead. I partly agree This transformation is being driven by I partly disagree the increased demand for sustainable I entirely disagree products, especially from institutional investors, as well as by rising regulatory
Private banks 13% 43% 44%
Banks under 32% 39% 29% foreign control
Regional banks 5% 15% 65% 15%
Cantonal banks 6% 35% 59%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 71 Banks want to expand their sustainable investment offering
«Does your organization have the intention to significantly expand the range of sustainable investment offerings in the future?»
2019
14% 22%
Yes 16% Probably Probably not No
48%
Private banks 26% 57% 13% 4%
Banks under 21% 47% 18% 14% foreign control
Regional banks 45% 20% 35%
Cantonal banks 41% 47% 12%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
The majority of banks (70%) are re- product-specific challenges facing them, sponding to the rising demand for but also to make adjustments to a wide sustainable investments and plan to range of internal bank business process- ramp up their offering in this area in the es. This applies in particular to invest- future. Regional banks are an exception ment processes, risk management and here, where the majority (55%) have no monitoring processes, and reporting. plans to expand their sustainable invest- Last but by no means least, the required ment offering at the present time. adjustments will call for relevant data and well-trained staff so that sustain- In order to expand their offering, ability aspects can be integrated into banks need not only to overcome the advisory processes.
72 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Financial performance remains a priority for customers
When investing, our customers assign at least the same importance to sustainability / ESG criteria as to financial factors.
2019
2%
24% 22%
I agree I partly agree I partly disagree I entirely disagree
52%
Private banks 26% 70% 4%
Banks under 4% 26% 44% 26% foreign control
Regional banks 5% 5% 45% 45%
Cantonal banks 29% 47% 24%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
The majority of banks (76%) say that thinking, but rather to find intelligent ization that integrating ESG criteria into while their customers are interested solutions that lead to financial success investment strategies does not have to in sustainability, only in rare cases do without generating conflict. be at the cost of financial performance; they think they would sacrifice financial on the contrary, it offers a potential performance. This clearly demonstrates The issue as a whole therefore should source of added value and can improve a that “sustainable investing” and, by not be understood as a benevolent portfolio’s overall risk-return profile. implication, the “multi-stakeholder undertaking. Institutional investors such value” approach needs to be incorpo- as pension funds, in particular, need to rated alongside the “shareholder value” generate a return in order to provide the approach in order to be successful. The benefits they have promised. The mar- key is not to abandon profit-oriented kets have increasingly come to the real-
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 73 Need for further regulatory requirements unclear
«To exploit the full potential of sustainable investments for climate protection, further regulatory requirements – such as binding standards to create a definition of sustainability – are needed.»
2019
Slightly more than one half of banks Against the backdrop of the regulatory 8% (51%) think that more far-reaching regu- discussion on sustainable finance, ESG latory requirements are needed in order trends have the potential to evolve quick- 26% to exploit the full potential offered by ly even without any conclusive legislative sustainable investing for climate pro- mooring and could establish themselves tection. At the same time, many players as de facto market standards. in the sector remain cautious when it comes to the impact of additional regu- latory requirements in a rapidly growing 43% and innovation-driven market for sustain- able products. 23% It is to be expected that the opinions on this question will not produce a uniform picture in the future either. Political bod- ies, supervisory authorities and central banks have indicated in no uncertain terms that creating clear framework conditions and uniform standards for a I agree sustainable financial market will remain a I partly agree focus of regulation, not least in order to address the risk of greenwashing in the I partly disagree advisory or sale of financial products. I entirely disagree
Private banks 13% 44% 17% 26%
Banks under 7% 47% 21% 25% foreign control
Regional banks 5% 40% 20% 35%
Cantonal banks 6% 41% 35% 18%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
74 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Topic of sustainability has trickled down into investment advisory processes...
«In our organization, the topic of sustainability is integrated in investment advice or is a mandatory topic in the advisory process.»
2019
As many as 30% of banks say they have already integrated the topic of sustain- 28% 30% ability as a compulsory element of the investment advisory process. This would seem to be quite a high percentage since the complete integration of the full range of formal ESG criteria is extremely complex and comes with its fair share of criticisms. Rather, we assume that these banks have already begun to incorporate the topic of sustainability into the ad- visory process, but this integration has hardly been systematically implemented 42% and also does not necessarily imply a full offering of sustainability products.
Only a minority (28%) have no plans to empower front-office staff on this topic. Yes This opinion is especially prevalent No; however, this will among regional banks (45%). be the case in the future. No
Private banks 22% 56% 22%
Banks under 30% 33% 37% foreign control
Regional banks 30% 25% 45%
Cantonal banks 41% 59%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 75 ...but not through to reporting to customers
«Within periodic reports, our customers are informed in detail on the sustainability of their investment portfolio (e.g., ESG score).»
2019
Only a minority of just under 10% say they 9% have already rolled out regular reporting on ESG. This shows conflicting priorities where in many areas the topic of sus- tainability has been integrated into the 40% advisory process, but the accompanying formal requirements for ESG reporting have not yet been met in full. Over one half of the organizations surveyed (51%) plan to incorporate these requirements into reporting in the near future, taking 51% them one step closer to the required bank-wide integration and transformation.
If reporting is provided to customers at regular intervals, it is entirely possible that momentum will increase at an even greater pace than today since this will give rise not only to more questions from Yes customers, but also to greater demand. No; however, this will be the case in the future. No
Private banks 4% 70% 26%
Banks under 12% 46% 42% foreign control
Regional banks 5% 25% 70%
Cantonal banks 18% 64% 18%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
76 | EY Banking Barometer 2020 | In the Grip of Monetary Policy The topic of sustainability does not play a major role in debt financing
«Our organization considers sustainability/ESG factors in its lending activities to commercial customers.»
When it comes to the question of sus- The realization that lending has an equal for Responsible Banking and the dialog tainability, the focus is primarily on in- if not even greater influence on sustain- initiated on the issue by European regu- vestments and investment products. So ability as investing has, however, started lators, for example in the Action Plan on far as credit financing by banks is con- to gain currency in recent years. This is Sustainable Finance published recently cerned, however, the topic of sustain- reflected not least in the emergence of by the European Banking Authority ability is of negligible importance – both sector initiatives such as the Principles (EBA). now and in the future. Only a minority of 19% of the banks surveyed say they take ESG factors into consideration when granting loans, with a further 25% plan- ning to do so in the future. The majority 2019 of the banks surveyed do not factor any sustainability criteria into their lending business with commercial customers. 19%
Public debate in the lending business is not yet as far advanced as it is in the Yes investment business, where the question No; however, this will of integrating ESG into the investment be the case in the future. process has been on the table for many No years now, and market trends are mea- 56% 25% sured according to yardsticks such as the Principles for Responsible Invest- ment (PRI) and are readily available.
Private banks 5% 38% 57%
Banks under 21% 17% 62% foreign control
Regional banks 21% 16% 63%
Cantonal banks 29% 29% 42%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 77 78 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Within the scope of this year’s Bank Barometer, we teamed up with the Redesigning Financial Services (RFS) initiative to conduct a survey among 2,000 bank customers. The Bank Barometer reports on only one portion of these survey results; the detailed results are published as part of a dedicated EY publication in the first quarter of 2020.
12Customer survey
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 79 Bank customers are satisfied, but...
«Our customers are «I am generally generally satisfied with us satisfied with my as their home bank.» home bank.»
2% 4% 1% 9% 10%
36% 35%
Bank view Client view
53% 50%
«Our customers are «I am convinced that the convinced that the advice we advice my home bank provides provide is in their best interests.» is in my best interests.»
1% 7% 2% 11% 21% 30%
Bank view 22% Client view
62% 44%
I entirely agree I agree I neither agree nor disagree I disagree I entirely disagree
80 | EY Banking Barometer 2020 | In the Grip of Monetary Policy 89% of the banks surveyed are convinced on the issue. Almost all of the banks sur- introduction of FIDLEG, the protection of that customers are generally satisfied veyed (92%) assume that their custom- legitimate expectation related to custom- with them. Cantonal and regional banks ers are convinced that the advice they ers has now been anchored in superviso- are especially confident when it comes provide is in their interests. In actual fact, ry regulations. However, customer trust to this question, with not one single bank however, customers’ trust in their bank is is not created through formal rules and among those surveyed expressing an not quite as strong: only two out of three procedures. The decisive factor will be opinion to the contrary. Private banks are bank customers (65%) are convinced that how banks market the added value of somewhat more reticent, with almost one banks are always aligned to customer consulting and avoid being perceived as quarter (23%) saying that their customers interests. This means that one third of mere product vendors. would probably give their bank a neutral the customers surveyed have doubts report card (“neither nor”). concerning this very important issue for banks (i.e. “neither nor” or “(entirely) Comparing this with our customer survey, disagree”). it would seem that banks are justified in their self-confidence: 85% of customers In view of the fact that customer trust agree with the statement that they are is very often cited as the most crucial generally satisfied with their home bank. factor for success in banking, this survey An additional 10% of customers are unde- reveals a certain need for action on the cided (“neither nor”), while only 5% say part of banks. If banks do not have the they are dissatisfied with their bank. underlying trust of their customers, it will be very difficult for them to increase their While banks are able to provide a very customer/product penetration and thus precise assessment of the general satis- to strengthen their earnings base on a faction of their customers in line with this sustainable basis. survey, the question as to whether banks act in the interests of their customers re- Swiss legislation has also recognized veals an interesting discrepancy between that there is obvious need for action on the perspective of banks and customers the topic of customer trust. With the
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 81 Service and customer protection are more important than bank fees
«The costs of financial «The costs of financial services do not play a major services do not play a major role for our customers. Our role for me. It is more important customers place greater emphasis for me that I can rely on my on reliable service and the bank to protect my interests.» protection of their interests.»
2% 7% 5% 15%
21%
30% 40% Bank view Client view
34%
25%
21%
100 I entirely agree 7% 5% 14% I agree I neither agree nor disagree 80 26% 32% 19% 47% I disagree I entirely disagree
60 19% 22%
32% 12% 40
48% 41% 41% 20 26%
4% 5% 0 Private banks Private Banks under foreign control banks Regional Cantonal banks
82 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Banks have differing assessments of In view of the fact that hardly a single how sensitive their customers are to bank anticipates rising fees for financial prices. While 42% of the banks surveyed services in the future (see p. xy for more are of the opinion that price is more information ), this survey finding can be important than reliable service and the interpreted as an encouraging sign; it protection of interests, 37% think the would appear that price is not the only opposite is true. This disparate picture is decisive factor for customers, and there evident across all banking groups. Inter- is plenty of room to charge higher prices estingly, the share of banks that assume or implement price hikes if this is consid- the price charged for financial services ered to offer added value on the cus- plays a secondary role for their cus- tomer side. Thus, the same rules apply tomers is higher among cantonal banks in banking as they do in all other areas (47%) and regional banks (37%) than it of the economy: customers are willing to is among private banks and banks under pay more if they perceive added value in foreign control (both at 33%). Given that the product or service. retail customers in particular are very often characterized as being especially price-sensitive, this finding comes as a real surprise.
It is interesting to note that banks seem to accord too much importance to the topic of price, since only 26% of customers say that, for them, price is their overriding concern when choosing financial services. Indeed, almost one half of customers (49%) give service and the protection of their interests a higher weighting than costs.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 83 13Appendix
84 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Market environment
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
2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019 2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019
LIBOR EUR 3M LIBOR JPY 3M MSCI WORLD MSCI USA LIBOR USD 3M LIBOR CHF 3M MSCI SWITZERLAND MSCI EUROPE CHF 10 y Swiss Bonds Source: MSCI Source: SNB
Real estate Debt ratio Indexed 1.1.2000 = 100 Left axis indexed, 1.1.2000 = 100
220 Debt ratio Debt (absolute) in relation to GDP 200 1000 450
180 900 400 800 350 160 700 300 600 140 250 500 120 200 400 150 100 300 200 100 80 100 50 2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019 0 0 2000 2005 2010 2015 2019 Switzerland Europe Global (A) Global (R) USA Developed countries (A) Developed countries (R) Source: BIS Emerging markets (A) Emerging markets (R)
Source: IIF
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 85 Market environment
Shiller-P / E ratio Volatility and interest rates Indexed, 1.1.2000 = 100 50 20 Dot-com-bubble 350
300 ?
40 Long term interest rates (USD) Global financial crisis 15 250
30 200
10 150
Shiller-P / E ratio 20
100 5 10 50
0 0 0 1881 1900 1921 1950 1978 2001 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 2018 2019 VSMI ® Shiller-P / E Ratio S&P 500 EURO STOXX 50® Volatility (VSTOXX®) Long term interest rates (USD) Cboe Volatility Index® (VIX®)
Source: SNB Source: STOXX, Cboe
Economic Policy Uncertainty Index
400
350
300
250
200
150
100
50
0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 20182019
Source: Davis, Steven J. (Policyuncertainty.com)
86 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Bank Landscape
Number of banks Number of branches
-33% -25% 400 4’000 375 3’809
350 3’500
300 3’000 2’864
248 250 2’500
200 2’000
150 1’500
100 1’000
50 500
0 0
2000 2005 2010 2015 2016 2017 2018 2000 2005 2010 2015 2016 2017 2018
Source: SNB Source: SNB
Number of employees
-14% 160’000
140’000 124’998 120’000 107’388 100’000
80’000
60’000
40’000
20’000
0
2000 2005 2010 2015 2016 2017 2018
Source: SNB
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 87 Value creation and profitability
Results by business area Result, Expenses, Profit, C / I ratio in CHF billion in CHF billion Cost/Income Ratio
80 80 80%
68.7 68.6 70 70 70% 3.7 64.6 65.3 6.9 61.5 62.5 62.5 60 12.5 8.9 11.6 60 60% 5.0 9.0 11.2 11.3 8.6 11.8 50 50% 50 6.2 7.7 8.2
40% 40 28.9 40 28.0 22.4 20.9 21.7 22.0 24.9 30 30 30%
20 20 20%
24.8 23.7 24.1 24.0 23.5 10 22.5 19.8 10 10%
0 0 0%
2000 2005 2010 2015 2016 2017 2018 2000 2005 2010 2015 2016 2017 2018 Other result from ordinary activities Operating result Result from trading activities and the fair value option Operating expenses Result from commission business and services Profit from operating business Gross result from interest operations Cost / Income Ratio Source: SNB Source: SNB
Value creation Result from commission business Indexed Relative share Securities holdings Result from commission business 1.1.2000 = 100 of banks in CHF billion in CHF billion 150 10% 7'000 40
9 % 140 6'000 35 8 % 130 30 5'000 7 % 120 25 6 % 4'000 20 110 5 % 3'000 4 15 100 % 2'000 3 % 10 90 2 % 1'000 5 80 1 % 0 0 70 0 % 2000 2005 2010 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Economy Securities holdings Banks Result from commission business Relative share of banks in % Source: SNB Source: SECO
88 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Value creation and profitability
Interest rates and lending volume Customer deposits in CHF billion
Lending volume Result from in CHF billion interest operations in CHF billion 2750 2'000 30 2500 1'800 2250 25 1'600 2000 1'400 20 1750 1'200 1500 1'000 15 1250 800 1000 10 600 750
400 5 500 200 250
0 0 0 2000 2005 2010 2015 2018
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Mortgages Private clients - national Amounts due from customers Commercial clients - national Financial assets Institutional clients – national Gross result from interest operations Private clients - foreign
Source: SNB Commercial clients - foreign Institutional clients – foreign
Source: SNB Interest rate margin of domestically focused banks
2.0%
1.9%
1.8%
1.7%
1.6%
1.5%
1.4%
1.3%
1.2%
1.1%
2003200420052006200720082009201020112012201320142015201620172018
Source: SNB; Interest rate margins are approximated as net interest income divided by the sum of mortgage claims, claims against customers and financial claims.
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 89 90 | EY Banking Barometer 2020 | In the Grip of Monetary Policy Responsible for the study
Patrick Olaf Timo Schwaller Toepfer D’Ambrosio
Managing Partner Partner Senior Manager Audit Financial Services Leader Banking & Capital Markets Audit Financial Services
Maagplatz 1 Maagplatz 1 Maagplatz 1 8005 Zürich 8005 Zürich 8005 Zürich
Telephone: +41 58 286 69 30 Telephone: +41 58 286 44 71 Telephone: +41 58 286 32 20 [email protected] [email protected] [email protected]
Experts
Mark Nikola Veser Simic
Senior Manager Senior Consultant Sustainability Leader Financial Services
Maagplatz 1 Maagplatz 1 8005 Zürich 8005 Zürich
Telephone: +41 58 286 36 79 Telephone: +41 58 286 40 15 [email protected] [email protected]
Further contacts
Elizabeth Bruno Stéphane Whitfield Patusi Muller
Partner Partner Partner Financial Services Leader Wealth and Leader Financial Services Asset Management Suisse Latine
Maagplatz 1 Maagplatz 1 Route de Chancy 59 8005 Zürich 8005 Zürich 1213 Genève
Telephone: +41 58 286 39 36 Telephone: +41 58 286 46 90 Telephone: +41 58 286 55 95 [email protected] [email protected] [email protected]
EY Banking Barometer 2020 | In the Grip of Monetary Policy | 91