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Swiss Banking 2017

Room for improvement

Swiss domestic banks, namely the Swiss units of UBS and Credit Suisse, Kantonalbanken, Raiffeisenbanken, regional banks, and other retail-focused banks have managed to maintain their profitability in a challenging negative interest rate environment. They reported aggregated equity returns of 5.7% in 20161. When adjusted for the over capitalization of these banks, this still translates into a small positive economic profit after accounting for capital costs.

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Even shocks such as negative interest rates, increasing capital and liquidity requirements, and decreasing loan growth rates did not have a significant negative impact on the overall profitability of the Swiss domestic banking market in the period from 2011 to 2016.

However, we do see several underlying weaknesses in the current position, as follows:

  • Valuations have continuously declined for quoted domestic banks, indicating that investors are no longer willing to pay a premium for banks with the existing business model.
  • Near-stable interest rate revenue has been achieved only through a substantial balance sheet expansion, and sometimes through increasing risk related to Asset Liability Management (ALM). These factors compensate for declining interest rate margins.
  • Structural costs have increased in a progressively more digitalized world.
  • The business model and cost structure rely on significant loan growth in excess of expected nominal GDP growth.

Moreover, we anticipate a number of future challenges which might exert a negative impact on the Swiss domestic market. Banks must get ready to tackle the challenges below:

  • New players in the core mortgage business with a better refinancing position and therefore a significant cost advantage (such as insurance companies or pension funds).
  • Transformation of the traditional client interaction channels, such as through a Swiss equivalent to the Second Payment Service Directive (PSD2).
  • High investment and maintenance costs to achieve cutting-edge customer experience in the digital area.
  • Possible risk of Fintech competition, especially by foreign players which can transfer their European or Global solutions to Switzerland with a scale advantage.