Less than a quarter (23%) of Swiss banks assesses their current business performance as positive (versus 20% the previous year), according to a survey of EY.
48 (58)% of the 120 institutions (excluding the two largest banks) surveyed in December 2013 for the EY Bank Barometer rate business as somewhat positive; 29 (22)% see a fall in operating income.
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The banks still have a confident view of the future: 75 (70)% expect a positive or somewhat positive trend in operating income over the coming months.
Yet the number of institutions planning redundancies within the next twelve months has nearly doubled within the period of a year, reaching 20%.
Patrick Schwaller, managing partner FSO Assurance at EY Switzerland, said: "Swiss banks have dealt with the challenges of increasingly difficult conditions such as low interest rates, falling transaction volumes and regulatory pressure. They have no choice but to adapt their business models and processes on an ongoing basis."
Automatic exchange of information expected as new reality
The EY Bank Barometer reveals a remarkable reassessment regarding tax transparency: no less than 74% of the banks surveyed are convinced that the concept of automatic exchange of information will, in the end, become a global standard. 49% of the institutions are even working on the assumption that this will already be the case in the medium run.
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By GlobalDataSchwaller added: "In view of the recent past, this clear of a result is astonishing and marks a historic turning point. Apparently, the banks had to acknowledge that the partner countries either did not understand or did not accept the previously proposed alternative concepts. In the meantime, many banks have also already introduced rules for assets with unclear tax status. Yet the issue of how to deal with untaxed assets from the past has yet to be resolved."
Major misgivings with US program
Banks are taking an increasingly negative view of the current developments concerning banking secrecy and tax transparency. 57 (51)% of the institutions surveyed expect there to be negative or somewhat negative consequences for the financial center in this area.
There are major misgivings in connection with the US program to end the tax dispute by reaching a settlement: a majority of 73% assess the target solution with the US as clearly negative for Switzerland as a financial center.
Schwaller added: "Yet the banks are not primarily concerned about the potential fines; instead, they see the greatest negative impact of the program in the work of preparing and delivering the data required. So it does not come as a surprise that a lot of banks have been quite reluctant to participate in the program."
Fear of greater difficulty entering the EU market
With the implementation of MiFID II, 79% of the Swiss banks surveyed fear that it will become much more difficult to enter the EU market. This may start shaking the foundations of an important pillar supporting the earnings of Swiss banks.
In light of this, it is understandable that 73% of the institutions find it sensible to introduce a financial services law (FIDLEG) as an equivalent regulation. However, they view some of the proposed changes, especially the register for client advisors, the reversal of burden of proof and the ombudsman regulations, as not expedient enough.
Bruno Patusi, head of Wealth & Asset Management at EY Switzerland, said: "The third country MiFID II rules create a major issue for Swiss banks. It remains to be seen whether the EU will actually recognize the planned Swiss regulations as equivalent, fulfilling the condition for market entry."
Private banking still under pressure
Private banking continues to report the strongest competitive pressure. 55% of the banks see the biggest challenges and the fiercest competition in this business segment. The strong competitive pressure is pushing consolidation forward: a large majority of the banks surveyed (76%) expect a reduction in the number of financial institutions, especially in the asset management business.
Patusi added: "The increasingly unfavorable conditions are currently leading many banks to reassess their business models. The competitive pressure and the tax agreement concluded with the US will tend to accelerate the consolidation."
Anti-cyclical symbolic buffer
A growing majority of 59 (53)% of the banks surveyed are anticipating more restrictive credit issuance during the current year. 64 (77)% of the institutions share the view that the real-estate market is currently tending towards bubble-building.
A majority of the institutions rate as stable the need for impairment allowances and provisions to cover for defaults in the loans business; in contrast, 41 (42)% continue to expect a growing need for impairment allowances. A large majority (82%) views the anti-cyclical capital buffer on mortgage loans that the Federal Council mandated at the request of the Swiss National Bank as sensible.
Yet only half of the banks think that this instrument can actually sustainably put the brakes on growth in the area of loans secured by mortgages.
Retrocessions – a mountain made out of a molehill?
The Swiss Federal Supreme Court’s ruling on retrocessions and trailer fees that shook up the sector at the end of 2012, has not had any major effects on asset management business so far. During 2013, just 19% of the banks surveyed found themselves faced with a significant number of client inquiries on distribution fees and only 8% reported that they had to deal with significant claims for restitution.
Patusi added: "The banks were generally able to satisfactorily explain the remuneration mechanisms to potentially affected clients."
The survey also shows that retrocessions are likely to continue to exist in the future: around 44% of the banks surveyed assume that they will not completely give up this type of distribution fees. However, transparency will continue to increase.
