Following a rather turbulent couple of years, the Swiss banking sector is set to enjoy a brighter future. In a recent survey, 90 percent of Swiss bankers indicated that they were positive about the future of the banking sector despite the move towards tighter regulations and the quashing of tax evasion practices. The optimism in the market was revealed in a report, commissioned by consultancy company, Ernst & Young, which surveyed 60 banking officials in Switzerland. Just over half of the banks surveyed regarded 2010 as a very positive business year, with a further 40 percent regarding it as generally positive.
Good news indeed for a country whose banking sector is crucial to its economy. Switzerland’s service sector, led by financial services, contributed 11.6 percent of Switzerland’s GDP in 2008, and the Swiss financial sector’s contribution to the total value added is twice to three times larger than in any other European country, except Luxembourg. Globally, too, Switzerland’s financial sector plays a major role. Despite being only 41,293 square kilometres in size and having a population of just over seven million, Switzerland is one of the world’s most important financial centres.
Switzerland’s banking sector is different from that of most other countries in that it has a wide variety of bank types and it allows all types of banks to offer all banking services, rather than commercial banking and investment banking being separate as it is in most other countries. However, certain bank groups in Switzerland do specialise in certain areas. For example, the biggest players are UBS and the Credit Suisse Group, which between them account for over 50 percent of the balance sheet total of all banks in Switzerland. However, only one-fifth of their activities are represented by domestic transactions, meaning that they have considerable international exposure.
UBS leads the world in wealth management and is also Switzerland’s top bank for individual and corporate clients. It is also a major company in the international investment banking and security business. Credit Suisse, a top global bank with its headquarters in Zurich, is well known for providing expert advice and innovative products to a wide range of corporate and institutional clients and high-net-worth individuals globally, as well as retail clients in Switzerland. Then there are also 24 cantonal banks, which are semi-governmental organisations with a state guarantee that mainly deal in domestic banking; a group of cooperative banks with the largest branch network in Switzerland, under the Raiffeisen Switzerland banner; and many smaller universal banks and private banks.
The financial crisis and beyond
But even Switzerland’s economy and mighty banking sector have been hit by the recession. The global financial crisis hampered the Swiss export market, causing the country to fall into recession in 2009, although the economy managed to rebound in 2010, recording a growth of 2.8 percent. However, because of its international exposure, the banking sector faced considerable problems, culminating in UBS suffering crippling losses in 2008/09.
The government was forced to step in with a rescue deal, which involved a cash injection> and the creation of a “bad bank” for UBS’s distressed assets in order to retain the bank’s solvency. As a consequence, financial reforms that introduce new capital rules for big banks are to come into force in 2013.
The Swiss banking sector was rocked to its core by the UBS bailout, and has been bruised further by the continuous hits by other countries on its banking secrecy legislation. Switzerland is currently in discussions with Britain and Germany over disbutes about Swiss banks protecting money that has not been declared to the relevant national tax authorities. At the beginning of this year, scandal raised its head again when a former Swiss banker passed on to Wikileaks data containing the account details of 2,000 companies and individuals including some prominent politicians.
As a result of international pressure, the government has decided to conform to OECD regulations on administrative assistance in tax matters, including tax evasion. The proposed new regulations are viewed by many in the industry as being beneficial to the market. In fact, 85 percent of respondents in the Ernst & Young survey were optimistic that the developments concerning bank secrecy, particularly with regard to the possible introduction of a form of withholding tax and the legalisation of untaxed assets, as something that will ultimately enhance Switzerland’s position as a global financial centre.
The phoenix emerges
Many in the banking sector believe that, since the recession and the banking reforms, the market has emerged a healthier and leaner beast. “All things being equal, our banks did a good job in weathering the global financial crisis, the European debt crisis, and the debate on regulating Switzerland’s financial centre, and they are relatively upbeat about the future,” commented Iqbal Khan, Head of Banking & Capital Markets at Ernst & Young.
Most respondents indicated that the fiercest competition in the Swiss banking sector was in the private banking area. Interestingly, this was the opinion of not only the private and foreign banks which specialise in this sector, but the cantonal and regional banks also indicated that competition was hottest in private banking.
Because of the developments in bank secrecy, fiscal transparency and cross-border services, many banks are revamping their private-public business models. As a consequence, respondents of the private and regional banks in particular believe that the banking sector will experience some consolidation in the short to medium term.
“Many banks are reviewing their private-banking business models due to the latest developments in the areas of bank secrecy, fiscal transparency and cross-border services.
The related transformation process is also set to heighten competition among the banks,” said Patrick Schwaller, Head of the Bank Barometer team at Ernst & Young. “The medium-term consolidation expected by the banks may well be the final consequence of this development.”
Taming the beast
Lending policies are expected to remain more or less stable at their current level over the next six to twelve months. Just under two-thirds of bank sources believed that “exception to policy” loans were becoming more popular, pointing to a more expansive loans policy on the part of banks. In addition, just over half of respondents surveyed agreed that in some regions bubbles were starting to form in the real estate market. “Low interest rates coupled with diminished returns in other asset classes have evidently favoured the generally more expansive real estate lending policies we have seen in recent years,” asserted Mr Khan.
Survey respondents indicated that the areas that would have the most impact on the banking sector in the medium term were the regulations of cross-border activities (48 percent agreed with this) and tax treaties and fiscal transparency (24 percent). Only a small minority of the banks in the survey considered the tightening of equity capital regulations – a moot point among the public – to be the most important issue.
Further regulatory changes are expected in the banking sector in the future, with around half the bank representatives in the survey viewing these as a positive move, with the other half questioning the advantages of the changes.
The future is bright
There was greater consensus on the effect the regulations were likely to have on operational business: just over two-thirds of the bank representatives believed the regulatory changes would have a negative or generally negative impact on their revenue over the forthcoming six to 12 months, because they maintained that the additional costs associated with these regulations would not be able to be passed on to their clients. As a consequence, 85 percent of the banks surveyed were of the opinion that there would be lower returns for their shareholders, while 65 percent expected a revision of incentive and remuneration packages.
Looking at currency fluctuation, the majority of bank sources expected the Swiss franc to increase in value against the US dollar and the euro in the coming year. Only 13 percent of respondents expect the Swiss franc to fall against the US dollar and 17 per cent against the euro.
The Swiss banking sector has had to change considerably in recent years and in doing so it is in a stronger position in relative terms than before the financial crisis. Over 90 percent of survey respondents were bright about the sectors future, agreeing that business in 2011 would be either very positive or generally positive. “This general strengthening can be attributed to classic Swiss security-related attributes such as a healthy national budget, political stability and the strength of the Swiss franc,” concluded Mr Khan.