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EY Banking Barometer 2024 – Confidence

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5 minute read 11 Jan 2024

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Despite a challenging market environment, according to the EY Banking Barometer 2024 96% of Swiss banks expect their operating profit to increase.

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In brief

  • 96% of Swiss banks can look back on a successful year of business overall and are also forecasting growing income for the future.
  • Confidence in the resilience of the real estate market and Swiss SMEs remains high.
  • Swiss banks are increasingly turning to artificial intelligence and extending their range of sustainability products.

The results of the EY Banking Barometer 2024 reflect an extremely positive mood among Swiss banks. 96% of banks surveyed expect their operating profit for 2023 to rise – a record figure, up 18 percentage points from last year. They also forecast growing income for the future, underlining their confidence in their own ability to generate value. This confidence is remarkable, especially given the background of a challenging environment of geopolitical tensions, banking collapses, persistent inflation and a slowing economy.

Banks are planning to use the higher-than-expected profits they have made in the past two years in very different ways. While retail banks want to primarily strengthen their capital, asset management banks mainly intend to invest in further developing their business models. Only 8% of banks surveyed want to invest in improving benefits for the customer, which is astonishing given that customer expectations are rising and customer queries have become more complex.

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Great confidence in the property market and the resilience of SMEs

Historically, interest rate hikes have often gone hand in hand with a decline in property prices, but this is far from the case in the Swiss market. Excess demand in the property market, which can be attributed to stable net migration and declining construction activity, still seems to be supporting prices in the residential construction segment in particular.

High interest rates, low impairment losses and the resilient Swiss economy led to record profits in 2023 among banks surveyed.

Patrick Schwaller

Managing Partner, Audit in Financial Services | EY Switzerland

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Swiss banks do not anticipate a change in the trend and continue to display great confidence in the property market: only 21% expect an increasing need for impairment losses on residential mortgages (last year: 31%). Confidence in the resilience of Swiss SMEs is also up substantially, with only 42% seeing loan defaults rising over the next few years, a figure 17 percentage points lower than last year.

 

The impact of the acquisition of Credit Suisse by UBS

The emergency takeover of Credit Suisse by UBS was an important factor in stabilising the financial markets and restoring confidence in the Swiss financial centre, but brings challenges too. For instance, concerns have been voiced that a gap in the offering could open up in the corporate client business in particular if credit becomes tight. There is no reason to expect this in the short term. However, the majority (66%) of banks surveyed believe that adjustments to the offering in the corporate client business are definitely possible in the medium to long term. This would mainly affect medium-sized companies without direct access to the international capital market.

 

In addition, Swiss banks expect financial market regulation to tighten, particularly in terms of liquidity and capital adequacy requirements (62% and 40%, respectively), as well as more supervisory activity by FINMA (67%). However, the extent to which confidence can actually be regulated on a lasting basis in this way remains to be seen.

 

Artificial intelligence advances

Artificial intelligence (AI) is becoming increasingly important in the Swiss financial sector; 82% of banks say they are engaging with the issue. Although the majority of banks said that it was limited to general discussions for the time being, it is striking that one-third (32%) have developed initial applications or already conducted pilot projects. However, only 6% already use AI applications operationally. Banks primarily see such applications in regulatory and compliance (54%), as well as in process automation (55%), and hence more in the back office than in interaction with customers – only 20% of banks are currently considering applications in customer and investment advice.

Swiss banks need to be very careful that AI does not introduce risks or problems for their institution, especially in terms of customer interaction, risk management and compliance.

Sustainability and reporting are key factors

When it comes to sustainability, Swiss banks are expanding their offering: 37% already apply ESG criteria when lending and a further 35% intend to do so in future.

Sustainability and reporting
regard reporting as the biggest operational challenge in sustainability.

If banks are unable to keep these promises or the data justifying claims are lacking, they risk being accused of greenwashing. Although around two-thirds of banks polled primarily still see a risk to their reputation, it is nevertheless noteworthy that supervisory authorities in leading financial centres are taking increasingly stronger action against greenwashing, with some issuing heavy fines.

From 2024, it gets serious – banks will have to implement the TCFD recommendations and climate risk will need to be integrated into risk management.

Eveline Hunziker

Partner, IBOR Country Leader in Financial Services | EY Switzerland

Most Swiss banks will face the additional challenge of climate reporting from 2024 onwards. Banks that meet certain size criteria must implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in a public report. The Federal Council is also planning to make the sustainability reporting prescribed in law subject to audit at some stage in future. Drawing up a report that can be audited could be a major project for many banks. One-third of them regard reporting as the biggest operational challenge in sustainability.

Summary

The EY Banking Barometer 2024 shows that Swiss banks successfully overcame the complex challenges of 2023 and are looking to the future with confidence. Now the challenge is to lay the foundations for the future and invest in forward-looking developments.

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Banking and capital markets
Financial services
Sustainability in Financial services
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    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Limited, each of which is a separate legal entity. Ernst & Young Limited is a Swiss company with registered seats in Switzerland providing services to clients in Switzerland.