EY Banking Barometer 2024: Sentiment overwhelmingly positive – banks express great confidence in the Swiss economy

• Record 96% of Swiss banks surveyed expect an increase in operating profit for 2023
  
  
• The high profits made in recent years should be used to strengthen capital or invested in developing business models
  
  
• Swiss banks continue to express great confidence in the real estate market; only 22% see a need to increase impairments on residential mortgages in the short term
  
  
• Following the acquisition of Credit Suisse by UBS, banks anticipate tighter supervision by FINMA (67%), as well as stricter liquidity and capital requirements (62% and 40%, respectively)
  
  
• 82% of the institutions surveyed said they were engaging with the issue of artificial intelligence, but only 20% of banks are considering applications in the customer and advisory business

Zurich, 11 January 2024 – The conclusion of the EY Banking Barometer 2024 is that overall, Swiss banks can look back on another very successful year of business. 96% of institutions surveyed expect an increase in operating profit for 2023 – a record figure, up 18 percentage points from last year. The banks are very confident about their strengths and are also extremely optimistic about the foreseeable future. 87% of the banks surveyed also predict growing income in the immediate future. Over the long term, 89% of institutions see income growing. This positive sentiment comes despite a very challenging environment of rising geopolitical tensions, banking collapses, persistent inflation and a slowing economy. “High interest rates, low impairment losses and the resilient Swiss economy led to record profits in 2023 among banks surveyed,” comments Patrick Schwaller, Managing Partner Audit Financial Services.

Banks are planning to use the higher-than-expected profits they have made in the past two years in very different ways. Retails banks are looking to retain the higher profits, primarily to strengthen capital and thereby improve resilience (72% of regional banks and 42% of cantonal banks), while asset management banks intend to invest in developing their business models (38% of foreign banks and 30% of private banks). Only 8% of the banks surveyed want to invest in improving benefits for the customer, which is quite astonishing given that customer expectations are rising and customer queries have become more complex. “Swiss banks can look back on two very successful years. Now the challenge is to lay the foundations for the future and invest in forward-looking developments,” comments Olaf Toepfer, Partner and Head of Banking & Capital Markets.

Confidence in the Swiss property market and SMEs

The continuing strong 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. Swiss banks do not anticipate a change in the trend and continue to put a great deal of trust in the resilience of the property market, since only 22% of institutions expect an increasing need for impairment losses on residential mortgages in the short term (well down on the previous year’s figure of 31%). A long-term comparison of the responses to this question shows that the Swiss residential market has proved to be consistently more robust than anticipated in the last few years. As a result of the coronavirus pandemic, in 2020 58% of institutions questioned expected to need higher risk provisioning in the short term for residential mortgages.

Banks surveyed also have considerably more confidence in Swiss SMEs: only 42% see defaults on SME loans rising in the next few years, a figure 17 percentage points lower than last year. “This is most encouraging given the challenging environment with tighter financing conditions, a cooling economy and rising geopolitical tensions. Banks evidently have a lot of confidence in the resilience of the domestic economy,” remarks Patrick Schwaller.

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. Swiss banks will presumably have to deal with the consequences of this emergency takeover for some time yet. 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 also possible in the medium to long term. Presumably, this would primarily affect medium-sized enterprises that do not have their own access to the international capital markets.

In addition, all banks are agreed that the emergency takeover of Credit Suisse by UBS will lead to a tightening of financial market regulation. The focus is mainly on stricter liquidity and capital requirements (62% and 40%, respectively) and tighter supervision by FINMA (67%). However, the extent to which confidence can actually be regulated on a lasting basis in this way remains to be seen.

Swiss banks and the use of artificial intelligence

Artificial intelligence has definitively reached the Swiss financial centre – 82% of the institutions surveyed said that they were currently engaging with the issue in one form or another. Although the majority of banks said that it was limited to general discussions for the time being, it is striking that one-third (32%) of those surveyed 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,” says Olaf Toepfer.

Sustainability, greenwashing and reporting requirements

For some time, Swiss banks have been expanding their range of sustainability products. Initially, the focus was on offering sustainable investments, but more and more banks are now applying ESG criteria when lending. The number of banks that effectively already apply ESG criteria when lending has risen markedly to 37%, up from 22% last year. A further 35% intend to do so in the future.

If banks are unable to keep these promises or the data justifying claims are lacking, institutions leave themselves increasingly open to accusations of greenwashing. Although around two-thirds of the 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.

Many Swiss banks will face the additional challenge of climate reporting from 2024 onwards. Specifically, all 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 has also announced that sustainability reporting under the Swiss Code of Obligations will have to be audited at some stage in the future. Creating a report with a data basis that can be audited is likely to be a major project for many banks and will involve the odd stumbling block. When it comes to sustainability, one-third of banks see reporting as the biggest operational challenge.

About the EY Banking Barometer 2024

More than 100 Swiss banks were surveyed in November 2023 for the EY Banking Barometer 2024. The study has been carried out since 2010; this is the 14th edition. 65% of the banks are based in the German-speaking part of Switzerland, 28% in Western Switzerland, and 7% in Ticino. The banks polled fall into the following categories: private banks (32%), foreign banks (24%), regional banks (26%) and cantonal banks (18%).

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