Banking Barometer – good results for the year, but medium-term outlook gloomy now interest rates are heading in the opposite direction

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• Almost all banks said in 2023 that they saw profits rising (87%), but 40% now see them declining in the medium term. Most (85%) see them rising again in the long term.
• 74% of banks anticipate lower interest margins in the next two years, driven by higher refinancing costs. Even so, only one bank in ten (10%) expect the interest margin to fall to the level it was at before rates changed direction.
• Confidence in the property market is high: only 7% of banks expect mortgage impairments to rise.
• Just one bank in three (33%) expect an increased need for risk provisioning for their SME lending in the short term.
• New supervisory instruments for FINMA: more than a quarter of banks (28%) regard increased transparency, “name and shame” in the event of misconduct and an increased duty of accountability for managers as the most effective supervisory instruments.

Zurich, 9 January 2025 – Swiss banks can again look back on a successful year’s business, but they are less optimistic for the immediate future than they were 12 months ago. New equilibriums are being formed in the Swiss financial center, and not just as a result of the takeover of Credit Suisse.

The results of the EY Banking Barometer 2025 show: for the roughly 100 institutions surveyed, the key issues for the next few years are optimizing their own results as interest rates fall, the ongoing tightening of regulations, the correct way to deal with AI, and sustainability issues. This is the 15th year that auditing and consulting firm EY Switzerland has published the study.

Balancing act between growth and costs

In 2023, Swiss banks benefited from an interest rate boom as rates went up but clients showed little inclination to shift their money out of accounts offering little remuneration. This came to an abrupt end in 2024 when the SNB cut its benchmark rate. As a consequence, the survey indicates that 39% of banks expect profits to decline in 2024, and 40% also see them falling in the medium term. Last year, almost all banks (87%) were still expecting higher profits. Nevertheless, the long-term outlook is still optimistic: 85% of banks see income rising.

The performance of banks’ current operating business varies sharply between banking groups. Regional and cantonal banks, many of which generated record profits in the previous year thanks to the interest rate environment, are more heavily affected by interest rate cuts and changes in customer behavior. Consequently, at 57% for regional and 47% for cantonal banks, the share of retail banks with a negative view is considerably higher than that of private (27%) and foreign banks (26%). At the same time, the pressure to cut costs is still high; 39% of all banks are planning efficiency improvements.

During the period of negative interest rates from 2014 through 2021, strong lending growth inflated bank balance sheets considerably, and this is now a limiting factor. The growth in credit volumes seen in recent years has led to a greater need for stable funding, especially in the case of banks with a focus on the domestic market, in the form of time-linked customer deposits. This involves higher costs, forcing banks to strike a balancing act between growth and cost discipline.

The benefits to banks from interest margins are constantly diminishing

After two years of rising rates, interest margins are now falling again. 74% of banks anticipate lower interest profit margins in the next two years. Even so, only one bank in ten (10%) expect them to fall to the level seen before rates changed direction. 42% of companies surveyed said the main reason for declining margins was increased refinancing costs.

The takeover of Credit Suisse has left a mark. When it comes to the corporate client business, two-thirds of banks are seeing greater demand for financing following the loss of one of the two major institutions. However, only 49% of banks have been able to translate this demand into higher margins. The long-term challenge is still to combat margin erosion by offering a better client experience and personalized advice. Patrick Schwaller, Head of Audit Financial Services, EY Switzerland, said of the situation: “The strong balance sheet growth over the past few years is now increasingly becoming a limiting factor. Banks will have to be even more selective in their financing business and tie up deposits for longer”.

Confidence in the property market remains high

Falling interest rates are having a stabilizing effect on the property market and prices are continuing to rise. Mortgage collateral, which makes up around three-quarters (77%) of banks’ exposures, is therefore continuing to increase in value. In addition, lower interest charges generally lead to lower rates of default on loans. Only 7% of banks expect mortgage impairments to rise. This is the lowest figure since the Banking Barometer was launched in 2010.

There is also still little need for risk provisioning on SME loans. In spite of a few negative outliers caused by the steep rise in interest rates in recent years and the current economic uncertainty (the threat of US import tariffs, energy costs, and geopolitical crises, to name but a few), bank confidence is at a record high; only 33% of Swiss banks expect an increased need for risk provisioning for their SME lending in the short term. There are major differences, though. Cantonal banks are by far the most pessimistic; 65% of institutions in this group expect impairment losses on SME loans to increase in both the short and long term. One possible reason is that this segment of the banking industry has identified the problem quicker than other institutions because it is close to Swiss SMEs that operate internationally.

FINMA expected to become more powerful

Despite some unresolved issues over the consequences of the fall of Credit Suisse, there is a consensus in the financial sector: it marks a turning point when it comes to supervision. There will be more regulation in the financial markets and FINMA will be given more supervisory instruments. Exactly what measures and instruments will be involved is still unclear.

For more than a quarter of banks (28%), the best way to make supervision more effective would be transparency in enforcement proceedings. That would extend to explicitly “naming and shaming” the people concerned and an increased duty of accountability for managers (a “senior management regime”). The least effective course of action from the banks’ point of view would be to extend FINMA’s audit activity under supervisory law. Only 13% think this makes sense. Banks would like to continue to appoint their auditors themselves and the overwhelming majority oppose the supervisory authorities issuing direct mandates. As well as the problem of interference with the economic freedom of banks, the emphasis here is arguably on efficiency considerations.

One bank in five still in the starting blocks with AI from the regulatory perspective

Artificial intelligence (AI) and GenAI are becoming increasingly important. AI has risen from 19th place to 6th on the banks’ list of 30 priority issues. The percentage of banks already using AI has more than doubled since last year, from 6% to 15%. The areas of deployment most frequently mentioned are process automation (55%) and compliance (54%).

Despite the increasing importance of AI, banks are not yet fully ready for regulatory requirements, especially as regards data protection. A fifth (19%) feel they are “not at all” prepared when it comes to meeting the regulatory conditions for using AI.

Marcel Zünd, Head of Financial Services Business Consulting, EY Switzerland, said: “A well-thought-out AI strategy and AI governance are crucial to minimizing the risks from AI and capturing the opportunities.”

Sustainability: striking the balance between regulation and benefits to clients

Sustainability is still a relevant issue, but declining in priority compared to IT topics like AI and big data. The percentage of banks applying sustainability criteria in lending declined (slightly) for the first time, from 72% to 67%. Clients are showing a mismatch between their stated demand and their actual investment behavior when it comes to sustainable products (attitude-behavior gap). Hardly any banks (1%) regard sustainability offerings as a distinguishing feature. The biggest sustainability challenge for banks lies in complying with reporting obligations (33%), and far less in meeting client wishes, which was mentioned by just 10% of the financial institutions surveyed.

Nevertheless, the importance of sustainability remains high. Regulatory requirements in particular are contributing to this – be it via reporting obligations or requirements to obtain investment preferences in relation to ESG issues. In addition, banks have the risk of potential greenwashing accusations hanging over them, representing an increasing risk to their reputation.

Conclusion

Fredrik Berglund, Senior Manager Audit, Financial Services EY Switzerland, summarizes the findings of the Banking Barometer as follows: “Swiss banks face a challenging year in 2025, with falling interest rates, margin erosion and increasing regulation. At the same time, the scope to use AI offers enormous opportunities. The balancing act between efficiency, client focus and cost discipline is the key to long-term success.”

If you have any questions, please contact: daniele.mueller@ch.ey.com. 

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About the EY Banking Barometer 2025

Roughly 100 Swiss banks were surveyed in October 2024 for the EY Banking Barometer 2025. The study has been conducted since 2010, making this the 15th edition. 68% of the institutions surveyed are from German-speaking Switzerland, 25% are based in the French-speaking part of the country and 7% in Ticino. The banks surveyed fall into the following categories: private banks (35%), foreign banks (20%), regional banks (27%) and cantonal banks (18%).