Since the financial crisis, the Swiss Banking industry has been under tremendous pressure. An unfavourable economic climate, increased regulatory focus, rising expectations of empowered customers and intense on- and offshore competition have reduced the revenue margins of Swiss banks by 21 per cent between 2010 and 2015. By reducing cost, banks have managed to keep the cost-income ratio more or less stable, however, ‘quick wins’ have now been exploited to a large extent while revenue and cost pressure is expected to remain high. Banks have to take more comprehensive measures now to increase efficiency and regain flexibility in order to deal with innovative competition and tightening economic conditions.
Swiss banks have been challenged significantly in the past five years in many ways. For instance, the average revenue margin (as a share of assets under management) of Swiss banks fell by 21 per cent from 2010 to 2015.
There is a multitude of factors which contribute to this development: The growing preference among clients for onshore banking, combined with stronger competition both on- and off-shore, weakens margins, while additional regulations are putting ever-increasing operational burdens on banks. Negative interest rates and the slow economic growth in developed economies limit opportunities to grow the client and asset base while increasing hedging costs. In addition, new entrants (FinTechs, start-ups, non-banking players) are starting to challenge the way banks have traditionally served their clients with the potential to disrupt the client relationship.
In a recent study of Deloitte and Hochschule Luzern, Institut für Finanzdienstleistungen (IFZ), we have investigated what measures banks have taken and are planning to deploy to deal with these challenges. Indeed, Swiss banks have reduced their operating costs to counteract the decline in revenue margins. They have achieved this mainly by reducing staff numbers (by six percent) and average compensation (by five percent). However, general and administrative expenses have risen significantly over the same time period. Partially, this can be explained by the increasing use of outsourcing by banks as a means of cost reduction and increasing flexibility.
With these measures, Swiss banks have for now managed to keep their cost-income ratio more or less stable (at 65%) since 2010. Nevertheless, this could not prevent the return on equity to decline significantly by 16%.
Furthermore, across brackets of Assets under Management (AuM), cost levels differ significantly. The degree of correlation between a bank’s costs (measured as bps of AuM) and its size (measured by AuM) indicates the extent of economies of scale in the industry. This hints towards the potential benefits of ongoing consolidation and measures for re-engineering the value chain or leveraging utilities serving several banks.
Considering the ongoing pressure on revenues, banks will only be able to generate funds to innovate and adapt to disruptive changes by fundamentally increasing efficiency and cutting costs. With some of the ‘quick wins’ already utilised, there is a requirement for more comprehensive measures. Banks’ business and operating models need to be scrutinised for fundamental changes to realise sustainable efficiency gains. If you want to know more about how industrialisation can be applied for this purpose and what banks’ plans are, you may find more information here.