The Swiss government wants to lift the ban on Postfinance to sell mortgages and other types of loans. Here’s the likely impact of such a move on other financial services institutes in Switzerland.

When Postfinance published its half-year figures a short while ago, it sounded much like a cry for help. The financial services unit of the Swiss Post, fully owned by the government, report a substantially lower half-year profit and warned of worse to come, given the persistently low interest rates.

Yesterday, the surprise decision by the government: after careful consideration, the federal council had opted to lift the ban on Postfinance to sell loans and mortgages, a business that Postfinance had been denied from doing even after it had received the banking license in 2013.

U-Turn

The government, faced with eroding profits at Postfinance, now made a u-turn and ordered the administration to revise the law regulating the postal services in the country.

The change of heart, though rather abrupt, didn’t come as much of a surprise. In May, the government had announced it wanted to reevaluate the situation. The radical solution to give in to the demands of Postfinance surprised the banking industry, according to people finews.com spoke to.

Cause for Concern

The industry, which lobbied successfully to retain the ban for years, is irritated, because a new, large competitor, which is supported by the state, may hurt the established players. It comes as small surprise then that politicians have announced their opposition to the plan.

These are the main reasons why the loans and mortgage business is in for some change:

1. Potential Price War in Mortgage Business

The government yesterday announced that Postfinance should start offering loans in small steps over a number of years. But if the ban falls, the launch is likely to be much faster. Otherwise the measure won’t make much of a difference to the company with a balance sheet of some 120 billion Swiss francs ($124 billion).

The industry believes that Postfinance will try to make inroads by offering cut-price mortgages. This strategy would further weigh on margins in a business that is essential for Swiss retail banking. It already has to slug it out with pension funds, insurance companies and fintechs. Even those companies, who’ve been offering mortgages for centuries are today struggling to make ends meet.

2. Real Estate Market Remains Hot

The mortgage business and real estate prices are closely linked. Observers say that prices have come down slightly in recent months, but the Swiss National Bank (SNB), the country’s monetary authority, nevertheless thinks that the real estate market is the main threat to financial stability in Switzerland.

If the bank with the most customers in Switzerland – Postfinance has some three million in a country with 8.5 million inhabitants – starts selling mortgages, the threat as presented by the central bank may not go away that quickly. The SNB and banking regulators may yet come up with stiffer rules for companies selling such products.

3. A New Bank on the Capital Market

If Postfinance gets the green light to sell loans, the requirements on its equity will increase. Postfinance will have to get the necessary funds by itself and without a state guarantee, according to the federal council. One way to get to the funds would be a partial privatization of Postfinance. That’s the option which was chosen for Swisscom, the state-controlled telecommunications company.

If so, the markets would have to welcome another big bank, alongside UBS and Credit Suisse. The business model of Postfinance is most transparent and its credit rating very good – AA+ at Standard & Poor’s. A partial IPO would likely be welcomed by the markets.

4. Wealth Managers Need Watch Out

Postfinance aims to become a digital powerhouse by 2020, not least to boost its wealth management business. The first products are planned to reach the market in a year from now and given the size of its customer base, the strategy is to be taken seriously. Not least of course if the company gets more room to breath with the right to sell loans.