In the coming months, Swiss bankers will have to get used to a world of fewer takings compared with last year's earnings bonanza. Although the situation has clouded over, some bright spots have also emerged.
1. Asset Management: Clients on the Sidelines
Earnings for the second quarter are yet to be made available, but the response from private bankers regarding their wealthy clientele rings almost unanimously: «risk off».
While the stock market turbulence during the two Corona years 2020 and 2021 proved to be a goldmine for the profession, clients are now retreating to the sidelines which means less can be earned from them.
Even the big names in the business are not immune to this trend. Philipp Rickenbacher, CEO of Julius Baer, warned as early as May of outflows from funds at the private bank. Thomas Gottstein, the head of Credit Suisse, also spoke of an overall «difficult market environment» for the Swiss bank at its Investors' Day a month later.
The stock market situation, now officially assessed as a bear market, is also likely to have affected asset managers.
The turnaround in interest rates and galloping inflation are putting pressure on risky investments such as equities, while the bond markets have not yet recovered. Niche areas such as private equity (see point 6) and credit derivatives also appear less attractive in the medium term - not to mention crypto assets (see point 3).
2. Investment Banking: Second Ice Age
Boom and bust cycles are getting shorter in investment banking. If the markets for mergers and acquisitions (M&A) and IPOs in particular virtually froze in the first half of 2020 in the wake of the Corona pandemic, the pent-up volume was unloaded in the following months. 2021 became the best year for dealmakers in decades, with an M&A volume of around $6,000 billion.
With the turnaround in interest rates and the Ukraine war, the next ice age is now approaching. After deals worth more than $1,000 billion in the first half of the year, leading Wall Street houses are now bracing themselves for much worse numbers; Citigroup, for example, expects second-quarter earnings to have halved.
Swiss banks UBS and Credit Suisse are also exposed to international investment banking. The latter is likely to suffer more, as it is operating with the handbrake - abiding by its regulator's orders - after the catastrophes of 2021. Moreover, it is not a major player in the currently lucrative trading of interest rate securities.
3. Crypto Winter
Leading digital currency Bitcoin has experienced the worst first half of the year in its 12-year history, falling more than 60 percent in the first half of 2022. Other cryptocurrencies suffered even bigger price drops. As central banks around the world raise interest rates faster than expected, investors continue to shun risky assets like cryptocurrencies. This is reflected in lower transaction activity.
In turn, the prices of digital assets and the volume of transactions made on platforms have a significant impact on the overall revenues of corresponding crypto institutions. Thus, if cryptocurrency prices and trading volumes remain low or even fall further, these institutions are likely to suffer revenue losses. The focus is not only on fintech companies such as Bitcoin Suisse, Sygnum or Seba, but also on traditional banking groups such as Swissquote or Vontobel, which have earned good money with their crypto offerings.
4. Retail Banking - Switzerland No Island
Swiss retail banks have traditionally been strong in the interest rate spread business. In this respect, a tighter monetary policy with a higher interest rate level is positive for retail banks, as it opens up more scope for a higher interest margin. At the same time, however, the interest rate turnaround increases the default risk.
The Swiss economy is likely to come under pressure in the coming months at a time when the global economy is about to enter a recession. This will make the commission and investment business more difficult for retail banks. The mortgage business, although largely stable, also threatens to lose some of its momenta. Market observers say that, in the current environment, challenges outweigh opportunities for retail banks.
5. Corporate Customer Business: Adverse Trends
Corporate banking is even more closely tied to the economy - and for the banks, the rising number of insolvencies is not a good omen. It seems that government aid and loans have kept a number of companies artificially alive that would not have survived in «normal times», shedding light on which companies will be able to continue after the end of the support measures and who will not.
Moreover, inflation, high energy and commodity prices, and supply chain problems are likely to put a severe strain on margins and companies in distress.
At the beginning of the Corona pandemic in 2020, banks set aside large provisions for loan losses as a measure of precaution. In 2021, these were largely reversed, resulting in large valuation gains on balance sheets. Now the pendulum could swing back in the other direction.
Furthermore, as companies realize that interest rates are rising and that financing costs will be higher in the future, those companies that still have capital are using it to reduce debt. This is also likely to weigh on the corporate finance business in the future.
6. Private Equity: Farewell to the Gold Mine
In recent years, the private equity and venture capital business proved to be a real goldmine for the financial sector. In view of low-interest rates and flourishing stock markets, investors were keen to get involved with promising young companies. To meet customer demand, some banks set up specialized investment departments, bringing them enormous profits.
However, now that financial markets have weakened and interest rates have gone up, the majority of investors have left this domain. As a result, not only will income from banks' commission fall in the second half of 2022, but many startups are likely to run into financial difficulties, which will put a strain on corporate banking (see point 5).
7. Neobanks No Longer a Threat
Admittedly, the card and investment business of established banks is also likely to suffer if - as feared- the western industrialized nations slide into recession. But financial institutions still have various other sources of revenue, while neo-banking apps such as Revolut, N26, or Neon in Switzerland primarily operate the payment business and prioritize growth over profit.
Now that capital from investors will no longer flow so lavishly, banking disruptors are suddenly facing headwinds. Add to that the fact that regulators are also scrutinizing the fast-growing providers more closely, as the example of German neobank N26 shows. Digital challengers are no longer scaring anyone as finews.com recently wrote.
Swiss digital banks, including Radicant and Alpian, which only launched this year, have likely missed the ideal entry point. But each has the advantage of having a strong backer, Basellandschaftliche Kantonalbank (Radicant) and Reyl Intesa Sanpaolo (Alpian).
