An annual banking gauge from EY seeks to highlight the issues and trends in the industry. Presently, industry expectations are characterized by confidence in the medium and longer-term outlook. But short-term dangers lurk.

At the beginning of last year, EY's annual banking barometer was brimming with optimism. That soon changed with Russia's attack on Ukraine on February 23 last year.

In the meantime, the economic environment has changed fundamentally for financial institutions, with inflation, higher interest rates, and geopolitical uncertainties now shaping the environment.

Despite the turbulent financial year, Swiss banks have shown remarkable resilience, writes EY on the survey results. For example, 78 percent of the institutions surveyed see a thoroughly positive development in operating profits for 2022. The proportion expecting a decline stands at 22 percent, compared with a mere 13 percent last year.

Rising Default Risks

Forecasts for the next one to two years reveal a more defensive assessment among banks, with the «optimism barometer» falling to 78 percent from 87 percent last year. The proportion of banks expecting a negative business development in the short term practically doubled to 22 percent within a year, from 13 percent previously, according to EY.

The environment is characterized by uncertainties and clouding the business outlook, at least in the short term. This also explains the expected increase in loan defaults, especially among SMEs.

Higher Rates Support Margins

Banks are more optimistic than ever about the longer-term future, with the barometer reaching a record reading of 98 percent from 86 the previous year, as interest rates are heading higher.

The turning point is enabling banks to sustainably improve margins in the interest differential business that is at their core, contributing many positive effects over the long term, outweighing short-term adjustment effects, according to Patrick Schwaller, managing partner audit financial services at EY Switzerland.

In addition to the changing interest rate environment and inflation, the dominant themes in the banking industry are seen as cost savings, increased efficiency, needs-based client advice, and sustainability.

A total of 100 banks in Switzerland were surveyed in November 2022, according to the data.