The fate of the Swiss financial sector

By Andreas Ruhlmann, Premium Client Manager at IG Bank and Philippe Yacoub, Head of Sales at IG Bank

Credit Suisse will cut 4000 jobs adding to another 6000 cuts announced last fall. Investors watched the second largest Swiss bank’s stock price drop to an all-time low at the beginning of the month, and this is not an isolated case. UBS has been downsizing dramatically in the past years and the whole sector experiences squeezed profitability.

Swiss banks benefitted for decades of an “unfair advantage”, the banking secrecy, making it one of the world’s leading financial center. With the abrupt end of this opportune legislation, the sector is facing several new challenges.

The implementation of the automatic exchange of information is increasing operational and regulatory costs. Assets under management of private clients is also directly affected as previously undeclared clients have seen an immediate haircut in their account holdings.

Additionally Swiss banks suffer from the current macro environment. The strong franc is eroding profits as most of the clients come from abroad. The negative interest rate is also pressuring net interest income and margins, which hit new lows in 2015. Considering these many challenges, it is no wonder that over 50 banks disappeared since 2008. Clearly the game has changed, and the whole sector no longer earns what it use to.

Can the “Golden age” be restored?

While the Swiss people are known for their adaptation prowess, things can no longer be like before, simply because the banking secrecy belongs to the past. On the other hand, Switzerland has the foundation for its financial sector to bounce back. Its political and economic stability, good infrastructure and high standard of living will continue to attract assets and talents in the country. It also has a long banking tradition, a strong sense of privacy and still shelters a dominant part of world’s wealth.

Obviously, banks can no longer simply continue business as usual. They will need to invest and innovate, improve their level of service, and, to tap on institutional clientele, they will also need to achieve higher performance.

The authorities will also have their part to play. The Swiss financial council needs to gain the permission to access European markets from Swiss soil as this will be important to preserve jobs and talents in Switzerland. Innovation must also be privileged. The FINMA recently authorized fully online account applications and intends to create a “light” banking licence for Fintech businesses. While lots still needs to be done, it is a first path in this direction.

Although most Swiss banks are now conscious of the need to innovate and to use technology, they have for too long rested on the banking secrecy. Comfortable salaries and bonuses in the sector also dissuaded many bankers to take part in entrepreneurial Fintec ventures. With both being now part of history, will the Swiss financial sector manage to reinvent itself and regain its place as a major financial hub?