The aggregate net income of the banks in Switzerland rose by around 5.8% year-on-year in 2020 and was well above the ten-year average.
The aggregate net income of all banks in Switzerland rose by 5.8% year-on-year to CHF 69.9 bn. This was largely due to the result from trading activities rising by an impressive 46.7% to CHF 10.9 bn. However, continuing low interest rates and increasing market activity on the part of non-banks caused the result from interest operations to show a slight fall of 0.9%. The big banks in particular were able to increase their share of aggregate net income by a further three percentage points. At the other end of the spectrum, the foreign banks’ share fell to just 9.8%.
Trends in 2021
Economy stages recovery in first half of 2021
Trends in 2020
Net income by banking activity
Aggregate net income comprises the results from interest operations, commission business and services, and trading activities as well as the other result from ordinary activities. It increased by 5.8% in 2020 due to a sharp rise in the result from trading activities.
With a share of 33.8%, the result from interest operations remained the largest contributor to net income despite a slight fall of 0.9% from CHF 23.8 bn to CHF 23.6 bn and the fact that low interest rates are still hindering the banks’ margin business. The lower result from interest operations was caused by a CHF13.7 bn (27%) decrease in interest income and a similarly high CHF 13.5 bn (49%) decrease in interest expense. This includes, for example, the cost of negative interest on sight deposits held with the SNB. Compared with the previous year, the SNB’s income from negative interest fell by around CHF 561 mn to CHF 1.4 bn, most of which came from banks. One reason for this sharp fall was the increase in the exemption threshold factor from 25 to 30 in April 2020. The SNB’s intention with this move was to ease the burden of negative interest for banks during the COVID-19 pandemic and thus give them greater room for manoeuvre financially.
The result from commission business and services is the second-largest contributor to net income, accounting for 32.9%. In contrast to interest operations, commission business and services showed an increase of around 3%. This was primarily attributable to commission income from securities trading and investment activities, which rose by CHF 1.1 bn in 2020.
The main driver behind the trend in net income is the increase in the result from trading activities, which rose by almost 50% year-on-year and was thus above CHF 10 bn for the first time since 2010. One reason for this was the high market volatility seen in 2020, especially compared with 2019. This normally goes hand in hand with high levels of trading activity for banks, both on behalf of their clients and for their own account.
Net income by bank category
While the share accounted for by the foreign banks fell further, those of the other categories were relatively stable, albeit with a shift in favour of the big banks due to their larger trading volumes.
All bank categories apart from the big banks saw their share of net income fall compared with 2019. The decreases ranged from 0.1 of a percentage point for the Raiffeisen banks to 0.9 of a percentage point for the foreign banks. The latter thus continued their downward trend and now account for less than 10% of the sector’s net income. The big banks (not shown in the chart), meanwhile, were able to increase their share from 50.1% in 2019 to 53.1% in 2020, mainly thanks to the success of their trading activities, which make up a greater proportion of their income than is the case for banks in the other categories.
The share of total net income contributed by the “other banks” category has increased from 11.5% to 17.4% since 2010. The big banks also increased their share over the same period, from 47.2% to 53.1% (not shown). The private bankers’ share fell from 4.0% to 0.4% during the period, that of the foreign banks from 17.7% to 9.8%. The reduction among foreign banks is partly due to the financial crisis, which led to many branch closures in Switzerland. In addition, some banks have cut their international activities back to specific fields of business in recent years as part of restructuring programmes, which has in some cases led to shifts within a group or even the sale of entire business units.
Annual profit and taxes
The increase in aggregate net income and a slight decrease in operating expenses caused gross operating profit to rise by 18.3% year-on-year in 2020. After value adjustments and taxes, the annual profits of banks in Switzerland totalled around CHF 13.7 bn.
Operating expenses, which are made up of personnel expenses and general and administrative expenses, were cut slightly (by 1.0%) year-on-year, while aggregate net income rose by 3.8%. This led to a gross operating profit CHF 4.2 bn higher than in 2019. After deduction of depreciation, amortisation, value adjustments and provisions, the Swiss banks’ operating result was CHF 14.5 bn. The resulting annual profit was more or less in line with previous years at CHF 13.7 bn. The banks paid slightly less tax in 2020 (CHF 1.9 bn, compared with CHF 2.3 bn in 2019).
Economy stages recovery in first half of 2021
After the COVID-19 pandemic dominated 2020, the big story in the first half of 2021 was the economic recovery. The SNB is continuing its expansionary monetary policy. The SECO forecasts GDP growth of 3.6% for 2021.
After the measures to prevent the spread of COVID-19 were tightened again at the start of the year, they were eased again in several steps during the first six months, which had a positive impact on the economic trend. The International Monetary Fund expects the global economy to grow by 6.0% this year. The SECO reports that Swiss GDP fell by 0.5% overall in the first quarter but forecasts GDP growth of 3.6% for the year as a whole in view of the rebound. The pandemic situation has settled down to some extent in recent months, but the SNB is maintaining its expansionary monetary policy. Its headline interest rate and the rate on sight deposits remain at -0.75%. The SNB earned a total of CHF 664 mn from negative interest up to the end of June. This is placing a considerable strain on the banks. The relaxed financing terms introduced at the start of the pandemic have also stayed in place. On top of this, according to the SNB, both mortgage loans and residential property prices have risen sharply again in the first half of the year. The SNB is therefore reviewing on a regular basis whether it needs to reactivate the countercyclical capital buffer. The US Federal Reserve (Fed) also decided in June to leave the target range for its federal funds rate at 0–0.25% and continue intervening on the market via monthly asset purchases totalling USD 120 bn, thus confirming its highly expansionary monetary policy. The Fed interprets rising inflation as a temporary phenomenon and expects inflation to settle down around 2% over the longer term. It is not expecting to hike rates before 2023. The European Central Bank (ECB) is taking a more relaxed approach to inflation, keeping its 2% target for the medium term but tolerating a rate of more than 2% in the short term. With inflation expectations at just under 2% for 2021 and around 1.5% for subsequent years, the ECB is also keeping its headline interest rate unchanged at 0%. It is also increasing the scope of its pandemic emergency purchase programme from EUR 500 bn to EUR 1,850 bn and extending the duration of the programme. There were a number of key political votes in Switzerland in the first half of 2021. The COVID Act, granting the federal government greater flexibility in the event of a pandemic, was adopted, whereas the CO2 Act was rejected. 1
There was an important development with regard to the institutional framework agreement (InstA) between Switzerland and the EU. On 26 May, the Federal Council decided that it could not sign the InstA2 and that negotiations were thus at an end. It nevertheless intends to continue the tried-and-tested bilateral cooperation with the EU. The framework agreement would have improved legal certainty and market access for the banks in Switzerland.
The positive trend on the stock market in 2020 continued in the first half of 2021, no doubt helped significantly by the central banks’ expansionary monetary policies. The SMI gained around 12% between January and June and reached a record level of 12,000 points, up almost 2,000 points year-on-year. As long as the pandemic situation does not worsen dramatically again, the economic recovery can be expected to result in further share price gains this year, which should have a positive impact on the banks’ trading and commission business.
The SECO believes that second-round effects of the crisis such as bankruptcies and large-scale redundancies are one of the biggest risks for economic growth in 2021. Bankruptcies are also a risk for banks’ business performance due to the likelihood of defaults. According to the SBA’s survey of its members, however, employment in the banking sector should remain stable.
In particular, a certain catch-up effect is to be expected once the COVID-19 support measures run out in view of the 6.6% year-on-year fall in the number of corporate and private bankruptcies in 2020.3 The Swiss banks anticipated this by forming additional provisions for value adjustments in the first half of 2020.4 The SBA also published recommendations on dealing with corporate insolvency risks.5
Given their strong capital underpinning and rigorous risk management, however, the banks are well prepared to prevent credit defaults and absorb the resulting losses if necessary. With the economic outlook for 2021 and 2022 appearing positive, net income is likely to show an increase year-on-year. That said, the big banks in particular are facing losses on individual deals as well as a threat of higher-than-usual credit defaults if the number of corporate bankruptcies rises.
1 https://www.swissbanking.ch/en/news-and-positions/news/switzerland-s-rejection-of-the-c-o2-act-is-a-blow-to-climate-protection 2 https://www.swissbanking.ch/de/medien/news/ bilateraler-weg-schweiz-eu-sichern-und-weiterentwickeln 3 https://www.bfs.admin.ch/bfs/en/home/news/press-releases.assetdetail.16564160.html 4 Oliver Wyman (2020). Schweizer Banken Report 2020. 5 https://www.swissbanking.ch/de/medien/news/neue-empfehlungen-fuer-banken-zum-umgang-mit-insolvenzrisiken-von-unternehmen