Banking Sector: Solid Growth Over The Medium Term
BMI View: The Swiss banking sector is poised to expand at a healthy rate over the medium term, which will go a long way to support the broader economic recovery. Despite a solid growth profile, industry competitiveness could be adversely affected over the longer term by creeping pay freezes and stricter regulation.
Alongside the robust economic recovery, the Swiss banking sector shows modest signs of growth with potential for a more significant improvement over the medium term. According to the latest data provided by the Swiss National Bank (SNB), total industry assets increased by 0.2% in July compared to the same month a year earlier, moderating from a 2.5% y-o-y expansion in June. Despite the subdued rate of growth, which pales with the double-digit rate of expansion before the financial crisis, banking sector assets are still over 500% of GDP - a level which will not change significantly over the medium term. While growth in headline assets is anaemic, lending has fared somewhat better with consumer credit, in particular, expanding at a robust pace during the post-crisis recovery period. The stock of loans to the economy increased by 3.1% y-o-y in July, below the most recent peak of 11.7% y-o-y in March but still representing relatively healthy credit supply when compared with the dire state of lending in parts of Western Europe.
With the economy showing few signs of losing momentum, we expect the Swiss banking sector to remain well anchored to a positive growth trajectory going forward. The combination of improving international trade - particularly on the back of a stabilisation in eurozone demand - and an increasing propensity for households to consume given the high employment rate and increasing purchasing power, suggest scope for solid growth in both lending and headline assets. On the back of data for the first half of the year, we have adjusted down our full-year growth forecast for 2013 to 1.1% from 3.2% previously. Beyond this year we still expect growth to pick up, with forecasts of 2.3% and 2.4% pencilled in for 2014 and 2015 respectively.
A major concern for the sector going forward will be the impact of stricter regulation and the public backlash against the banking industry. As we have highlighted elsewhere (see our online service, October 7, "Crackdown On Financial Sector Intensifies") reforms to the financial sector in Switzerland have been more stringent and far reaching than in the likes of the US and the UK. Voters have already backed legislation to curb excessive corporate pay by handing over more power to shareholders and banning golden handshakes. The electorate is also currently considering a proposal to limit the monthly pay of executives to the annual income of the lowest paid employee in the firm. Although such proposals are not industry specific, the high remuneration packages in the financial sector mean that the banks will likely take the brunt of such measures. Given that the US and the UK continue to resist such reforms (the UK Treasury has launched a legal case against Brussels in a bid to prevent wage curbs), there is a risk that the global standing of the Swiss banking industry could be undermined over the longer term.