The highest interest rates in a decade led to widening margins and jumps in income and dividend distributions, benefiting Swiss banks' results in 2023. At the same time, last year's demise of Credit Suisse opened opportunities for local peers, but also created waves and turmoil in deposit and bond markets.

S&P Global ratings believes overall economic sentiment for the banking sector is not at risk. We expect Swiss banks' safety-conscious business models, sound underwriting standards and the country's economic resilience to continue supporting our very-low-risk assessment of the banking sector, strongest globally.

Areas to monitor are potential spill overs from the uncertain geopolitical situation and impact from new initiatives aimed at overhauling Switzerland's regulatory framework.

In this report, we address questions from investors on Swiss banks' profitability, real estate exposures, liquidity and the country's regulatory environment in 2024.

Frequently Asked Questions

What's the economic outlook for Switzerland in 2024?

We project the Swiss economy will rise by 1.0% in 2024 and 1.4% in 2025. Growth is being held back by tense geopolitics and the adverse implications for international trade, inflation, and monetary conditions.

Still, things could be worse. The Swiss franc has appreciated, supported by substantial foreign exchange sales by the Swiss central bank (SNB). These factors helped to contain imported inflation and is positive for banks' income statements and asset quality.

The Swiss economy has demonstrated remarkable resilience to adverse external spillovers in recent years and we have not seen any notable increase in insolvencies or nonperforming loans due to adverse shocks.

We deem the private sector as flexible, competitive, and well positioned to withstand the ramifications of a persistently strong Swiss franc. This differentiates Switzerland from peer countries, such as Germany, Austria, Norway, and Finland and leads to the best economic risk score globally.

What are the expectations for Swiss banks' profits in 2024?

We forecast a slight narrowing in net interest margins this year after a large, profitable widening in 2023. Higher interest rates have supported banks' net interest margins after many years of subdued profitability. By end-2023, the net interest income of most Swiss banks increased by more than 20% year over year.

By our estimates, return on equity (ROE) in 2024 will be slightly lower than 2023 figures. This is based on decreasing interest income but overall sound cost bases. The ROEs of Swiss domestic banks often fall short of those for similar banking systems, given very high capital ratios, often exceeding 20%.

Following the stabilization of margins, several banks decided to lower or abrogate bank charges. This negatively affects banks' fee income, which we expect to dip in 2024.

The SNB's decision in December 2023 to not pay interest on certain sight deposits has no material implications for Swiss banks, with only a small number of entities holding the maximum amount allowed. Such deposits that are used as minimum reserve requirements will still be remunerated.

Nonperforming loans and credit losses will likely remain close to their cyclical lows. Backing our view of the superior resilience of the private sector, credit losses at Swiss banks were substantially less sensitive during the 2020 pandemic. And nonperforming loans are still at around 0.7% of systemwide loans.

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What's the outlook on the digitization progress for Swiss banks?

We believe that domestic banks predominantly use a fast-follower approach in their retail strategies, not intending to become digital leaders. This is partly because they aren't feeling the heat: a lack of economies of scale in retail banking limits the country's attractiveness for international competitors. We consider the highest barriers for foreign banks to be the relatively small customer base, high labor needs (because of four official languages), and different regulatory frameworks compared with the EU.

In our view, Swiss customers largely do not demand pure online retail banking products. And global digital banks have not yet established full alternatives to traditional banks. We think a seamless switch between distribution channels is important to banks' competitiveness. However, we expect digital services, such as online mortgages, to play only a minor role.

Swiss customers still favor relationship-based banking and prefer personal advisory for wealth management or for important life decisions, such as a first mortgage financing and pension plans. Depending on their customer base, more banks are becoming digitally advanced, especially in mortgage lending. However, we generally see less differentiation for digital pension solutions and the deposit business.

What are the key regulatory topics in 2024 following the events around Credit Suisse?

Further regulatory change is likely to ensue, including changes to Switzerland's capital and liquidity ordinance and its too-big-to-fail regime, among others. This could raise costs for the sector, but should, likely, also shield against the hits that come with financial-system shocks. Negotiations with the EU could lead to more structural changes.

On Sept. 6, 2023, the Swiss Federal Council adopted a public liquidity mechanism based on the backstop that was first provided to Credit Suisse. The new law grants additional emergency and extraordinary liquidity assistance to systemically important banks (SIBs). This can help them to restructure or wind down their business while safeguarding trust and avoiding a disorderly failure.

In its latest report, the Swiss Financial Market Supervisory Authority (FINMA) outlined limitations of SIB supervision, which the Federal Council intends to remediate. Further legislative changes could ensue, for example related to capital ordinance, FINMA's early intervention powers, the SNB's role as lender of last resort, and resolution.

While we acknowledge FINMA's principle of proportionality in Switzerland's two-tier banking system, legislative changes will most likely also pertain to smaller banks--potentially leading to increasing regulatory costs.

The EU and Switzerland's agreement to restart their dialogue on financial regulation will occupy politics in 2024. These bilateral treaties are essential for Switzerland's access to the EU's single market, pertaining to Swiss banks' market reach, ownership support structures and equivalence to European peers.

Although very remote at this stage, we see a potential risk that future agreements between Switzerland and the EU on preferential market access for Switzerland might include the removal of remaining government-backed guarantees for cantonal banks, which are often enshrined in law.

What are the risks for Swiss banks stemming from declining housing prices or commercial real estate (CRE)?

They are low relative to other developed countries. Due to comparatively tame inflation and structural features such as tight supply, Switzerland's house prices have held up. Real housing prices in the second quarter of 2023 were only 1% lower than the peak during 2020-2022.

While we anticipate Switzerland's nominal housing prices will also decline in 2024 and 2025, real price growth will be supported by subsiding inflation combined with factors like high immigration and low housing supply (see "European Housing Markets: Forecast Brightens Amid Ongoing Correction," published on RatingsDirect on Jan. 25, 2024).

We currently do not consider the CRE market as a significant source of risk for our rated banks. In our view, the most vulnerable exposures are sufficiently collateralized or already provisioned.

While CRE real prices declined by about 1.5% in Switzerland in 2023, we consider conditions in this subsector as stable overall given predominantly smaller-ticket CRE financings, adequate pricing, and sound risk governance structures.

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What's the funding situation for Swiss banks?

In our view, funding conditions will continue to be more affected by overall monetary settings than sentiment issues. We have not seen a hit to customer confidence in Swiss banking after the Credit Suisse turmoil, which was followed by significant customer and deposit movements in the market. While some domestic banks profited from inflows of deposits from Credit Suisse in 2022, we do not observe or anticipate lasting effects for most entities. And, on a systemic base, we see no outflow of domestic funding for local banks.

Overall, funding through deposits has become more attractive following increases in interest rate hikes; this is because of limited pass-through of deposit rates, which allowed banks to restore their liability margins. At the same time, overall deposit volumes have decreased due to the search for yields.

Structurally, we see vulnerabilities to funding given the Swiss banking system's moderate dependence on net external borrowing. This is mainly driven by lending businesses linked to international wealth management activities, pertaining to UBS Group and smaller private banks. For the domestically focused banks, we observe almost no reliance on external funding.

How likely is a replay of the Swiss regulator's decision to write down Additional Tier 1 (AT1) instruments--which caused significant market turbulence after this treatment for Credit Suisse Group?

We consider FINMA's decision to enforce a write-down on Credit Suisse's AT1s as a notable precedent, but we don't conclude that FINMA would automatically follow a similar approach in the future.

In our view, the Federal Council's new law on the public liquidity backstop only makes explicit a risk that we see as already inherent in AT1 instruments. Regulatory interventions on AT1 instruments remain at the discretion of FINMA and subject to broader legal principles, such as the principle of proportionality.

As demonstrated by issuances of UBS and Raiffeisen Schweiz in recent months, Swiss AT1s attract investor interest. We do not expect a lasting impact on Swiss banks—although smaller banks might hesitate to issue such instruments over the next few years. Generally, market interest is higher for those instruments, whose terms include a roadmap for other mechanism, such as equity conversation, which could lower write-down risk around stress events. Such terms were part of UBS's AT1 issuance late last year (see "UBS Group AG's Proposed Additional Tier 1 Perpetual Notes Assigned 'BB' Rating," Nov. 8, 2023).

Our view on the risks is reflected in our notching approach for such AT1 instruments--typically rated four notches below the bank's stand-alone credit profile (SACP) for standard low-trigger AT1 instruments. The explicit inclusion of a legal basis linking AT1 write-down or coupon conversion and liquidity stress is unusual compared with other countries, but we do not see it as a material increase in the structural default risk already reflected in the ratings on Swiss SIBs' AT1s.

Related Research

• Switzerland, Feb. 12, 2024
• Ratings On UBS Group Affirmed On Progress On Restructuring, Feb. 6, 2024
• European Housing Markets: Forecast Brightens Amid Ongoing Correction, Jan. 25, 2024
• Top European Bank Rating Trends In 2024: The Future Is Now, Jan. 24, 2024
• UBS Group AG's Proposed Additional Tier 1 Perpetual Notes Assigned 'BB' Rating, Nov. 8, 2023
• Tech Disruption In Retail Banking: Country-By-Country Analysis 2023, Sept. 27, 2023
• Swiss Public Liquidity Backstop Has Limited Implications For Hybrid Ratings, Sept. 18, 2023
• Banking Industry Country Risk Assessment: Switzerland, Aug. 18, 2023