Swiss banks to benefit less than global peers from high interest rates

Due to comparatively lower interest rates, the average return on equity in Switzerland for 2023 is expected to be well below the global average, according to management consultant McKinsey. © Keystone / Michael Buholzer

Thanks to the significant rise in interest rates, banks are currently able to increase their profitability according to an analysis by management consultant McKinsey. Swiss banks, however, are unlikely to exceed the global average return on equity this year.

In an analysis for 2023, management consultant McKinsey expects the average return on equity to rise to 13% from 12% the year before.

+ How the wealth management industry is changing in Switzerland

The past 18 months represent arguably the best window of opportunity for the financial industry since 2007, McKinsey wrote Wednesday. As recently as 2010, the average return on equity was only 9%, it said. The ratio puts profit in relation to equity as a measure of how efficiently companies have used their money.

Overall, McKinsey projects a profit for the entire sector of about $1.4 trillion (CHF1.34 trillion) in 2023, a doubling since 2017. It said the average core capital ratio for financial institutions reached a 10-year high of 13.8%. For the global figures, McKinsey analysed data from the world’s 1,000 largest banks.

Swiss sector below average

However, the Swiss industry has only been able to partially benefit from this development due in part to comparatively lower interest rates, according to the release. Overall, the average return on equity in Switzerland for 2023 is expected to be well below the global average, Christian Zahn, head of the Swiss Banking & Insurance Practice at McKinsey, is quoted as saying in the statement.

Due to structural differences though, the Swiss financial center has higher margins compared to many other European markets. The country also benefits in particular from its continued strength as the largest offshore center in private banking, with a total volume of $2.9 trillion in invested assets and a continued growth rate of 3% in 2018 – 2022, it said.

McKinsey sees the “green transformation” of the economy, which requires significant investment, as an opportunity for the industry. For Switzerland, the consulting firm estimates the associated financing volume in areas such as transport, buildings and energy provision at CHF700 to 800 billion by 2050. The sustainable transformation of the economy can only succeed if banks can provide the financing and financial infrastructure for it, it says.

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