2012 Banking Barometer

Transcription

1 September Banking Barometer Economic trends in the Swiss banking industry 2012 Banking Barometer SBA September

2 2012 Banking Barometer Executive Summary 5 1 Macroeconomic trends Global economy Switzerland Special topic: The European banking sector during the crisis 9 2 Financial markets Interest and exchange rates Equity markets 15 3 Bank profits operating profit and net earnings Current year performance 18 4 Balance sheet business Balance sheet trends Credit business in Switzerland 21 5 Wealth management Assets under management in Switzerland in Performance of assets under management in Employment in Switzerland s banks employment trend employment survey of the banks in Switzerland 29 List of sources 31

3 Executive Summary In 2011 the main features of the economic environment of the banks in Switzerland were the uncertainty on the financial markets, cautious investors and the tightening of regulations. This led to lower profits from trading and from commission and services. The total operating profits of the banks in Switzerland fell correspondingly by 3.8% to CHF 59.1 bn. The aggregate balance sheet of all the banks in Switzerland grew by 2.9% to CHF 2,792.9 bn. The volume of mortgages in Switzerland increased by 5.3%. In 2011, for the second year in a row, slightly more people were employed by the banks in Switzerland. Staff levels in Switzerland rose by 0.1% to 108,100 employees. The survey of the Swiss Bankers Association (SBA) shows a -1.1% decline in employment (-1,070 employees) in the banks in Switzerland for the first half of In the second half, employment is expected to trend down slightly. The debt crisis in the euro zone and in the USA, together with the strong Swiss franc, also harbour risks for Switzerland s economic performance during the current year. The State Secretariat for Economic Affairs (SECO) expects 1.4% growth for 2012 and 1.5% in Operating profit down balance sheet total up and higher domestic credit volume in 2011 The aggregate operating profit 1 of the banks in Switzerland fell in 2011 by 3.8% to CHF 59.1 bn. In the interest margin business most bank categories achieved higher interest income (+5.4%) in This increase was not able to offset the marked decline in profits from the trading business (-26.4%) and the commission and services business (-5.1%). The commission and services business, accounting for around 40%, continued however to be the biggest contributor to the profits of the banks in Switzerland. After increasing in 2010 (+1.7%), the balance sheet total of the banks in Switzerland grew again last year. It rose by 2.9% to a total of CHF 2,792.9 bn. This result was due in particular to the marked increase in cash (+144%) and renewed rise in mortgage receivables (+5.3%). In 2011, the number of institutions in the Swiss banking centre decreased by eight to 312. The total credit made available by the banks rose in 2011 by 5.1%, with credit take-up increasing by 4.3% to CHF 937 bn. The total credit available was therefore used at only 85.3% (including mortgages). Mortgages, at 83.7%, were again the main contributor to the demand for credit in Switzerland. The credit growth was upheld by the continuing very low interest rates in 2011 and the positive performance of the economy. The Cantonal banks, with 33.5% of the market, further increased their significance in the credit business (2010: 32.7%). 1 Operating profit is defined as revenues minus expenses in the four business activities of the banks (interest margin business, commission and services, trading and other ordinary profit). Operating profit less staff and operating expenses equals gross profit Banking Barometer SBA September

4 Reduction in security holdings and interestrelated shifts in 2011 Slight increase in security holdings in 2012 Expansion of employment in 2011 Lower staff levels in the first half of 2012 Subdued outlook for 2012 The slightly lower stockmarket prices in 2011 and losses on foreign currency investments led to lower security holdings. They fell by 4.9% to CHF 4,240 bn in As already observed in the previous year, there were some interest-related shifts in the fiduciary deposits managed by the banks and in balance sheet positions. All in all, banks in Switzerland were managing assets amounting to CHF 5,269 bn at the end of No noteworthy outflows of customer deposits were observed. Security holdings grew by 3% in the first five months of The drivers were the two asset classes of bonds (+3.9%) and collective capital investments (+6.1%). Money market papers continued to trend down, falling by 5.5%. Stockmarket performances were uneven, so that the stockmarket effect on the valuation of security holdings is unclear. Interest-related shifts in various investment positions have also persisted in After an increase in 2010 (+0.4%), the banks in Switzerland also expanded their staff levels in The number of people employed in Switzerland rose by 0.1% to 108,100. Whilst the levels declined in the big banks (-0.4%) and the foreign banks (-2.5%), most of the other bank categories increased their staff levels. The two banking categories, Other banks (+4.3%) and Regional banks and Savings banks (+3.1%), posted the biggest increase. The positive change in employment levels among female staff in 2010 (+1.9%) was not so marked this year (+0.2%). According to the employment survey of the SBA, the banks in Switzerland reduced the numbers employed by 1,070 full-time equivalents (-1.1%) during the first half of The banks in Switzerland expect a slight fall in the numbers employed in the second half of 2012 too. Despite the confident mood on the financial markets in the short term and growing value creation in the banking sector in the first quarter of 2012, there are still risks concerning the way the economy will perform. The rather restrained volumes of transactions on the Swiss stock exchange reflect the continuing high level of uncertainty among investors. A significant factor in ensuring the sustainable development of Switzerland s economy is whether a further worsening of the debt crisis can be prevented Banking Barometer SBA September 2012

5 1 Macroeconomic trends After an initial upswing in 2010, the global economy continued to recover in 2011 and grew at a rate of 3.9%. Growth of 3.5% is predicted for As before, the growth drivers are the up-andcoming Asian economies. At 9.2%, China s economy grew less than in the previous years, but it is still one of the strongest growing economies. Slightly negative economic growth can be expected in the euro zone due to the debt problems. Although slightly higher growth is expected for the USA in 2012 than in the previous year, the situation on the labour and real estate markets remains tight. 1.1 Global economy Further slight recovery Slightly higher growth in the USA GDP in the euro zone declining According to the International Monetary Fund (IMF), the global economy after recovering in 2010 (+5.3%) grew in 2011 somewhat less than in the previous year at 3.9%. Growth was primarily driven by the developing and emerging countries, which grew by 6.2% in 2011 (2010: 7.5%). Slightly weaker global growth is again expected (3.5%) in In comparison with the first quarter, the global economy performed slightly less well in the second quarter of % economic growth is expected for the USA during the current year. This is slightly above the previous year s figure of 1.7%, which is low for the USA compared with the pre-crisis level. High unemployment and the growing public debt are the particular factors adversely affecting economic performance. Unemployment had been slightly reduced since 2010 (9.6%), but it was high again in 2011 at 8.2%. The national debt increased again in 2011 and amounts to 102.9% of GDP (2010: 98.5%). In Japan the economy shrank by 0.7% in 2011 because of the earthquake and tsunami disaster. According to the IMF, there will be 2.0% positive growth in Japan in A 0.3% decline in GDP is expected for the euro zone for 2012 (2011: 1.4%). This performance is due first to the shrinking of the economies in Greece, Portugal, Italy and Spain. Secondly, much weaker growth than in the previous year (3.1%) is expected for the growth driver Germany (0.6%). At 11.2% in June 2012, unemployment in the euro zone was at an all-time high Banking Barometer SBA September

6 up-and-coming economies in Asia and South America Emerging economies in Asia and South America, such as China, India and Brazil are driving global economic performance. It is true that China is not achieving double-digit growth as in previous years, but with an expected 8.2% growth in the current year, China is still one of the strongest growing economies. Rising raw material and electricity prices, falling real estate prices, growing social inequality and increasing public debt constitute threats to sustained growth however. Since it opened its markets at the beginning of the 1990s, India has posted constant growth and developed into a powerful economy. Brazil is one of the fastest growing emerging economies and overtook Britain last year as the world s sixth largest economy. 1-1 GDP in developed markets 1-2 GDP in emerging markets In % In % 6% 12% 4,4 10,4 10,6 4% 10% 3,0 9,2 9,2 1,9 2,1 1,7 2% 1,4 2,0 8,2 7,5 8% 6,6 7,2 6,9 0% -2% 6% -0,3-0,7 4% 2,7 3,0-4% 2% -3,5-4,3-6% 0% -5,5-0,3-8% -2% p p US Eurozone Japan China India Brazil Source: IMF Source: IMF Slower growth of world trade Economic situation burdened by high levels of public debt In 2010 world trade grew at a very high 13.8%, due in particular to the catch-up effect after the financial crisis. In 2011 the volume of world trade grew by a more moderate 5.0%. The World Trade Organisation (WTO) expects an increase of still 3.7% for The high levels of debt of some euro countries and the USA continue to be a burden for the global economy. The Organisation for Economic Co-Operation and Development (OECD) expects gross debt in the euro zone to have been 88.1% of GDP in 2011 (2010: 85.8%). 1.2 Switzerland More moderate growth than in the previous year Tough external economic environment After a big decline in 2009 (-1.9%) and a recovery in 2010 (+3.0%), GDP grew by 2.1% last year. SECO has raised its growth forecast for 2012 from 0.8 to 1.4%, after the economy proved to have performed better than expected during the winter half of 2011/12. The continuing low interest rates are holding up investments in construction and private consumption. Declining inflation and the immigration-related population growth are contributing positively to this performance. Because of the strong Swiss franc, the trading activity of Swiss firms in 2011 grew less strongly than in the previous year. Compared with the previous year, exports grew by 2.3% (2010: 7.2%), and imports by 0.2% (2010: 8.6%). For exporting companies in particular, the recessionary economic situation of Europe is a challenge, in addition to the strength of the Swiss franc. In order to remain competitive internationally, many firms have had to reduce their sales prices to the detriment of margins. The setting of a lower limit on the Swiss franceuro exchange rate succeeded in stabilising the currency situation, increased the planning certainty of exporters and positively impacted their businesses Banking Barometer SBA September 2012

7 Labour market improvement, slightly higher unemployment in 2012 National finances in the black The labour market in Switzerland evolved positively despite the strength of the Swiss franc and the economic uncertainties in Europe. In 2011 the unemployment rate was 2.9% on average. In June 2012 the rate was 2.7% (January 2012: 3.1%). For 2012 and 2013, SECO expects an average unemployment rate of 3.2 and 3.4% respectively. Although higher unemployment is expected during the current year, Switzerland is doing very well compared with other countries. Compared with most European countries and the USA, Switzerland s national finances are also in very good shape. At 37.9% in 2010, Swiss debt was far below the Eurozone average of 85.3%. Whereas debt in the European monetary community has risen over the last ten years, it has fallen in Switzerland. Despite the financial crisis, Switzerland was able to achieve a CHF 3.9 bn surplus in 2010 and a CHF 2.2 bn surplus in Special topic: The European banking sector during the crisis The worsening debt crisis in 2011 and again during the current year constitutes a major challenge for the euro zone. The political situation in Greece is still unclear. The issues of increasing national debt and substantial problems in the banking sector in Spain, Portugal, Ireland and Italy remain. Although the capital base of the banks in the Eurozone has been strengthened, profits have fallen, leading to correspondingly lower returns on equity. Despite a variety of measures, both implemented and planned, at international and national level, major risks overshadow the future economic performance of the Eurozone. From finance crisis to debt crisis The problems that began on the US mortgage market put the global financial system under severe pressure. The bursting of the real estate bubble in Spain and Ireland in 2007 and 2008 also had far-reaching consequences. Because everything on the financial market is so interrelated, the financial crisis produced balance-sheet losses and financial institution failures. As a result, the banks had to be supported by government action. This action has led in part to rising public debt in the affected countries. 1-3 Public debt of selected euro countries % GDP 2007 Change from previous year 2011 Change from previous year 2013* Change from previous year Greece 107.5% -0.1% 165.4% +14.1% 168.5% +3.1% Ireland 24.8% +0.5% 108.2% +17.0% 120.9% +4.5% Italy 103.1% -2.7% 120.0% +1.1% 122.5% -0.5% Portugal 68.3% +7.2% 107.8% +15.4% 120.3% +5.1% Spain 36.2% -8.5% 68.5% +11.9% 84.1% +3.7% Eurozone 66.3% -3.2% 88.1% +2.8% 93.0% +0.9% *Forecast Source: OECD 2012 Banking Barometer SBA September

8 In 2007 public debt in the Eurozone still averaged 66.3% of GDP; by 2011 it had risen to 88.1%. The increase during this period was most striking in Ireland. Whilst debt was still at 24.8% in 2007, in 2011 it was already at 108.2%. In 2011, all the countries listed in Table 1-3 exceeded the total debt ceiling established in the Maastricht Criteria of 60% of GDP. For 2013, the OECD is forecasting a further, albeit somewhat smaller, increase in the public debt of the euro zone (+0.8%). Negative impact of state interventions on public deficits The impact that the measures in support of the financial institutions had on national budgets varied with the extent and structure of the support. The biggest public deficit rise following the interventions was in Ireland. Between 2007 and 2011, the deficit increased by 26% of GDP in total. In other countries of the euro zone such as Germany, Portugal and the UK, the deficit also rose - but to a lesser degree (between 0.5 and 3.0% of GDP). In a few countries, the interventions even led to a slight reduction in the budgetary deficit (incl. Spain). This was because of the profits from guarantees given to financial institutions and interest income from bonds and loans. For the EU countries as a whole, the interventions between 2007 and 2009 resulted in a slightly higher deficit. In 2010 the deficit in the EU countries increased by a high 0.54% of GDP however. In 2011, the impact of state aid on the deficit was weaker again at 0.04% of GDP. 1-4 Intervention impacts on public deficits % GDP 0.5% 0.0% -0.5% -1.0% % -2.0% % -3.0% -3.5% -4.0% DE UK PT IE GR ES EU-27 Source: Eurostat Falling return on equity for banks in the EU The consequences of the financial crisis are also reflected in falling bank profits. Return on equity fell heavily for the banks of the EU-27 between 2007 and Whereas the return on equity still averaged 17.5% 2 in 2007, by 2009 it had dropped to 5.0%. This decline is especially due to the outbreak of the financial crisis and the resulting very tough market conditions. In 2010, the general situation of the banks improved slightly and the return on equity rose to 7.9%. After a short-lived improvement in most EU countries last year, the return on equity has fallen again (2011: 3.5%). Whilst the return on equity of the banks in Switzerland was still below the EU average in 2007 at 13.7%, they were above average in 2011 at 9.9%. 2 Median of 27 EU member states Banking Barometer SBA September 2012

9 1-5 Return on equity (ROE) In % 30.0% 20.0% 10.0% % -10.0% % -30.0% -40.0% FR SE CH DE* ES NL PT IE UK IT GR EU-27 (2007) 17.5% EU-27 (2011) 3.5% * Position at 2010 NB: ROE = returns / equity Source: IMF, SNB Support measures to combat the debt crisis Measures to strengthen the banking sector Politicians have attempted to prevent an escalation of the sovereign debt crisis through a variety of measures. A distinction can be drawn between measures to strengthen the banking sector and measures to save countries. In order to keep the banks liquid, the European Central Bank (ECB) has carried out various operations on the open market. As part of two long-term refinancing operations (LTROs), the ECB supplied the banks with additional liquidity to ensure that the euro money market continued to operate and to prevent a credit crunch. The first auction, during which demand amounted to EUR bn, took place at the end of December The banks were supplied with EUR bn as part of the second LTRO in March A large proportion of this money found its way into Spanish and Italian banks. With the help of these measures, the markets could be reassured at least in the short term and a liquidity crisis prevented. As can be seen in Figure 1-6, it was possible, as a result of these interventions, to mitigate the tension on the interbank market in the euro zone. 1-6 Interbank market: difference between LIBOR and overnight index swap rates Basis points LTRO 1 LTRO Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Switzerland Eurozone NB: the difference between the (unsecured) LIBOR and the interest rate on overnight index swaps can be used as an indicator of the tightness of the money market. This enables confidence on the interbank market to be assessed. Source: Datastream 2012 Banking Barometer SBA September

10 Measures to save countriess Higher capital ratios for greater security Agreement on joint bank supervision The EFSF 3 bailout fund was ramped up in September 2011 to a total of EUR 780 bn. In addition, it was decided to cut Greece s debt and recapitalise the Greek banks. Since 2008, the ECB has used other unconventional means 4 to combat the crisis. For example, in August 2011 it bought Italian and Spanish government bonds on the secondary market for the first time, to stop the interest rates for the crisis-hit countries from rising further. Since mid-march this year, the ECB has bought no more government bonds. However, the ECB reserves the right to purchase more government bonds on the secondary market to support ailing member states in the euro area, as the head of the ECB Mario Draghi said in a speech at the end of August The purchases would be linked to certain conditions though, such as lowering the national deficit or structural reforms. At the beginning of August 2012, the ECB had outstanding assets of EUR bn. Banking regulatory action was also taken. For example, in October 2011 the European Council of Ministers decided that by June 2012 banks in the EU would have to have a Core Tier 1 capital ratio 5 of 9%. Despite the tough conditions on the financial markets, many banks in the EU managed to strengthen their capital base between 2008 and According to the EU-wide stress test, which the European Banking Authority (EBA) carried out in 2011, the banks in the EU had on average a Core Tier 1 capital ratio of 8.9% at the end of For 2011 the EBA is expecting assuming that the banks receive no additional state capital a Core Tier 1 capital ratio of 7.4%. By 2018, according to the new capital requirements of the Basel Committee on Banking Supervision (Basel III), the banks must have 7% Common Equity Tier 1 capital 7. Despite various measures, already implemented and planned, at international and national level, which produced relief at least in the short term, uncertainty about the further economic performance of the euro zone remains. At the end of June 2012, it was agreed at the EU summit in Brussels that there should be common supervisory oversight. This is to be help to better protect investors, restore confidence and cushion the financial sector from shocks 8. In addition, as soon as there is common supervision of the banks, the EFSF and/or ESM will be able to recapitalise banks directly. Under the banking union plan, the EBA will hand over powers to the ECB, which is to be the supreme authority with respect to the planned EU system of banking supervision. The EU Commission intends probably on 11 September this year to present its plans in this regard. Further signals are awaited, firstly because Germany and Italy have not yet come to a decision regarding the ESM, and secondly because the ECB plans need to be made more concrete. In the meantime the ECB is expected to inject further liquidity. 3 European Financial Stability Facility: The bailout fund was created in 2010 by the euro area Member States to safeguard the financial stability of the euro area Member States and provide financial assistance. The measure was intended to come to an end in June 2013, running until then in parallel with its planned successor, the European Stability Mechanism (ESM). The ESM was to become effective in mid-2012, but neither Germany nor Italy have ratified it. The ESM, like the EFSF, is part of the euro rescue package. 4 Full participation in all open market operations, long-term tenders with a maturity of up to one year, extension of the collateral framework to non-marketable instruments, liquidity provision in foreign currencies against collateral, covered bond purchase programme amounting to EUR 60 bn. 5 Core Tier 1 capital ratio in accordance with the Basel III requirements and the corresponding EU provisions (CRD I-III). 6 At the end of 2010, three banks had a Core Tier 1 capital ratio of less than 5%. Without state recapitalisation, it would have been 18 banks. 7 Common Equity Tier 1 (CET1) according to the requirements of Basel III. In contrast to the Basel II Core Tier 1 capital ratio requirements, the requirements concerning the quality of CET1 are much higher. Consequently the two capital ratios are not readily comparable. 8 European Commission, A Banking Union for Europe, 26 June Banking Barometer SBA September 2012

11 2 Financial markets In 2011 the Swiss financial markets were again characterised by very low interest rates and a further decline in Confederation bond yields. The 3-month CHF LIBOR and ten-year Confederation bond yields reached record lows. Following the setting of the lower limit for the EUR-CHF exchange rate at CHF 1.20 by the Swiss National Bank (SNB) in September 2011, the Swiss franc appreciated much less. Its external value grew by only 0.5% in The global equity markets trended mostly negatively in In the first half of 2012, a slightly positive performance was observed, which however weakened again in the second quarter. The reasons for this performance were in particular the persisting sovereign debt crisis in the euro zone and a definite flagging of the economy in the USA. 2.1 Interest and exchange rates Interest rates still low, Confederation bond yields historically low Interest rates are still at an extraordinarily low level. On 3 August 2011, the SNB again reduced the target range for the CHF LIBOR by % to %. The last reduction was almost two and a half years before that. Thereafter the LIBOR hovered around 0.01%. This performance is largely driven by the SNB s expansive monetary policy, intended to support the fragile upswing and combat the still strong Swiss franc. Swiss Confederation ten-year bond yields fell very considerably again compared with Ten-year Confederation bonds yielded 1.5% on average in Swiss Confederation bond yields and 3-month CHF LIBOR 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul month CHF LIBOR 10-year Confederation bonds 2012 Banking Barometer SBA September

12 Real appreciation of the Swiss franc slowed down The setting of the lower limit for the EUR-CHF exchange rate in September 2011 enabled the export-weighted real exchange rate to be stabilised. The real appreciation of the Swiss franc against the country s 40 leading trading partners was only 0.5% in From January to August 2011 the appreciation of the Swiss franc was still 13.9%. Thus the pressure on the Swiss franc to appreciate not only against the euro is much less. 2-2 CHF exchange rates Indexed, January 2008= Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr GBP EUR USD JPY Rise in SNB foreign currency reserves in 2012 In 2011 the lower limit set by the SNB did not produce any marked effects on the central bank s balance sheet. It was only in 2012 that the SNB had to intervene on the currency markets in order to be able to maintain the 1.20 EUR-CHF lower limit. The SNB s foreign currency reserves at the end of July 2012 amounted to CHF bn. They comprise 60% euro-denominated, 22% US dollar-denominated and 8% Japanese yen-denominated investments. 85% are held in the form of government bonds and 10% in equities. 86% of the currency reserves have an AAA rating. Although the US dollar has strengthened against the Swiss franc in the last few months, no further depreciation of the Swiss franc is to be expected in the near future. From the point of view of political and financial stability, the Swiss franc is still in fact a safe haven currency. Equilibrium price falls towards EUR-CHF lower limit Partly due to the variations in pricing, the EUR-CHF exchange rate in terms of purchasing power parity (equilibrium price) is falling towards the actual exchange rate. Consequently, the Swiss franc is now slightly less overvalued, which should soon reduce the pressure on the lower exchange rate limit set by the SNB. No rise in interest rates is to be expected in the next few months, either in the euro zone or in Switzerland Banking Barometer SBA September 2012

13 2.2 Equity markets Negative performance on the equity markets in 2011 After a patchy 2010, most stockmarket prices fell in The equity markets in Asia fell heavily, especially in the second half (MSCI Asia excluding Japan: -17.3% and NIKKEI: -11.5%). Among the causes were the earthquake and tsunami disaster in Japan, floods in Thailand and the fragile economic situation in the Eurozone. In Switzerland the -7.8% fall of the Swiss Market Index (SMI) was slightly less than the -8.4% decrease in the European Blue Chip Index STOXX 50 EUR. The negative performance of the European share indexes was mainly due to doubts about a sustained economic recovery in the industrialized countries and also to the still unresolved sovereign debt crisis in the euro zone. The USA stockmarkets on the other hand succeeded in challenging the negative trend. As a result the Dow Jones Industrial grew by 5.5%, and the S&P 500 remained constant, in Increasing risk aversion and investor uncertainty were also reflected in a higher demand for precious metals as investments. The price of gold therefore grew in 2011 by over 23% and silver by almost 8% (both in USD/ounce). The high rates of increase of the previous year were not reached however. 2-3 Selected stockmarket indexes Indexed, 1 January 2008 = Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr NIKKEI STOXX 50 EUR SMI MSCI ASIA ex JP Dow Jones Industrial, Datastream Slightly positive trend in the first half of 2012 Dull outlook on developed markets In the first half of 2012, the European and USA stockmarket indexes trended slightly positively, whereas the markets in Asia were down. A rise in stockmarket prices was observed during the first quarter of 2012 in particular, whereas most trended negatively during the second quarter. Among the reasons for the sharp decline in the second quarter were the increased threat of a collapse of the European monetary union and a flagging of the US economy. With an unemployment rate of 8.3% in July 2012, the US labour market is still suffering from the consequences of the financial crisis. The problems still to be solved in the euro zone will influence the performance of the equity markets in the coming months. The numerous EU summits during the last few months succeeded in calming the markets but only for a short period each time. To make a sustained impact, EU heads of government need to make a clear commitment to fiscal union. The USA may have slipped below the media horizon somewhat for the moment, but its public debt is still an issue to be resolved. Because the emerging countries are not completely decoupled from the rest of the world, there too poorer equity prices are to be expected. The forecasts however assume a slight improvement by the end of the current year Banking Barometer SBA September

14 3 Bank profits The aggregate operating profit of the banks in Switzerland fell by 3.8% to CHF 59.1 bn in The increase in interest income (+5.4%) was not able to offset the marked decline in profits from trading (-26.4%) and from commission and services (-5.1%). At 40%, the commission and services business was still the largest contributor to the profit of banks in Switzerland. After the interestearning business decline experienced by most bank groups during the previous year, all bank groups with the exception of the Regional banks and the Savings banks achieved higher interest income in In the commission and services business, only the Regional banks and Savings banks (+16.1%), along with the Raiffeisen banks (+0.6%), produced higher profits than in the previous year. In trading, the foreign banks (+11.8%) and the Cantonal banks (+3.5%) also grew their profits, in addition to the Raiffeisen banks (+18.4%). On the other hand, net earnings grew by about a fifth to CHF 13 bn. In 2011, the banks in Switzerland paid corporate income tax amounting to CHF 1.46 bn. The persistent uncertainty on the financial markets, together with the constantly increasing strength of the Swiss franc, are likely to depress the profit margins of the banks in Switzerland again this year operating profit and net earnings Operating profits down After two years of positive growth (2009: +10.8%, 2010: +13.3%), the aggregate operating profit 9 of the banks in Switzerland fell in 2011 by 3.8% to CHF 59.1 bn. The decrease is due to the lower profits from trading and from the commission and services business. In contrast, profits from the interest-earning business rose by 5.4%. 3-1 Profit by banking activity CHF bn Interest-earning business profit Other ordinary profit Commission business profit Trading business profit Based on the data relating to the statutory unconsolidated financial statements of the banks (parent company). The statutory financial statements comprise the operations of the head offices in Switzerland and of the legally dependent subsidiaries in Switzerland and abroad. In the case of the big banks in particular, these figures in the profit and loss account can sometimes vary considerably from the numbers in the consolidated financial statements Banking Barometer SBA September 2012

15 Staff costs down Profits from commission and services down again Interest income up again Trading profits down Although staff levels remained about the same in 2011, the banks reduced staff costs by CHF 2.1 bn or 7.2%. This fall is due in particular to the much lower staff costs (-14.1%) of the big banks. Staff levels at the big banks fell by 0.4% compared with The banks in Switzerland experienced a further fall in profits from the commission and services business of 5.1% to CHF 23.6 bn in 2011, one reason being the slightly lower trading activity of customers. The decrease in income from the securities and investments (-8.2%) and credit (-3.3%) sub-categories was the reason for this result. However, there was a slight increase in the profit on other service-related commission (+4.3%). Only the Regional and Raiffeisen banks were able to post an increase in commission and services-related profits (+16.1%, +0.6%). At around 40%, the commission and services business was still the most important contributor to bank profits in Switzerland. Following on from the rise in profits from the interest-earning business in 2010 (+1.7%), interest income rose last year by 5.4% to CHF 20.8 bn. There was above-average growth in profits from the interest-earning business of the big banks (+11.4%), the wealth management banks (+10.9%) and the private banks (+15.0%). Moreover interest expenses fell by 6.0% to CHF 25.9 bn. The interest-earning business, accounting for 35.3%, remained the second largest contributor to bank profits in Switzerland. After tripling in 2010, profits from trading fell in 2011 to CHF 8.7 bn (-26.4%). This decline is predominantly due to the much lower trading profits of the big banks and the Regional banks (-35.9%, resp %). The Raiffeisen banks posted higher profits of CHF 13.7 bn (+18.4%). No change in breakdown of bank group profitst 3-2 Profit by bank group 2011 Raiffeisen banks 4% Private bankers 4% Regional banks, savings banks 3% Cantonal banks 16% 3-3 Profit by bank group 2010 Raiffeisen banks 4% Private bankers 4% Regional banks, savings banks 3% Cantonal banks 13% Foreign banks* 13% Foreign banks* 13% Big banks 46% Big banks 47% Other banks 11% Other banks 11% * including foreign bank subsidiaries * including foreign bank subsidiaries Total net profits: CHF 13 bn Income tax: CHF 1.46 bn In comparison with the previous year, the banks in Switzerland succeeded in growing net profits by around one fifth to a total of CHF 13 bn in As was already the case in 2010, over 83% of the 312 banks made a net profit. Income and equity taxes of CHF 1.46 bn were levied on these earnings in Banking Barometer SBA September

16 3.2 Current year performance Persistent uncertainty and strong Swiss franc Cautious trading on equity markets Stable credit growth The consequences of the prolonged financial and debt crisis in Europe were also visible in Switzerland in 2012, as the poor economic situation of some major trading partners also affects Switzerland and causes a slowing of the country s economy. Despite a more confident mood on the financial markets in the short term and growing value creation in the banking sector at the start of 2012, there is still uncertainty about how the economy will perform. The pressure on profit margins will also continue. And the persistent strength of the Swiss franc is adversely affecting the cost-income ratio of the banks in Switzerland. The rather restrained transaction volumes on the Swiss stock exchange reflect the continuing high level of uncertainty among investors. After a 10% increase in the first quarter of 2012, transaction volumes again declined (-10.0%) in the second quarter of The effect of the low interest rates is again manifest in a stable credit growth. Credit volume rose again slightly in the first five months of 2012 (+2.7%), due in particular to higher mortgage lending Banking Barometer SBA September 2012

17 4 Balance sheet business After a 1.7% increase in 2010, the balance sheet total of the Swiss banks rose again last year. The aggregate balance sheet total grew by 2.9% in 2011 to CHF 2,792.9 bn. With the exception of the big banks, which saw a slight fall in their balance sheet total (-1.0%), all other bank groups expanded their balance sheets. The marked increase in cash (+144%) and the renewed rise in mortgage lending (+5.5%) were the specific drivers of this development. The Cantonal banks, with 33.5% of domestic credit volume, were again the leading lenders in Switzerland in 2011 (big banks: 31.2%). 4.1 Balance sheet trends Aggregate balance sheet total up again The aggregate balance sheet total of all the banks in Switzerland was already 1.7% higher in This trend continued with 2.9% balance sheet growth to a total of CHF 2,792.9 bn in Most bank groups posted balance sheet expansion, with about a half of the increase coming from the Cantonal and the Raiffeisen banks. Only the big banks posted a slight decline (-1.0%). The number of institutions in the Swiss banking centre fell by eight to 312 banks in Balance sheet total by bank group Number of banks Balance sheet total (CHF bn) % change in balance sheet total Cantonal banks % 4.5% Big banks 2 2 1, , % 2.6% Regional banks and Savings banks % 4.1% Raiffeisen banks % 5.5% Other banks % -6.6% of which wealth management banks % -11.2% Foreign banks % -4.0% Private banks % 16.8% Total , , % 1.7% 10 Six banks were taken over by other banks, two banks were liquidated and four banks lost their bank status. Two banks merged and five banks were licensed to operate for the first time. 11 Other banks include merchant banks, wealth management banks, microfinance institutions and all other banks. Banks in the all other banks group do not fit into any of the other categories. They have no particular features in common Banking Barometer SBA September

18 Assets: big expansion of cash, big decline in receivables from money market papers Liabilities: customer deposits up Whilst receivables from other banks hardly changed (-0.2%), mortgage lending rose by 5.5% to CHF bn. As a result, mortgage receivables, representing 29% of the balance sheet total, continued to be the most significant asset position of the banks in Switzerland. Liquid assets expanded strongly (2011: %, 2010: +13.9%), due to the measures taken by the SNB to increase liquidity on the money market as part of the effort to counter the strength of the Swiss franc. Money market paper receivables declined considerably, by 45.4% to CHF 78.2 bn. The banks held fewer papers issued by domestic and foreign institutions, and the SNB also reduced the volume of outstanding SNB bills 12. Customer deposits rose as they had already done in the previous two years (+3.9%). Liabilities in the form of savings and investment monies increased by 7.0% and other sight liabilities payable to customers by 12.1%. Time deposits and medium-term bonds on the other hand declined (-13.4%, -18.7%). Interest-related shifts contributed to this performance. With a further decline in liabilities to banks in Switzerland and abroad (-4.1% to CHF bn), there was no change in the trend of the previous year. 4-2 Breakdown of assets Breakdown of liabilities 2011 Other assets 13% Cash 9% Equity finance 6% Liabilities to banks 17% Other liabilities 7% Bonds and loans by central mortgage bond institutions, Mediumterm bankissued notes 14% Customer receivables18% Bank receivables 22% Securities 6% Mortgage loans 29% Money market receivables 3% Time liabilities towards customers 12% Money market liabilities 4% Savings and investment liabilities to customers 17% Other liabilities to customers 23% Higher sight deposits at the SNB, continuing low exposure to debtors in PIIGS countries In the wake of the measures to combat the strong Swiss franc, in August 2011 the sight deposits of the banks with the SNB were first expanded from CHF 30 to CHF 80 bn, and progressively increased to CHF 200 bn during the same month. Receivables from private and public debtors domiciled in PIIGS 13 countries fell to a low level for the banks in Switzerland, amounting, as before, to 1.8% of the receivables from all foreign debtors SNB bonds, which serve firstly to mop up the liquidity in the system following the financial crisis and secondly are intended to enable a more flexible management of money market liquidity. 13 The PIIGS countries include Portugal, Italy, Ireland, Greece and Spain. 14 The Bank for International Settlements (BIS) published a much higher figure (48.8 bn USD) for 2011 than the Swiss National Bank. One of the reasons for this is the distinction between banks in Switzerland and Swiss banks. The SNB statistics only cover banks in Switzerland Banking Barometer SBA September 2012

19 4.2 Credit business in Switzerland Growth of credit volume take-up The credit business of the banks is especially important for the Swiss economy. The credit limits granted by the banks rose in 2011 by 5.1% (CHF 1,098.2 bn). Credit take-up increased by 4.3% to CHF 937 bn, with companies, after a decline in 2010 (-2.1%), again increasing their demand for credit (+2.9%). At 85.3%, the total credit available was therefore again not fully used in Continuing rise in mortgage volume 4-4 Credit limits and take-up in Switzerland CHF bn (04) Mortgage receivables Customer receivables Credit limits Mortgage lending, which grew by 5.3% in 2011, was still the main component of credit demand in Switzerland at 83.7% (cf. Table 4-5). Companies (+6.4%) and the public sector (+7.1%) contributed particularly to this growth. Private households, which were the biggest group of mortgagees with over three quarters of loans, increased their demand by 4.9%. This increase in mortgage lending was upheld, as in 2011, by the very low interest rates and the positive performance of the economy. New minimum requirements for mortgages No overheating of the Swiss real estate market has been seen despite a few hot spots. However, in order to counter any tendency of the mortgage business to overheat, the Swiss Federal Council decided to accept new self-regulation arrangements proposed by the banks. The proposed measures have Swiss Financial Market Supervisory Authority (FINMA) approval. The rules require the borrower s own resources to account for a minimum of 10% of the total value of the mortgage. The 10% may not come from the assets of the Second Pillar. In addition, the mortgage debt must be reduced within a maximum of 20 years to two thirds of the total value of the loan. These rules came into force on 1 July Banking Barometer SBA September

20 Shift from variable to fixed-rate mortgages Bank loans in greater demand from private households At the end of % of mortgages in Switzerland belonged to the first lending group, 6.8% to the second and 2.5% to the third 15. The continuing shift from variable to fixed-rate mortgages was also manifest during the period under review. Overall at the end of % of all mortgages in Switzerland were at fixed rates of interest (1996: 42.6%). At 4.3%, the growth in the demand for bank loans was higher than in the previous year (+2.1%). Whilst mortgages grew at more or less the same rate as in the previous year, the level of other outstanding private household debt increased by 11.3% (2010: -2.5%). Companies, which at 63.1% had the biggest demand for credit, reduced their loan portfolio far less than in 2010 (-2.8%, 2010: -13.7%). 4-5 Credit volume * in Switzerland by sector CHF m End 2011 Mortgages Customer receivables Total lending Change from previous year End 2011 Change from previous year End 2011 Change from previous year Private households 596, % 34, % 630, % 2011 share 76.0% 22.5% 67.3% Companies 171, % 96, % 267, % 2011 share 21.8% 63.1% 28.6% Public sector 16, % 22, % 38, % 2011 share 2.2% 14.4% 4.2% Total 784, % 152, % 936, % * Loans taken up according to credit volume statistics SME the biggest corporate borrowers At the end of 2011, 90.8% of outstanding corporate credit loans had been taken out by small and medium-sized enterprises (SME). In 2006 the SME share amounted to 84.9%. Compared with the previous year, the SME demand for borrowing was 2.5% higher, whereas it was 7.5% higher for bigger companies. 15 Mortgage receivables are attributed to various lending groups (LG) as they exceed a pre-defined proportion of the market value of the collateral (e.g. real estate: receivables up to 2/3 of the market value are in the 1st LG, receivables above that value and up to 80% are in the 2nd LG, receivables above 80% are in the 3rd LG). In general market risks increase with the LG Banking Barometer SBA September 2012

21 4-6 Credit volume by company size CHF bn employees employees employees > 250 employees NB: Includes loans to financing and wealth management institutions (e.g. trusts or foundations). Between 2006 and 2010, there was a loss of data continuity concerning loans to companies with 1 to 9 employees due to reclassifications. Rise in credit volume for all lenders All lenders increased their credit volume last year (total +3.6%). The Cantonal banks further increased their significance in the credit business, taking their market share to 33.5% (2010: 32.7%). After a decline in 2010 (-4.7%) the credit volume of the big banks also rose again slightly (+0.3%). The big banks had the second largest market share with 31.2%. 4-7 Swiss lending by bank group CHF bn Big banks Cantonal banks Other bank groups Regional banks Slight rise in credit volume in the first five months of 2012 The first five months of 2012 posted with +1.5% a slightly positive change in domestic credit volume (same period previous year: +1.7%), compared with December In May 2012 the take-up of total available credit was CHF bn or 85.8% (December 2011: 85.3%). Mortgage lending went up 2.0% between December 2011 and May Customer receivables grew 2.8% in the same period Banking Barometer SBA September

22 5 Wealth management The security portfolios in customer custody accounts fell again in 2011 to CHF 4,240 bn. The factors driving the reduced level of holdings were the predominantly negative equity market environment and the stronger Swiss franc. Similarly, fiduciary deposits continued their downward slide of the previous year due, as before, to the extremely low interest rates, amounting at the end of 2011 to CHF bn. Interest-related shifts were also observed in balance sheet positions. As a result, time deposits declined from CHF bn to CHF bn. Customer liabilities in the form of savings and investment monies rose on the other hand from CHF bn to CHF bn. Overall, at the end of 2011, the banks in Switzerland were managing wealth assets amounting to CHF 5,269 bn. No noteworthy outflows of foreign customer deposits were observed. 5.1 Assets under management in Switzerland in 2011 Definition of assets under management Further decline in security holdings According to the FINMA, assets under management include other positions in addition to security holdings in client custody accounts. According to a FINMA Circular, assets under management comprise all assets for which investment advice and/or wealth management services are provided. 16 Consequently the following positions are included in assets under management: security holdings in client custody accounts, fiduciary investments, customer savings and investment liabilities and customer time liabilities. 17 After a slight decline in 2010, security holdings fell in 2011 by a further 4.9% to CHF 4,240 bn. The slightly lower stockmarket prices and currency losses on investments in foreign currencies in 2011 were the reasons for these lower holdings. In particular investments in money market papers and equity holdings fell (-32.7% and. -5.3% respectively). 16 Cf. FINMA Circular 2008/2: Accounting - Banks. 17 The relevant SNB statistics sampling level for security portfolios and fiduciary deposits includes the subsidiaries of the banks in Switzerland, but not the foreign branches. To that extent, the consolidated figures are representative of the Swiss banking centre in the narrower sense of the term. The definition does not apply however to the customer deposits in the balance sheet, which also include deposits in foreign branches. However, this distinction has not been taken into account in the calculation Banking Barometer SBA September 2012