Switzerland Economic Update QNB Group September 14
Switzerland Overview Switzerland s efficient capital markets, highly skilled human capital and low corporate tax rates make it the world's most competitive economy, with per capita GDP one of the highest in the world; the economy is highly service-oriented Overview Data (13) GDP (bn USD) 65.8 % GDP related to Services 68.9 Real GDP Growth (%) 2. Per Capita GDP (k USD, PPP) 46.4 CPI Inflation (%) -.2 Current Account Balance (% of GDP) 9.6 FX Reserves (months of import cover, end-13) 25.5 Exchange Rate (USD:CHF, end-13).9 Fiscal Balance (% of GDP) Government Debt (% of GDP) 49.4 Broad Money Growth (%, M3, end of period) 7.7 Banking Assets (% of GDP) 217.6 3-Month Interbank Rate (%) Population (m) 8. Population aged 15-64 Years (% share, ) 68.1 Population growth (%).6 Unemployment (%) 3.2 Religion (% Muslim) 4.9 Doing Business Rank out of 189 29 Competitiveness Rank out of 148 1 Moody s Rating (Long-term FX debt) Aaa Industry Other Services 1 Manufacturing Wholesale & Retail Trade Financial Services Government Services Transport & Comms Total Nominal GDP by sector (13) Services 26.% 17.6% 14.8%.5% % 9.9% 7.7% Construction 5.3% Utilities 2.% Other 6.2% CAGR 9-13 2.6% 2.6% 1.5%.8% 2.4% 2.1% 3.5%.7% 1.7% 2.1% 1 Mainly real estate and private household services Sources: CIA World Factbook, International Monetary Fund (IMF), National Bank of Switzerland (SNB), Swiss Federal Statistical Office, World Bank, World Economic Forum and QNB Group analysis 2
Switzerland GDP Growth Real GDP growth is expected to recover in line with the Eurozone recovery through higher investment spending; unemployment is likely to peak at 3.2% in 14, but recover thereafter while population growth remains low Real GDP Growth (%) Investment Spending (bn USD) CAGR 1.6% 2. 2.1 2.2 2. 127 131 132 134 135 Unemployment (%) Population (m) CAGR.6% 2.9 3.2 3.2 3. 2.9 8. 8. 8.1 8.1 8.1 Sources: Bloomberg, IMF, Swiss Federal Statistical Office and QNB Group analysis and forecasts 3
Switzerland Balance of Payments The current account surplus is expected to remain broadly flat over the medium term; after the introduction of a 1.2 floor on the EUR:CHF exchange rate in 11, international reserves have grown rapidly; trade is mostly with the Eurozone Current Account (% of GDP) Exchange Rate (USD:CHF). 9.9 9.8 9.7 9.6 9.5 Exports (RHS) Balance (LHS) 9.6 9.6 9.9 Imports (RHS) 9.8 9.7 6 5 4 3.98.96.94.92.94.93.94.95.96 9.4.9 International Reserves (months of import cover) Directions of Trade (13) 3 25 24. 25.5 15.5 15 12.2 7.4 5 9 11 12 13 Exports Imports Destination (bn USD) Source (bn USD) Germany 42.4 Germany 56.6 United States 26.8 Italy.3 Italy 16.2 France 16.4 France 16.1 China 12.3 UK 12. United States 12.2 Sources: Bloomberg, Swiss Federal Statistical Office, SNB and QNB Group analysis and forecasts 4
Switzerland Fiscal Policy Fiscal policy is bound by a structurally-balanced fiscal rule; accordingly, the fiscal balance will hover around zero over the medium term on a stable level of federal and local expenditures; public debt is projected to decline gradually through 16 Government Budget (% of GDP) General Government Expenditure (% of GDP) 4 3 - Expenditure (LHS) Revenue (LHS) Balance (RHS).7.4 -.2.5 -.5 35 3 25 15 5 Cantons Municipalities Social Security Federal 11 12f 13f 14f Public Debt (% of GDP) Fiscal Policy 51 5.1 5 49.4 49 48.1 48 47.3 47 46 45.4 45 44 43 Fiscal policy is bound by a structurally-balanced fiscal rule, implying that the fiscal balance will hover around zero over the medium term The fiscal deficit was in balance in 13, however there are spending pressures over the medium term and long-term challenges from the aging population Public debt is projected to decline gradually to 45.4% of GDP by 16 Sources: IMF, Swiss Federal Statistical Office, SNB and QNB Group analysis and forecasts 5
Switzerland Monetary Policy Monetary policy aims to achieve price stability; inflation is expected to become positive over the medium term as the economy recovers; short-term interest rates are zero, while broad money continues to expand in line with capital inflows Inflation (%) 1.5.5.5.2 -.5 -.2 -.7 - Broad Money Change (%).8.6 Interbank Interest Rates (%, 3-Month) Switzerland US.4.4.3.3.2.2.3.1.2.1 9 11 12 13.6 Monetary Policy Monetary policy aims to achieve price stability, defined as a target of inflation of less than 2% Inflation has been negative in 12-13 as the pass-through of the exchange rate appreciation turned foreign inflation negative 6.4 7. 7.2 9.8 7.7 Short-term interest rates are zero as monetary policy seeks to avoid a further appreciation of the CHF Broad money continues to expand in line with large capital inflows attracted by the safe-haven role of the CHF 9 11 12 13 Sources: Bloomberg, Swiss Federal Statistical Office, SNB and QNB Group analysis and forecasts 6
Switzerland Banking Sector Overview Banking penetration is high, with a very sophisticated range of banking services; the banking sector is still undergoing significant deleveraging following the global financial crisis as banking secrecy laws are being reformed Assets to GDP (13) Asset (bn USD) Loans (bn USD) Bahrain UK France Lebanon China Singapore Switzerland Jordan Iran Morocco UAE Qatar S Africa Turkey Kuwait Tunisia Egypt Libya India Oman Saudi Arabia Mauritania Indonesia Iraq Yemen Nigeria Sudan Syria S Sudan 586% 457% 373% 351% 268% 261% 218% 178% 136% 134% 132% 124% 113% 111% % 98% 96% 88% 78% 73% 67% 55% 55% 46% 37% 3% 25% 23% 15% CAGR.4% 1,451 1,566 1,538 1,437 1,473 9 11 12 13 Deposits (bn USD) CAGR 11.9% 757 88 951 1,64 1,186 9 11 12 13 Analysis CAGR 5.9% 981 1,5 1,144 1,239 1,234 9 11 12 13 Profit 1 (bn USD) CAGR 3.6% The stable deposit base results in a solid liquidity position Profitability will remain challenged by continued low interest rates eroding net interest margins as large capital inflows increase the deposit base 7.5 9.9 1 9.2 9 11 12 1 Profits estimated based on average return on assets Sources: Bankscope, Bloomberg, Swiss Federal Statistical Office, SNB and QNB Group analysis and forecasts 7
Switzerland Banking Sector Ratios The loan to deposit ratio has fallen on strong deposit growth; profits are on a declining trend due to the low interest rate environment; banks remain well capitalized and the share of non-performing loans is low by international standards Loan to Deposit Ratio (%) 129.6 125.6 1.3 116.5 4.1 9 11 12 13 Return on Average Assets and Equity (%) 12.5 9.9 9.2 7.3 8 6 4.7.7.6 2.5 ROAE (LHS) ROAA (RHS) 9 11 12 2. 1.5.5 Capital Adequacy Ratio (%) Non-Performing Loans (% of Gross Loans) 18 17.9 17.3 16.7 16.9 16 14 Basel III Guideline for 19 12 9 11 12 1.2.8.9.8.8.6.4.2 9 11 12 Sources: IMF, SNB and QNB Group analysis and forecasts 8
Switzerland Banking Sector Competitor Analysis The top two banks account for 45.7% of assets, but UBS is losing market share on continued deleveraging following the financial crisis; the top banks liquidity has improved but dependence on wholesale funding remains high for some Financials for Top 5 Banks (13)* Market Share by Assets Net Income Equity ROE Assets ROA Loan to Deposit Ratio Non-Performing Loans (%) (bn USD) (bn USD) (%) (bn USD) (%) (%) (%) UBS 24.5 3.8 56. 6.8 1,132.8.3 73.6.4 Credit Suisse Group 21.2 3.3 52.9 6.3 979..3 74.4.6 Raiffeisen Schweiz Genossenschaft. 4.3.8 12.6 6.4 198.1.4 12.6 Swiss Life Holding 4.1.9.1 8.7 191.3.5 N/A.3 Zürcher Kantonalbank 3.6.8 12.6 6.4 198.1.4 12.6 Analysis There are 297 operational banks broken down into 3 foreign banks, 66 regional banks, 24 cantonal banks and the remaining categorized as private and other banking institutions UBS and Credit Suisse Group dominate the sector and account for a combined 45.7% of assets Non-performing loans for the top five banks are some of the lowest in world While the long-term operating environment in Switzerland remains stable, Swiss banks face near-term challenges driven by continued moderate economic growth, the persistently low interest-rate environment as well as continued large capital inflows adding to liquidity * Consolidated balance sheet of each bank, including international operations Source: SNB, Bankscope, Moodys, IMF and QNB Group analysis 9
Switzerland Financial Markets The Swiss Stock Exchange is up 23.3% since Jan-13 on a recovery of investor confidence; sovereign yields and CDS spreads have remained broadly flat as rating agencies continue to attach the highest rating to the sovereign Switzerland Stock Exchange Index Sovereign USD -Yr Bond Yield (%) 9, PE Ratio 16.7 1 Market Cap 179% of GDP 2 8, 7, 6, 5, Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Sovereign Credit Default Swap Spreads (basis points) 6 5 4 3 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 1.4 1.2.8.6.4.2 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Sovereign Ratings (July 14) Rating Outlook Moody's Aaa Stable Standard & Poor's AAAu Stable Capital Intelligence AAA Stable Fitch NR N/A 1 Price to Earnings (PE) ratio, 12-month forward 2 Market Capitalization as at July 14 as a share of 13 GDP Sources: Bloomberg, Swiss Federal Statistical Office, SNB and QNB Group analysis and forecasts
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