CORRECTION TO TEXT: MOODY'S REPORTS: RATED SWISS BANKS ENJOY SOLID FRANCHISES AND LOW RISKS, BUT FACE DOMESTIC MARKET SATURATION AND RISING COSTS
All rated Swiss banks - the global banking groups as well as the smaller institutions - benefit from strong franchises underpinning relatively stable revenue bases as well as comparatively low risk levels, but the maturity and saturation of the domestic banking market and rising production costs could cap further earnings growth in future, reports Moody's Investors Service in a new Banking System Outlook on Switzerland.
"The financial performance of the Swiss banks rated by Moody's has improved in recent years and has remained resilient in the face of the current economic downturn," says Alexandra Sleator, Senior Vice President and author of this report. This is because those banks enjoy entrenched customer franchises in their core product and customer target segments.
Moreover, the two-tiered Swiss banking system - comprising the two global banking groups, Credit Suisse Group (CSG) and UBS, on the one hand, and smaller institutions, such as the regional, cooperative, cantonal and private banks, on the other hand - continues to exhibit comparatively low risk levels. Consequently, asset quality has not been an issue but further economic deterioration in 2003 will probably translate into higher, albeit still manageable, risk provision charges.
Although CSG and UBS's respective wealth management and investment banking activities expose both groups to the equity markets, Moody's notes that their results have been showing increasing divergence since late 2000. For instance, while both groups are lenders to a number of currently distressed companies, CSG has been hit harder by companies that have lost their investment-grade status ("fallen angels"). "Moreover, CSG has been hit by the large equity losses suffered by its insurance affiliate Winterthur," explains Sleator.
Moreover, the gradual saturation of the Swiss banking market could cap domestically generated revenue for all banks in the longer run. In this context, the reduction of costs and achievement of efficiency gains will, in Moody's view, be a key rating driver going forward. Moody's expects the smaller banks' search for economies of scale to lead to new co-operation initiatives and domestic mergers as well as possible linkups with foreign players with greater scale.
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