Raiffeisen is expanding its mortgage business by getting into the business of buying and selling property itself – a first for a Swiss bank. What could possibly go wrong?

Mortgage lending is booming in Switzerland, thanks to ultra-low interest rates. But the mini and negative interest rates have a flip side: they have led to crumbling margins, as new home loans are granted at far lower rates than in previous years.

The problem: banks can't cut costs any faster than their interest margin withers. This in turn prompts looser lending in a bid to compensate the fall with higher volume – usually unsuccessfully, as Raiffeisen's half-year results showed.

If domestic lenders like Raiffeisen want to shield their profits, they have to find new avenues for business. The Swiss cooperative has found an inventive way to expand, after backing away from a call for looser mortgage lending standards for young clients.

Bank as Realtor

Raiffeisen is getting into the business of buying and selling property with real estate agency Casa. The new offering is an extension of its existing services for home buyers, the bank said.

Clearly, Raiffeisen plans to use Casa as an additional distribution channel for its mortgage lending business: besides a Raiffeisen platform-powered search engine for a new home, prospective home buyers are offered financing from the same source. 

The bank also helps sellers by providing a free marketplace on its own platform as well as cheaper terms on homegate.ch, the ubiquitous Swiss house-hunting portal.

Swiss Life, ZKB 

Raiffeisen, a cooperative comprised of several hundred Swiss banks, is the biggest Swiss mortgage lender, with a 17.3 percent share – more than giants UBS and Credit Suisse. Raiffeisen's love of lending is the reason that Switzerland's central bank lists the bank alongside the two Swiss giants as a systemically relevant firm.

Raiffeisen is the first bank to get into real estate agency, but insurer Swiss Life – a major owner of commercial property throughout Switzerland – got into the business five years ago. Zuercher Kantonalbank, a state-backed regional lender, is indirectly involved in property through a minority share in homegate.ch, which offers mortgages backed by the bank online.

Property Bubble?

So far, so good – except that Raiffeisen's reliance on mortgage lending is risky. Should rates eventually shift, homeowners with variable rate mortgages could be caught out in larger numbers, leading to a rise in defaults.

Certain hot spots in Switzerland are still categorized by economists as frothy, and the central bank has not stopped worrying about the housing market overheating. The situation is likely benign as long as Switzerland's economy keeps ticking along and immigration continues, but that could quickly change.

Default Risk

Raiffeisen boss Patrik Gisel emphasized in half-year results that the bulging mortgage book didn't necessarily mean more risk, and that writedowns for housing defaults had fallen to a record low of 213 million Swiss francs.

The writedowns need to be taken with a grain of salt: Swiss banks can't begin writing down against potential defaults until they are imminently apparent.

Lenders are well aware of the risk of relying too heavily on interest income, where they have been squeezed for countless quarters now.

Failed Diversification

Raiffeisen draws a whopping 70 percent of its revenue from this business. Gisel's predecessor, Pierin Vincenz, now struggling to turn around derivatives boutique Leonteq, attempted to diversify by buying Notenstein, a private bank carved out of collapsing Wegelin & Cie. in 2012.

Vincenz's efforts were not entirely successful. Understandable perhaps that Gisel casts his eye instead of plunging deeper into mortgage lending, a business at the heart of the cooperative bank's activities.