Share prices have recovered from the lows of the financial crisis in every sector of the Swiss economy. The exception: banks. Thomas Steinemann explains why in his essay for finews.first.
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The Swiss Federal Department of Finance once a year publishes a study about the Swiss financial market, which considers the development of banks, insurers and pension provision funds. The value created by banks (see Financial services) and insurers is listed in the table below, starting in 2007.
It becomes apparent just how weak the performance of the banking industry has been. The value created by banks has dropped by a third since the financial crisis even as the Swiss economy as a whole expanded from 576 billion Swiss francs ($574 billion) to 668 billion francs over the same period. Insurers by contrast have been able to increase their value creation.
«The contribution of these banks to the Swiss gross domestic product was minute»
The sobering performance of the banks has nothing to do with a decline in the number of banks (from 330 to 253 within ten years). What happened was a decline in the number of foreign-owned banks and their branches. The contribution of these banks to the Swiss gross domestic product was minute. Hence, the value generated by the other banks, in other words the big banks, declined massively.
It is clear from the development of their profits: while Credit Suisse in 2007 had a profit of 7.7 billion francs, the bank posted a loss of 1 billion in 2017. Over at UBS, the trend at least was the opposite: while it had a loss of 20 billion francs at the time of the bailout, it generated a profit of 1 billion francs last year.
The share prices of the banks was in sync with the unfortunate development of their profits (see table below).
Banking is the only industry where share prices haven’t made any progress since the financial crisis and where shares still trade far below the records reached before the crisis. In the table above, it is not only the difference to other industries that stands out, but also the difference between banks and insurers.
The conclusion for investors: it is surprising that investors aren’t vehemently demanding a solid and sustainable business performance coupled with a steady growth of profit. While this isn’t the case, (big) banks may be good for (many) employees, but not for investors.
Thomas Steinemann has been chief investment officer and a member of the executive board of Privatbank Bellerive in Zurich since February 2013. After obtaining a degree in economics from the University of Zurich he started his career in the economic department of Zürcher Kantonalbank. During this time, he earned his PhD with a critical analysis of the European Monetary Union. He also worked for Credit Suisse for eight years and was chief strategist at Vontobel for another twelve years.
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