The corona crisis represents a massive challenge for Swiss banks – and is poised to torpedo profits for smaller firms.
Switzerland's central bank puts its finger on the vulnerability of banks in the pandemic-induced economic crisis in its annual financial stability report: while the Swiss National Bank sees UBS and Credit Suisse as well as domestic-focused lenders as equipped to handle the storm, it sees risks for smaller firms.
The SNB said capital is essential for the mini-sized banks to weather coming months when profitability – already at a low level before the crisis – takes another hit. «While domestically focused banks should remain profitable overall, a number of banks are expected to incur losses.»
Eroding Credit Quality
These lenders are especially vulnerable to the solidity of domestic companies and households. Specifically, an expected deterioration of corporate credit quality in Switzerland will bring provisions and write-downs on outstanding loans for the banks (currently at record lows).
The SNB also expects to prolong its more than ten-year streak of low-to-negative interest rates due to the pandemic, which means banks will continue to suffer from a shortfall in interest income. The SNB identified trading income, which provided a fillip to many banks in the first quarter, as another risk factor.
Crisis Won't Spare UBS, Credit Suisse
UBS' and Credit Suisse's profitability is also under pressure, the SNB noted – credit quality hits their business as well. Equity market corrections hit their assets under management, and clients may retreat from transactions like capital markets business. This would hit revenue in both wealth management and investment banking arms, the SNB noted.
The central bank highlighted continued heightened uncertainty, especially with the specter of a second pandemic wave. The SNB said it is convinced that their solid respective capital bases puts them «in a favorable position to face these challenges.»
