Postfinance is relevant for the Swiss economy's well-being and a case for restructuring says economist and public-governance expert Philipp Weckherlin in an exclusive essay for finews.com. Given the size of the company as a percentage of the Swiss federations balance sheet, the government will need to find new and different avenues for the business than it currently envisages.
Postfinance is a big business for the federation of Switzerland: the company, which is fully owned by Swiss Post, makes up about a third of the consolidated balance of the Swiss federation, and the capital is equal to a fourth of the state's total assets.
And yet, profit is modest at best – according to the reporting standards of regulator Finma, in 2019, the result of Postfinance even turned negative. In short: the company is not earning its capital cost, it is destroying value. Postfinance is systemically relevant, but a case for restructuring.
Others Can Do Basic Services as Well
The business model of Postfinance is limited by law and outdated. There is a great number of banks that can just as well guarantee the basic payment services. Furthermore, it is the branches of Swiss Post that stand for cash handling – which leads to significant costs to the detriment of Postfinance.
Philipp Weckherlin
The main barrier to a sustainable business model is the ban on selling loans. Postfinance can't invest the 126 billion Swiss francs ($139 billion) it has on its balance sheet in the shape of loans to private clients or companies in Switzerland. It is forced to invest a large part of client assets abroad. Like any other bank, it suffers from the low-interest-rate environment, but in addition to that, from the absence of attractive investment opportunities from a profitability-risk perspective.
Following the Rules of OECD
This was the reason why the government decided to lift the loans ban under certain conditions and embark on a part-privatization. It launched a consultation process and received mostly negative responses.
The answers suggest that the government didn't prepare sufficiently for likely problems raised, such as concern about a distortion of the market, continued lack of transparency and cross-subsidization, or the unfavorable timing for a part-privatization.
It looks as if a bundle of measures and in particular the strict adherence to OECD standards might alleviate some concerns of opponents to the government plans.
Should the Government Remain Invested?
The question remains however whether the ideas of the government make economic sense or whether there aren't any better options. For decades, banks internationally have been among the worst investments. Most aren't even worth their equity.
This also raises the question of whether the Swiss state should be invested in Postfinance at all, the biggest single position on its balance sheet, and of its equity. Even if the management of state assets on a trust basis protecting their value wasn't such an important issue so far with government, parliament, and civil service, doesn't mean that it must continue that way.
States such as Norway, New Zealand, and Austria have shown that better ways are possible. So, quo Vadis Postfinance? There are four different possible solutions to the problem:
1. Lifting of the Loans Ban and Immediate Part-Privatization
Postfinance is currently worth 2 billion francs at most, taking the difficult situation into account. A part-privatization would mean that government and Swiss Post will have to write down about 4 billion francs. 1 billion would flow back through the sale of shares, but the government would forego a little less than 50 percent of the share capital. About 17 percent of the government's equity base would be destroyed and Postfinance would remain the biggest position on its balance sheet.
2. Lifting of the Loans Ban and Part-Privatization Following an Improvement of the Performance
The part-privatization would, as it does under proposition 1, lead to an immediate net write-down of 4 billion francs at the state and Swiss Post level. Thanks to an improved performance, the sale of part of the company would generate 1 billion francs more, albeit at a later point in time. This would reduce the need for write-down at the owners to 3 billion francs. This solution leaves Postfinance as the biggest component of the government's balance sheet and, in the medium term, more than 12 percent of the government's equity would have to be written off.
3. Liquidation and Divestment of All Its Assets
A liquidation of Postfinance implies the divestment of infrastructure and business, dissolution of reserves, repayment of client assets, and the setting up of a redundancy plan. This option (if reserves and invested assets conform to market averages) would mean that the capital of Postfinance would just about be covered and that government and Post wouldn't have to write down anything. The equity base of government and Post would remain untouched, the government's balance sheet significantly reduced by the elimination of Postfinance.
4. A Full Divestment of Postfinance
Only about three Swiss banks could buy Postfinance outright. Abroad, the options are wider. Assuming, that Postfinance wouldn't be weighed with any shackles (loans ban, basic services provision), the company would likely be sold slightly north of its capital value. The government's balance sheet would be relieved significantly and the capital base of Post and the state strengthened.
Such a legislative move would have to be prepared with such conceptual specifications so that a consultation procedure would return a positive response. Also, there are alternatives that would very likely create a bigger benefit for citizens.
The numbers need to validated and the options included in the discussion in a transparent fashion. That's how good decisions are arrived at. Things are urgent though. Otherwise, Postfinance will become a showcase for how not to treat state-owned assets.
Philipp Weckherlin has a Ph.D. in Economics and is an expert on public governance. He founded CE Asset Management in 2003 together with Markus P. Hepp. CE Asset Management today is called Hérens Quality Asset Management. It is a pioneer in the field of systematic, international quality-stock investments.
