The Swiss National Bank casts a look over the country's two largest banks which are on different courses, although the capital position of both has improved.

Even with economic recovery and favorable financial conditions through the end of last year, Credit Suisse and UBS were on very different paths in terms of profitability, the Swiss National Bank (SNB) said in its Financial Stability Report 2022.

While UBS posted a strong increase in profits and a historically high return on assets (ROA), Credit Suisse's ROA was negative, hampered by litigation provisions and a «relatively low» operating performance. To be sure, the ROA was impacted in part after Credit Suisse reduced its risk exposure about the collapse of the Archegos hedge fund.

Both banks had at least one positive thing in common as losses related to the war in Ukraine were «very small»  thanks to their limited exposure to Russia and Ukraine, the SNB said.

Market-Based Indicators

In terms of market indicators, the performance of both diverged when measured by credit default swap premiums and share prices. 

And while the war and sanctions against Russia caused the market's assessment of globally active Swiss banks and their peers to deteriorate, «the market had already been drawing a stronger distinction between the two banks following the Archegos losses, and it continues to have a more positive assessment of UBS than Credit Suisse,» the SNB said.

Capital Position

The capital position of both institutions improved since the previous stability report, with the capital ratios of Credit Suisse and UBS exceeding the requirements under Switzerland's «too big to fail» (TBTF) regulations and are above average by international comparison. For Credit Suisse, the improved capital position is attributable to a capital increase and a reduction in exposure, while at UBS it is due to retained earnings.

Because of such capital buffers, both banks are well placed to face the more challenging environment prevalent since the end of 2021 and able to cope with the risks stemming from the war in Ukraine.

The direct impact of the war should continue to be limited given the comparatively low exposure of Credit Suisse and UBS to Russia and Ukraine.

Loss Potential

Still, the SNB’s stress scenario analysis shows the loss potential for both banks remains substantial, including under the two scenarios offering a benchmark for significantly worse-than-expected economic and financial effects of the war in Ukraine, i.e. the protracted euro area recession scenario and the interest rate shock scenario.

Domestic Banks

The SNB’s stress scenario analysis suggests most domestically focused banks’ capital buffers remain sufficient to cover the loss potential stemming from their exposures. This applies both in a scenario involving a protracted euro area recession, and one involving risks materializing on the Swiss mortgage and real estate markets in an interest rate shock scenario. 

The central bank said it will continue to monitor developments on the mortgage and real estate markets closely, and to assess whether further measures are necessary to mitigate the risks to financial stability.