Swiss private bankers believe high levels of capital will help protect them from recession. The question now is whether clients and investors agree.

Thomas Meier, the Swiss private banking veteran chairing VP Bank, is confident that having ample amounts of capital will be an important factor for clients and investors in the coming months, he indicated to media and analysts at an event held on Wednesday (17 August).

At the same event, he rejected suggestions from market observers that future profits be returned to shareholders through buybacks.

«If you cut to the bone now, you won't be in a position to benefit from the recovery,», Meier indicated.

Glory Days Are Over

It is naturally a matter of some debate as to whether regulatory capital requirements are enough to render Swiss banks immune to future crises, at least enough so that they do not need to have taxpayers come to their rescue again. In any case, the Swiss National Bank, as the guarantor of the country's financial stability, gave the banking sector a positive report card in June. The capital quotas of major banks Credit Suisse and UBS were seen as above average by international comparison.

And most of the other domestic banks were in a position to weather any storms that came to their way, such as a prolonged recession in the eurozone or another interest rate shock, the SNB indicated in its report then. 

That is a stark contrast with the share prices of the Swiss and Liechtenstein-based private banks. The market believes the glory days are over and analysts have been complaining about it to anyone within earshot. UBS is down 14 percent since the start of the year, Zurich-based investment house Vontobel has fallen 23 percent, private banking pure-play Julius Baer is off 16 percent while Credit Suisse has declined more than 40 percent. Even VP Bank's Tier 1 capital ratio, at a very robust 22.8 percent, still didn't keep its share price from falling by about 10 percent since the start of the year, a very modest outperformance of the broad-based Swiss Performance Index (SPI), which is down 12 percent over the same timeframe. 

Little New Money

Both UBS and Credit Suisse are currently trading below book value. Ostensibly, investors are not paying much heed to any so-called safety buffer held by Swiss wealth managers.

The picture from overseas clients also looks dim. After the records of 2020 and 2021, the first half slowed down significantly. Net new money inflows dried up, much as they had before the pandemic, while the levels of assets under management fell as a result of the correction in the equity markets. Even a house as successful as Vontobel had to report significant declines in practically every line item in its last earnings report. Switzerland's status as a safe haven didn't seem to have much of a cachet in the first half.

Billions for Buybacks

Both Switzerland and the eurozone are not yet in a recession while the US already appears to be in a technical recovery. If the economic picture darkens significantly, as many private bankers expect, the solidity of balance sheets will be sorely tested.  Despite the tense environment, a number of private banks have decided to continue to gift shareholders with buybacks instead of retaining their profits.

UBS wants to buy back shares worth about $5 billion by the end of 2022. Julius Baer announced it would buy back slightly more than $400 million. That, despite a drop in Tier 1 capital to 15 percent in the first half of 2022 from 16.4 percent at the end of 2021.

Credit Suisse as the Exception

Credit Suisse stands out in all this. It had to cut the levels of risk-weighted assets and strengthen its capital buffers. In the meantime, it is operating with a Tier 1 capital ratio of 13.5 percent and it indicates it expects the ratio to remain between 13 and 14 percent for the rest of this year, meaning that they may even decline slightly in the future.