Swiss banks low risk but face market saturation, says Moody's

The two-tiered Swiss banking system, split between global giants Credit Suisse Group (CGS) and UBS at one level and smaller regional and private banks at another, continues to exhibit comparatively low risk levels, said Moody’s in a report on Swiss banks. But the maturity and saturation of the domestic banking market and rising production costs could cap further earnings growth, the rating agency warned.

Due to relatively low risk levels, asset quality for Swiss banks has not been an issue, but further economic deterioration in 2003 may translate into higher, albeit still manageable, risk provision charges, said Moody’s. Additionally, the gradual saturation of the Swiss banking market could cap domestically generated revenue for all banks in the longer run. Moody’s anticipates reducing costs and effective efficiency gains will be a key rating driver.

Moody’s also noted that although both CSG and UBS have been exposed to the downturn in equity markets through their investment banking and wealth management activities, their results have been showing increasing divergence since late 2000. CSG has been hit harder by exposure to ‘fallen angels’ - companies that have lost their investment grade status. “Moreover, CSG has been hit by the large equity losses suffered by its insurance affiliate Winterthur,” said Alexandra Sleator, senior vice-president at Moody’s and author of the report.

On Tuesday, fellow rating agency Standard and Poor’s lowered the long-term counterparty credit rating on CSG to ‘A’ from ‘A+’ with a stable outlook. S&P also lowered its insurer financial strength and counterparty credit ratings on Winterthur Swiss Insurance to 'A' from 'AA-' with negative outlook. S&P credit analyst Diane Hinton said the rating actions are based on CSG’s continued poor consolidated operating performance and capitalisation, which has been substantially affected by poor investment performance and capital needs at Winterthur.