CS Credit Suisse Group

UBS and Credit Suisse struggle as negative rates continue to pressure earnings

By John Letzing 

ZURICH -- Switzerland's biggest banks -- UBS Group AG and Credit Suisse Group AG -- are expected to post downbeat quarterly results later this week, as each struggle amid turbulent markets and increasingly strict regulation.

Among the newest challenges: a tightening squeeze due to the country's negative interest rate policy.

Negative rates aren't new in Switzerland. The Swiss National Bank started the policy in December 2014, and in January of last year it reduced the rate on bank deposits stored at the SNB to -0.75%, where it has stayed since. Central banks in Japan, Denmark, Sweden and the eurozone have also used negative rates, which may boost growth and inflation by weakening demand for their currencies.

In Switzerland's case, the charge only applies to reserves above a threshold that is 20 times the minimum that the lenders are required to hold with the central bank. In the case of UBS and Credit Suisse, this threshold level totals about 85 billion Swiss francs ($86.1 billion).

Data from the SNB show that sight deposits were under the threshold, or not too far above it, for much of last year. But sight deposits Credit Suisse and UBS hold at the SNB have surged well past that amount in recent months, central bank data show. They rose from 52 billion francs in December 2014 to 108.9 billion francs last May, according to the SNB's monthly report.

As a result, the two big banks are on track to absorb a combined amount of nearly 170 million francs in negative interest rate charges over the course of this year if recent trends hold.

The root of the problem for both the SNB and Swiss banks, experts said, is the relentless strength of the franc, which the negative rates policy is designed to blunt. The SNB installed the -0.75% deposit rate the same day, Jan. 15, 2015, that it abandoned a ceiling on the franc's value against the euro, causing the franc to soar.

Since then, the central bank has intervened in currency markets to weaken the franc by buying euros and other currencies from parties including the big banks that are major players in foreign exchange markets -- and then crediting the banks an equivalent amount in francs in their sight deposits.

"In many cases they're just the intermediary," Alexander Koch, an economist at Raiffeisen Schweiz, said of the big banks. "They have to pay the negative interest rates to the SNB, but then they decide how to push through the costs to their clients." To date, the major Swiss banks have only passed on the cost of negative rates to corporate or large institutional clients, by charging them to hold deposits.

A spokeswoman for Credit Suisse, which reports second-quarter results on Thursday, declined to comment. And a spokesman for UBS, which is scheduled to report earnings Friday, declined to comment.

UBS is expected to post a significant decline in profit, while Credit Suisse is forecast to report its third quarterly loss in a row, amid a restructuring drive underway for nearly a year. Each have become increasingly focused on wealth management -- a business that can be less volatile, and less demanding of the protective capital mandated by regulators, than investment banking.

UBS and Credit Suisse aren't alone in feeling the pain of negative rates. Smaller Swiss bank Julius Baer Group AG's costs tied to negative interest charged to its central bank deposits amounted to 20 million francs during the first half of this year, it said Monday.

Julius Baer Chief Executive Boris Collardi said much of the problem is the allure of the local currency. "Clients continue to be in love with the Swiss franc," he said.

Executives at UBS have been particularly vocal with their criticism of negative rates. "Because of low and even negative interest rates, we and the whole industry are now presented with a frankly absurd question: do we still really want to take on client assets when doing so costs the bank money -- and when we have to back up liquid assets with an unreasonably large amount of capital?" UBS Chief Executive Sergio Ermotti said in May .

Martin Lüthy, a senior lecturer at ZHAW School of Management and Law, said it's only a matter of time until the big Swiss banks begin expanding the range of clients that they hit with negative interest rates. "I'd expect they'll start now with wealthy clients," Mr. Lüthy said, "and say, if you have more than a half a million in your account, we'll start charging."

Write to John Letzing at john.letzing@wsj.com

(END) Dow Jones Newswires

July 27, 2016 02:47 ET (06:47 GMT)

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