By John Letzing
ZURICH--The market value of Switzerland's biggest banks crumbled
after a surprise decision by the central bank to do away with a cap
on the country's currency.
The Swiss National Bank's move Thursday to ditch a long-standing
policy of maintaining a limit of 1.20 Swiss francs per euro
suddenly exposed the country's big banks to relative declines in
the value of both the euro and U.S. dollar--currencies in which
lenders including UBS AG and Credit Suisse Group AG derive much of
their earnings. As European trading ended Thursday, the euro had
fallen to about 1.05 francs. The U.S. dollar also fell sharply
relative to the franc.
The central bank had pledged for years to maintain the cap to
curb the value of the franc, keep Swiss-made products affordable
and facilitate Switzerland's export-driven economy. Another
potential negative: The bank said it would raise the rate charged
on overnight deposits by the big lenders that exceed a certain
amount.
The hundreds of smaller, private banks that dot
Switzerland--already under duress--may also suffer from a potential
decline in dollar- or euro-denominated income. They will have fewer
francs to cover their costs when they repatriate their
earnings.
Meanwhile, the portfolios they maintain for wealthy clients
could suffer from declines in the value of those currencies.
"It's bad for the whole banking sector," said Andreas Ruhlmann,
an analyst at IG Bank.
Shares of Zurich-based UBS, the country's biggest bank, fell
nearly 12%. Credit Suisse's shares were down almost 11%. The stock
moves shaved a combined 11.7 billion francs ($11.5 billion) from
the two banks' total market value, nearly equivalent to the gross
domestic product of Albania.
Representatives for the two banks declined to comment.
The Swiss Bankers Association, the industry's lobbying group,
said in a statement that it expects the SNB to now actively prevent
a severe run-up in the value of the franc. Lombard Odier Group, the
closely held, Geneva-based private bank where Patrick Odier,
chairman of the Swiss Bankers Association, serves as senior
managing partner, declined to comment through a spokesman.
According to Barclays PLC research, UBS is expected to derive
75% of its profit next year in currencies other than the franc,
while Credit Suisse is pegged to make 80% of its profit in nonfranc
currencies.
Credit Suisse has said previously that 27% of its total expenses
during the first three quarters of last year were in francs,
compared with 19% of its net revenue in the period.
Analysts at Morgan Stanley said in a note that the SNB's move
may shave as much as 24% from Credit Suisse's earnings per share,
and as much as 16% from those reported by UBS. The analysts added
that they are now more certain that Credit Suisse will cut its 2014
cash dividend from the 70 rappen, or hundredths of a franc,
designated for the prior year.
In addition to dropping its currency cap, the SNB said it is
raising the rate charged on deposits from banks held overnight to
0.75% from the 0.25% level established last month.
Both big banks are required to hold a certain amount of funds at
the central bank, though the lenders said last month that their
deposits weren't above a threshold that would trigger the
charges.
The SNB said Thursday that it is maintaining the current
threshold, which is 20 times the minimum amount each bank is
required to place on deposit.
While smaller, private Swiss banks may be less affected by the
new deposit rate, they may suffer more from the SNB's scrapping of
the currency cap, according to Barclays. A larger proportion of
their operations and costs are denominated in francs, while managed
assets and revenues are largely in dollars or euros.
Julius Baer Group AG, a Zurich private bank, may derive 87% of
its profit next year in currencies other than the franc, according
to Barclays.
Shares of Julius Baer fell more than 11%. A spokesman declined
to comment.
Write to John Letzing at john.letzing@wsj.com
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