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Smaller Swiss private banks most exposed to SNB policy shock
[ZURICH] As the dust settles after Switzerland's shock abandonment of its currency cap earlier this month, the country's smaller private banks have emerged as possible casualties of the decision and an associated change in interest rate policy.
In a bid to discourage investors from piling into the safe-haven Swiss franc, which shot higher after the removal of the cap, the Swiss National Bank (SNB) decided to charge even higher so-called negative interest rates as of Jan. 22 on some of the banks who deposit overnight funds with it, after first saying it would introduce negative interest rates in December.
This means that, instead of receiving interest on that money, affected banks have to pay the SNB for looking after it, giving them a decision to make on whether to pass that charge on to clients.
The move is potentially a competitive hit to the smaller banks, as Switzerland's biggest universal banks UBS and Credit Suisse are spared because of the detailed working of the policy.
Although deposits greater than 20 times individual banks'minimum reserve requirement are being charged a rate of minus 0.75 per cent, UBS and Credit Suisse are exempt because their lending activities mean they need to store more cash with the SNB.
Many of Switzerland's smaller, often family-run private banks, who do not put deposits to work by lending, are deemed less risky, so have lower reserve requirements and therefore lower exemption thresholds.
"These private banks are negatively impacted by this fact that they don't have any major lending business," Patrick Schwaller, partner at EY Financial Services Switzerland, said.
UBS and Credit Suisse have said they plan to charge institutional and large corporate clients for some accounts.
Switzerland's private banks, already confronting shrinking margins and growing international competition, now face the tricky decision of whether or not pass on these negative interest rates to clients in the form of deposit charges.
"If we would pass on these interest rates to our clients and other banks would not do so, then the money will move to these banks who do not charge negative interest rates," Christoph Gloor, chairman of the Association of Swiss Private Banks (ASPB) and co-owner of Basel-based private bank La Roche, said.
Some banks have already said they will pass on the negative interest rates to clients, but many are still evaluating their options.
The strong appreciation of the Swiss franc, sparked by the SNB's decision to end its currency cap against the euro, will put a further squeeze on these banks, as much of their clients'holdings are in foreign currencies.
"This means, with the fact that these currencies go down, also the assets under management goes south," Mr Schwaller said."As a consequence, the fees they earn on that, and that's the major source of income, is negatively impacted by 15 to 20 per cent if currencies remain at the level they are at right now."
Some private bankers are confident Swiss banks' reputation for safety and reliability will allow them to cope with negative interest rates. They say the ultra rich will still be happy to cough up a fee for the peace of mind provided by a Swiss account.
Data published on Monday showing the amount of cash commercial banks held with the SNB at the end of last week could support the notion that, in an uncertain environment, Switzerland's relative stability remains attractive.
Others say negative interest rates, coupled with the strong franc, are yet another headache for the private banks dotted around Lake Geneva and Zurich's Bahnhofstrasse.
The surge in the Swiss currency is also likely to mean banks will look to cut costs, which are mostly denominated in francs, analysts say.
"I am expecting job cuts at private banks if currencies stay around current levels," said Zuercher Kantonalbank analyst Andreas Brun. "The first place banks normally look to cut costs is in the back office, as cutting here means the probability of losing clients is lower."
Julius Baer Chief Executive Boris Collardi, speaking last week as chairman of the Association of Swiss Asset and Wealth Management Banks, said the strong franc would likely hit profitability at many Swiss wealth managers.
This could speed up consolidation in the industry, Mr Collardi said, as institutions are pushed to merge, sell up or shut down.
A spokesman for Julius Baer said the bank is monitoring the market closely but has not decided yet whether or not to pass on negative interest rates to clients.
Mr Gloor said all 10 ASPB members, including Geneva-based wealth managers Pictet and Lombard Odier, had reserves above the exemption threshold, exposing them to negative rates.
Of those facing negative rates, Lombard Odier has said it will charge some private clients to hold Swiss francs accounts. Regional lender Zuercher Kantonalbank, which also has a wealth management business, has also said it will react to the SNB's policy moves by charging a fee on deposits of certain major clients, without elaborating on who that could include.
A spokesman for Lombard Odier declined to comment on the potential impact on the bank's business from negative interest rates and the strong franc.
Cross-town rival Pictet has not yet decided whether to introduce negative rates for clients, a spokesman said. In the case of the strong franc, the spokesman said perspective is needed after the SNB's decision and that the bank would make a more in-depth analysis in coming weeks.
Ultimately, many will follow Lombard Odier's lead, said EY Switzerland Financial Services' Schwaller. "Over time negative interest rates for private clients will be the new reality."