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Swiss banks hammered as earnings face hit from currency surge

[LONDON] Shares in Switzerland's two big banks UBS and Credit Suisse slumped as much as 15 per cent on Thursday after a massive strengthening in the Swiss franc raised the threat that reported earnings will be hit hard.

The Swiss National Bank (SNB) shocked financial markets by scrapping a three-year-old cap on the franc, sending it soaring nearly 30 per cent against the euro. The SNB also cut interest rates, which were already negative, to minus 0.75 per cent.

Analysts said that both factors could dent profits at the banks. Swiss banks derive much of their earnings overseas, which translates into lower reported earnings in francs, and have a greater share of costs in francs.

"We estimate that the sharp Swiss franc appreciation will potentially negatively impact forward earnings by about 7-10 per cent. With interest rates going into deeper negative territory, there could be further margin pressure," Citi analyst Kinner Lakhani said.

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Credit Suisse shares were down 10.6 per cent at 20.75 Swiss francs and UBS was down 10.8 per cent at 14.88 francs by 1414 GMT. Both had slumped by more than 15 per cent at one stage, which dragged Credit Suisse shares to a two-year low. Julius Baer shares were down 12.4 per cent.

A 10 per cent appreciation in the Swiss franc against the US dollar would have knocked 277 million francs (US$271 million) off Credit Suisse's pretax income in the first nine months of last year and a 10 per cent appreciation against the euro would have hit it by 180 million Swiss francs, the bank said in its third-quarter results.

"The appreciation of the Swiss franc in particular and exchange rate volatility in general have had an adverse impact on our results of operations and capital position in recent years and may have such an effect in the future," it warned.

About 19 per cent of Credit Suisse's revenue and 27 per cent of its costs were in Swiss francs last year. About 69 per cent of revenue was in US dollars and euros, compared with 52 per cent of expenses.

Next year only 20 per cent of Credit Suisse's earnings, 25 per cent of UBS's and 14 per cent of Julius Baer's are expected to be in Swiss francs, analysts at Barclays estimated.

Adding in the impact of higher costs - especially in wealth management - UBS could take a 14 per cent earnings hit, Credit Suisse 15 per cent and Julius Baer 30 per cent, Barclays said.

On the flipside, Swiss banks' capital and leverage ratios should receive a slight lift from the currency moves.

The amount of their capital in francs would decrease, but their assets would go down by a greater amount (as they have more assets in overseas currencies), which would improve capital ratios.

UBS has said that a 10 per cent appreciation of the Swiss franc against other currencies would improve its common equity capital ratio by 15 basis points.

Credit Suisse has said that a 10 per cent appreciation against the US dollar would improve the bank's core capital ratio by 10 basis points and its Swiss leverage ratio by 3.2 basis points.