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Competitive dynamics: Low risk

Table 4

Swiss Confederation Competitive Dynamics
 
ROE of domestic banks 10.00
ROE of corporate sector 17.50
System-wide return on average assets for banking sector 0.65
Net interest income to average earning assets for banking sector 0.70
Market share of largest three banks 25.00
Market share of gov't-owned + not-for-profit banks 35.00

The competitive dynamics factor represents the structural implications of the competitive landscape a bank faces within the broader banking industry, and is determined by risk appetite, industry stability, and market distortions.

Risk appetite. S&P considers that the Swiss banking industry benefits from a restrained risk appetite, reflected in a prolonged profitability that is predictable and slightly lower than for other sectors. Exceptional stability stems from the Swiss domestic and cantonal banks, thanks to their focus on basic and low-risk banking products (residential real estate funded by deposits) and advisory-focused private banks. There is observed a very stable return on equity of typical domestic banks of about 10% for the past decade, distorted only by the international investment banking businesses of UBS and CSG.

The average annual change of domestic credit growth has been only about 0.88% of GDP over the past four years, that can be observed in a conservative risk and lending culture almost throughout the domestic banking system with fairly low LTVs, low delinquencies, and historically conservative risk provisioning.

Industry stability. Market shares are relatively stable, and pricing across the risk spectrum shows moderate to high differentiation. Therefore, there was observed sound earnings potential in domestic banks' core products, which has also led to superior RAC ratios via retained earnings. The barriers to entry are quite high, as seen in the very limited presence of foreign banks, which mainly engage in the wealth-management business.

Market distortions. Many Swiss domestic banks (for example, cantonal banks) are government owned with a market share of about 35%. Raiffeisen banks (mutual societies) are not predominantly oriented in providing return on equity. However, usually, either pricing or underwriting discipline prevails, and market distortions are either immaterial or not detrimental to the health of the system. Moreover, Swiss banks' superior profitability has continuously allowed them to become one of the best-capitalized banking systems in the world. It is seen that a very low level of state interference, such as administrative control over deposit and lending rates, or government-directed lending. The impact of nonbank competitors is marginal.

Systemwide funding: Very low risk

Table 5

Swiss Confederation Systemwide Funding
Systemwide domestic core customer deposits/Systemwide domestic loans 78.66
Banking sector net external debt/systemwide domestic loans (1.21)
Systemwide domestic loans/consolidated systemwide assets 32.98
Outstanding bonds and CPs issued by the private sector in the domestic markets/GDP (%) 50.50

The systemwide funding risk score assesses the relative stability of a banking sector's funding sources and its access to alternative funding sources.



Core customer deposits. According the S&P, the Swiss banking system benefits highly from a very stable, high core-customer-deposit base of about 79% of total domestic loans. The key metrics data is massively distorted by that of the Big Two (Banks), which have significantly lower deposit ratios because of large shares of external wholesale funding. All other domestic banks are largely funded by customer deposits. Deposit outflows at UBS during the financial crisis have been largely absorbed by domestic banks, which proved to be highly stable, although global pressure on Swiss banking secrecy has increased in past years.

External funding. S&P usually views cross-border funding as a vulnerable source of bank funding during economic, financial, or liquidity stress. As rating agency suggests, the Swiss banking system has a minimal dependence on net external borrowing. In particular, for the smaller domestic banks, observed a limited need for external funding due to the high customer-deposit base and access to domestic capital markets. Therefore, the ratio of the banking sector's two-year average annual net external debt as a percentage to total domestic loans has been less than zero since 2006, and it was never higher than 3% any time in the past decade. Furthermore, it is considered that the major banks in Switzerland have developed a good franchise among investors in external funding markets.

Domestic debt capital markets. Switzerland's banking system benefits from its access to a "broad and deep capital domestic debt market", underpinned by private sector debt outstanding in the domestic capital markets that has generally exceeded 40% of GDP over the past four years. It was noticed that Switzerland has an active capital market that issues mainly investment-grade debt of medium- and longer-term maturities, if needed.

Government role. The Swiss government has a history of strong willingness to provide liquidity and ample support in times of stress. But under some stress scenarios, government resources might be insufficient for supporting major banks' international operations. Therefore, the government and regulators have designed a framework to minimize future risks under the Basel III "Swiss finish". Systemwide central-bank lending facilities are far reaching and effective, in our view.

 

Used literature:

http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245331911252##


Date: 2015-12-18; view: 868


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