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Credit risk in the economy: Low risk

BICRA Overview

According to the Standard and Poor’s ratings the Swiss banking industry is supported by its sizable and very stable customer-deposit base. Pure domestic Swiss banks have not loosened credit standards in recent years, thanks to sound earnings potential from core products.

Economic Risk

S&P gives to economic risk score for the Swiss banking system is '1', based on assessment of three main factors: economic resilience, economic imbalances, and credit risk in the economy, all of which our criteria define.


Economic resilience: Very low risk

Table 1

Swiss Confederation Economic Resilience
Macroeconomic indicators
Nominal GDP (bil. $)
Per capita GDP ($) 76,259
Real GDP growth (%) 1.80
Inflation Rate (CPI) 0.23
Change in general government debt as % of GDP (1.17)
Net general government debt as % of GDP (%) 7.73

An assessment of economic resilience is based on the underlying stability of an economy and its resistance to adverse economic developments.

Economic structure and stability. As S&P states Switzerland's economy benefits from its very stable past and projected GDP growth, with very limited volatility. Its GDP per capita, estimated at more than $76,000 in 2011, is among the highest in the world. And we can view the Swiss economy to be resilient, highly diversified, competitive, and flexible, underpinned by a demonstrated high degree of market orientation.

Macroeconomic policy flexibility. S&P consider that, the Switzerland’s government's finances are very robust. The country's strong fiscal framework and the unconventional monetary measures taken helped Switzerland withstand the economic and fiscal fallout from the financial crisis without undermining the country's extremely strong creditworthiness, which still rated at AAA/Stable/A-1+, as S&P have done since they assigned the ratings in 1988.

While the Swiss franc is regarded as a safe haven--not only since 2008, the Swiss National Bank has implemented a floor exchange rate of Swiss franc (CHF) 1.20 to the euro since September 2011, which rating agency expect to sustain in order to preserve the Swiss economy's competitiveness. And currently it is not seen this as likely, owing to the unfavorable global economic outlook and in particular the possibility of a euro zone recession in 2012.

Political risk. S&P suppose that political risks are minor, reflecting a political environment in Switzerland characterized by a stable, consensus-based system, with a long history of policy continuity. At the same time, we believe that the same inclusive political system tends to slow decision-making.



Economic imbalances: Very low risk

Table 2

Swiss Confederation Economic Imbalances  
  Annual change in domestic credit private sector & NFPEs as % of GDP 2.53
  Annual change in residential housing prices (real): national 4.01
  Annual change in commercial real estate price index (real) (%) (0.78)
  Annual change in equity index (inflation-adjusted) (%) (8.00)
  Current account balance as % of GDP 13.68
  Net external debt as % of GDP (148.03)

The economic imbalances factor focuses on imbalances that affect financial institutions, such as credit-fueled asset-price bubbles and persistently lopsided current account flows.

Expansionary phase. Rating agency believes that the Swiss economy remains in an "expansionary phase", as reflected in a trend of real growth in private sector debt and house prices over the past several years.

Private sector credit growth. S&P considered that the risk of a credit-fuelled real estate price bubble to be very low, reflecting a very low credit growth of about 0.88% to GDP over the past four years, although it was noted that this growth partly reflected with contraction in GDP in 2009.

Real estate prices. Although residential real estate prices have risen at a higher pace since 2009, the increase is much smaller than that seen in some other Western European countries in precrisis times. Nevertheless, here observed some signs of overheating, specifically in tourist areas and economic centers. However, high-priced real estate is mainly being purchased by foreign investors, who use such investments because other investment opportunities are limited. It can be assumed that these purchases are largely not financed by Swiss domestic banks, and in fact even completely paid in cash.

Nevertheless, the price increase observed over the past years represents the main risk for the potential weakening of the assessment of the "economic imbalances" score. Currently there are no expectations of the rise in real estate prices to halt or even reverse, but we expect the increase to take a slower pace in the medium term. Furthermore, it is considered that the risk of a sharp correction is low, because of robust demand for housing, not only in light of immigration-driven population growth relative to a limited supply of new stock, but also because of the country's sound economic outlook.

In contrast, commercial real estate price growth was slightly negative over the past years, which as the P&S considers is neutral to our overall assessment.

Equity prices. The average annual development in inflation-adjusted equity prices does not affect the BICRA score, because the national equity price index (Swiss market index) has even decreased for the past two years. S&P suppose that the trend in equity prices does not indicate in general any significant additional burden for economic imbalances in Switzerland, as they think that most domestic banks have very limited direct exposure to stock markets, although there is some indirect exposure through wealth- and fund-management businesses, some of which the own banks.

Current account and external debt position. Switzerland's external debt position does not exacerbate the economic imbalances, because the country is a very solid net external creditor, a position it has maintained over the past decade. Significant net external assets reflect persistently high current account surpluses, which expected to remain at about 10% of GDP over the next few years, thanks to surpluses in the trade, service, and interest balances.

Credit risk in the economy: Low risk

Table 3

Swiss Confederation Credit Risk In The Economy  
  Per capita GDP ($) 76,259
  Domestic credit private sector & NFPEs as % of GDP 177.14
  Household debt as % of GDP 111.98
  Household net debt as % of GDP (93.55)
  Corporate debt as % of GDP 85.93
  NPAs as % of total loans (year-end) 0.90  
  Foreign-currency lending (% of total lending) 38.9  

The given credit risk score summarizes a banking sector's credit risk relative to its exposure to households and companies, and to the sovereign. We assess credit risk largely by looking at private sector debt capacity and leverage, lending and underwriting standards, payment culture and rule of law, and sovereign government credit stress.

Private sector debt capacity and leverage. The assessment that credit risk in the economy is of "low risk" reflects that credit losses are likely to remain low. S&P believes that comparatively high private sector credit (estimated at 177% of GDP at year-end 2011) is mitigated by three factors:

1. According to the previous analysis of S&P Switzerland has a significantly financially stronger household sector (with estimated $76,000 GDP per capita as of year-end 2011) than a number of peer countries'. As a result, Swiss financial wealth ranks among the highest worldwide. In addition, was taken into account the fact that households are able to deduct interest to be paid on residential Swiss mortgages from their income taxes. This leads to comparatively high private sector credit levels. Without this feature, our debt ratio would likely be much lower. Moreover, Swiss mortgages are highly collateralized and it is observed through very limited unsecured lending. Finally, household financial assets which are broadly allocated among the Swiss population--are about double the country's debt.

2. Besides, the Swiss corporate sector is also significantly stronger compared with a number of peer countries', as seen in the near lack of increase in corporate bankruptcies during the recent crisis, and a still very low unemployment rate of about 3.3% for year-end 2011.

3. Finally, we do not envisage high concentration risks in domestic banks' loan books. Domestic lending to small and midsize enterprises is highly collateralized--in most cases by real estate--and we observe negligible construction lending.

Lending and underwriting standards. S&P says that the share of new mortgage lending that is above 80% of loan-to value (LTV) ratio is marginal. Domestic banks' underwriting standards are based on multiple factors, such as the amount of private net income to be used for household debt service based on a potentially much higher interest rate environment, or a conservative calculation of collateral values using haircuts on official house prices, flanked by superior market knowledge of most domestic banks.

Payment culture and rule of law. It is seen that Switzerland's legal framework as very effective, fair, and predictable. It supports creditor rights so that creditors are able to recover collateral without inordinate delays in the event of foreclosures. Laws are clearly defined and parties adhere to them to a high degree. Thus observed very low levels of corruption, which is also indicated by a very beneficial World Bank governance indicator of 1.88.



Date: 2015-12-18; view: 491

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