Sector Report - Performance in Swiss Retail Banking

Based on the published annual reports until 2022, we assess the following questions:

How are the valuations of listed Swiss retail banks developing?

Since 2016, the shares of listed Swiss retail banks have generated an average total shareholder return p.a. of 7.1%, 40 basis points above the annual return of the SPI over the same period.

• While Swiss retail banks significantly outperformed the SPI in 2022, the SPI generated a slightly higher return in the first eight months of 2023 (unweighted view).
  > The positive effects of the new interest environment have not yet led to an outperformance of Swiss retail bank stocks versus the overall market.

• The median M/B ratio declined from 0.88 in 2021 to 0.83 in 2022.
  > The current market valuation reflects the market’s expectation that, on average, the return on equity will be below the cost of capital.

• However, the valuation of the current operating performance in 2022 was on average higher than the stock market price.
  > Investors continue to consequently expect a decline in operating performance.

How profitable are the Swiss retail banks?

The average cost/income ratio of Swiss retail banks improved from 61.7% in the previous year to a remarkable 60.8% in 2022.

• In a multi-year comparison, small retail banks (total assets < CHF 10 billion) recorded a significantly higher average cost/income ratio compared to than large retail banks. At times, the difference was over 10 percentage points.
  > Large retail banks can profitably realize size-related advantages.

• The lower cost/income ratio of large retail banks compared to smaller institutions is due to better profitability of the interest and commission business among other things.
  > In the last two years, large retail banks were able to achieve a significantly better interest margin compared to smaller institutions.

Do retail banks create economic value?

While a large proportion of Swiss retail banks was able to earn the risk-adjusted cost of capital on regulatory capital, only 9 out of 54 retail banks were able to do so in the short- and long-term in relation to total equity.

• Large retail banks found it significantly easier to earn the cost of regulatory and total equity.
  > On average, the excess return on regulatory capital of large retail banks was 3 percentage points higher than that of smaller institutions.

• Increasing cost efficiency was the main driver of economic value creation last year.
  > To improve economic value creation, improving profitability was the key to success at both large and small retail banks.

• In terms of total equity, only a few retail banks were able to create economic value in the short- and long-term.
  > Only 17% of the owners of Swiss retail banks can be satisfied with their economic value creation.

Which institutions achieved the highest economic value creation?

What are the trends and challenges facing Swiss retail banks?

CS/UBS: Confidence in financial institutions has taken a hit, and new regulations are expected to be introduced. The challenge of Swiss Retail Banks is to strengthen the confidence of the customer base and position themselves as an attractive alternative to the new UBS.

Interest rate turnaround: Driven by the new interest environment, half-year results of banks show a significant improvement in interest differential business. However, rapidly and sharply rising interest rates are having a negative impact on the affordability of loans and may lead to an increase in loan defaults.

Volatile environment: The current economic uncertainties lead to increasing volatility in the retail banks commission business. The tense macroeconomic situation also has the potential to have a negative impact on the mortgage market, which is extremely important for retail banks.

‍

IFBC Sector Report - Performance in Swiss Retail Banking (publication in German)