Moody’s Investor Service, the global rating agency, has raised its outlook on Switzerland’s banking industry to stable from negative, encouraged by the rapid recovery in the Swiss economy, likely changes to bank secrecy laws and improving profits.

However, Moody's said it retained a negative outlook on the ratings for UBS and Credit Suisse, the Alpine state's two biggest banks. Moody's said this stance reflected "continued competitive, capital, and profitability challenges in their trading and investment banking businesses; the potential for lower systemic support for these banks; and for UBS, the need to further rebuild client confidence within its wealth management business".

The rating agency said the Swiss economy has been less severely affected by the global credit crisis than many other European nations, which was a factor in its more positive view on the banking sector there.

“We therefore expect continued solid economic growth with very low unemployment during the outlook horizon. Together with solid government finances, this contributes to an overall stable operating environment for banks,” the agency said.

However, the improving outlook is hampered by the low margins at domestic banks and a risk that the asset quality of some banks could deteriorate, affected by developments such as overheating in parts of the regional property market and the headwinds caused by the strong Swiss franc on exporters.

"Profitability for the overall banking system has improved and is at a sustainable level, supporting the outlook change to stable," explains Carola Schuler, a managing director in Moody's Financial Institutions Group.

Swiss-based wealth managers continue to experience money inflows, as strong business growth from emerging market clients and international branches more than offset some outflows from European clients, the report said.

On the bank secrecy issue, Moody’s said negotiations between the UK and Germany on withholding tax for private bank clients will be good for the Swiss banking system as they reduce some uncertainty over changes to bank secrecy while safeguarding the core principle of client confidentiality.

It went on to warn, however: “Developments in banking secrecy rules remain uncertain and may weigh on the Swiss private banks, as the exact conditions of the withholding tax for UK and German private banking clients remain to be finalised. It is also unclear whether other European countries will follow this example.”