Investment Strategies

Fitch Warns Swiss Private Banks Continue To Face Headwinds; France Downgraded From Top Spot

Natasha Taghavi, Reporter, London, 19 July 2013


In a recent report, Fitch Ratings said that Swiss private banks will continue to face headwinds from challenging markets, increasing regulatory costs and elevated litigation risk, while at the same time the rating agency downgraded neighbouring France's long-term foreign and local currency issuer default ratings to "AA+", from its top "AAA" status.

Private banks in Switzerland continue to operate in a challenging environment, with low transaction-based revenues and a significant cash bias in client portfolios putting pressure on gross asset under management margins, Fitch said.

On 5 July 2013, Fitch affirmed three Swiss private banks, Pictet & Cie (AA-/Stable/aa-), Lombard Odier & Cie (AA-/Stable/aa-) and EFG International AG (A/Stable/a) as part of a peer review, and given the three rated Swiss banks' solid franchises and the scalability of their business models, any improvement in their operating environment should translate into a gross margin recovery and better profitability, the agency said.

However, changing regulatory requirements, notably regarding European and US cross-border private banking, remain among the banks' main challenges. All three banks are trying to mitigate the pressure on Western European offshore private banking by improving their non-European private banking, European onshore and to some extent asset management franchises. While pressure on Western European offshore private banking is likely to continue in the medium term, the three Swiss banks' size and diversification make them better placed than many peers to withstand this pressure, the firm said.


Meanwhile, Fitch’s recent downgrade of France’s "AAA" rating indicates how such pressures are affecting other European countries. However, despite the loss of its "AAA" status, Fitch said that for France, “the outlook is stable”, as the country’s strong credit profile is reflected in its "AA+" rating. This, the rating agency says, is due to France's wealthy and diversified economy and political stability entrenched by strong and effective civil and social institutions.  Fitch judges France’s financing risk to be very low, reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by its status as a large benchmark eurozone sovereign issuer.

Given tighter regulation and the banks' increasingly global footprint, Fitch believes litigation risk will remain high. However, sound risk management and compliance practices at all banks support Fitch's assumption that litigation costs will remain of a manageable size and absorbable by the banks' still adequate operating profitability.

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