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S&P Affirms Ratings on Swiss Banks

CS UBS

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Standard & Poor’s Rating Services (S&P) has reiterated its ratings on fourteen Swiss banks including UBS AG (UBS - Analyst Report) and Credit Suisse Group (CS - Snapshot Report). S&P affirmed the ratings on expectations of a full-fledged financial support from the Swiss government to these systematically important banks owing to the recent unfavorable real estate pricing trends.

As per S&P, many Swiss banks have sizeable mortgage portfolios. With the unfavorable pricing trend lurking, these banks are at a risk of facing substantial losses if prices continue to mount.

S&P states that although the prices of residential real estate has pushed north since 2009, the average hike has remained in line with the earlier evaluation. The same holds true for real estate loan growth trajectory. Further, the rating agency expects Swiss regulators’ initiatives on mortgage lending to reduce the number of properties sold, leading to a sharp drop in private sector lending growth. Also, this will result in a fall in the property prices.

S&P anticipates a dip in housing prices to continue in the near term, since chances of correction in the property prices are very unlikely. This will sustain the demand for properties along with several other factors including population growth owing to immigration. S&P is of the idea that the traditional risk and lending culture of several Swiss lending institutions will also help to alleviate the risk of a housing price bubble.

S&P has maintained a ‘Negative’ outlook on nine Swiss banks for the same reason – exposure to real estate loans. At the same time, the remaining five banks received a mixture of outlooks from S&P due to subdued dependence of these on domestic real estate exposure and several other bank-specific factors.

S&P maintains a ‘Stable’ outlook on UBS given the restructuring of its expansive investment bank division and risk profile reduction. While, for Credit Suisse, uncertainties relating to its operations stemming from international pressures on cross-border tax collection along with sluggish macroeconomic backdrop and stringent regulatory landscape resulted in a ‘Negative’ outlook from the rating agency.

We believe that S&P’s rationale for affirmation of ratings is well justified. However, it must be mentioned the rating agency may put the ratings outlook on these banks for possible downgrade revision if the property prices do not decline. Also, it is of the opinion that eventually Swiss economy would become vulnerable to the economic turmoil in Europe and that would be another reason for downward revisions.

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