The Swiss zero-rate squeeze on banks could lead to a bumpy ride for the borrowers
Analysts say that banks in Switzerland may look for ways to increase the cost of banking services or credit as they are affected by the introduction of zero interest rates.
After the Swiss National Bank cut its benchmark interest rate to zero in June, the country's borrowing cost was at the lowest among major economies. It was even lower than the European Central Bank deposit rate of 2.0%.
Daniel Geissmann, a banking consultant at zeb, estimates that banks' net interest income could fall by 660 million Swiss Francs ($830m) this year. In 2024, banks will have made around 20 billion Swiss francs.
Geissmann stated that "zero interest rates is the worst case scenario for banks." "The banks lose, because they cannot pass the rate reduction to deposits."
SNB data shows that when interest rates last hovered around 0%, between 2011 and 2015. the net interest margin of Swiss banks fell from 1,4% to just 1.1%, affecting profits.
Geissmann estimates that banks lost nearly 4 billion Swiss francs from 2011 to 2014, though the impact will be lessened this time around because lenders have a lower starting point.
If banks are unwilling to pass on the costs to depositors through sub-zero interest rates, they will have to find other ways to make up the lost revenue.
Martin Hess is the chief economist at the Swiss Bankers Association. He said that credit may become more costly as banks are forced to use costlier funding sources such as capital markets instruments in place of deposits.
He said that the higher costs of mortgages would be passed onto customers and the real economy.
Property
SNB data shows that ultra-low interest rates tends to fuel the demand for property. From 2011 to 2015, house prices jumped by 15%, three times the rate of 2000-2005.
This increased the risk of an overvaluation and a subsequent correction in the real estate market, even though it did not happen last time, said GianLuigiMandruzzato, economist at EFG Bank.
These risks may reappear.
He noted that insurers and pension funds also faced challenges in generating returns to meet their obligations as bond yields plummeted.
UBS economist Maxime Botteron stated that banks could also become more reluctant to lend in the event of a further flattening or inversion of the yield curve with rates at zero.
Stock markets are also affected by the SNB's zero rate. The official rates of the SNB are well below other central banks' rates in Europe and North America. As a result, the shares of Switzerland’s major listed banks have begun to perform worse than their competitors. UBS shares, which face tougher capital requirements following the 2023 acquisition of Credit Suisse by UBS, are only up 2.2% in 2025. Julius Baer shares are down 6.7%, as new management tries to put an end to a recent string of failures.
In contrast, the Stoxx European Banks Index has increased by 29.3% in this year. This highlights Switzerland's underperformance.
The erosion of margins is likely to have the greatest impact on savings and loan banks.
Data from the companies shows that banks like Raiffeisen Valiant, which primarily collects deposits and issues mortgages and whose revenue is derived from interest income, generate over 70% of their revenues.
Outright wealth managers and asset managers such as Vontobel and Julius Baer are less affected, as they only receive around 10% of their income from interest. Diversified lenders such as UBS with about 15%, and ZKB at 54% are in the middle.
Andreas Venditti, Vontobel's banking analyst, said that the impact of zero-rates on banks will depend on the length of time they remain in place.
He said that the problem would get worse if one stayed at zero for an extended period. "Interest margins are higher in Europe, and particularly in the U.S."
(source: Reuters)
