Downgrading Of Swiss Bank Dents Prestige
THE venerable Swiss bank Credit Suisse had been on Moody's "watch list" since October 1991. But the Jan. 28 news that Moody's had downgraded Credit Suisse's long-term debt rating from Aaa to Aa1 hit Switzerland like a bomb.Skip to next paragraph
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The exclusive club of banks boasting triple-A ratings by all major rating agencies, including Moody's, Standard & Poor's, and International Bank Credit Analysis (IBCA), had lost a member.
Four AAA banks remain, two of them Swiss: Union Bank of Switzerland (assets $167 billion), and Swiss Bank Corporation ($138 billion). Moody's also announced that it was placing Swiss Bank Corporation on its "watch list." Though the press has exaggerated the significance of the downgrading, Moody's did identify the factors that are raising the pressure on all Swiss banks and on Switzerland as a financial center.
Moody's cited a "potential for deterioration of the quality" of the bank's assets. Indeed, Credit Suisse, with assets of $107 billion, recently had some large problem loans, among others to Brent Walker, a travel and leisure company, and Polly Peck, a diversified group based in Britain. Roughly $25 billion of Credit Suisse's assets are real estate related. Given the stagnating real estate market, Moody's saw potential risk.
The Swiss Bank Corporation confirmed that it holds $130 million in loans to United States retailer R. H. Macy & Co. which has applied for Chapter 11 bankruptcy protection. It is also owed $118 million by the crumbling Robert Maxwell empire.
David Andrews, an analyst with IBCA, says in spite of these problem loans, "the asset quality of the Swiss banks is still very good by any international standard. The big question mark is if these assets will deteriorate." Mr. Andrews adds that "the great strength of the Swiss banks lies in their high capital to asset and high capital to risk ratios."
In 1990, the banks saw a major slump in their profits due to a downturn in the securities market in Switzerland. There is some evidence that banks have recovered, but higher loss provisions did have to be made in 1991.
As of this year, deregulation is getting rid of the banking conventions through which the large banks fixed prices for services offered. This exacerbates the competition for domestic clients in a country which, with 625 banks, is already overbanked.
The stamp duty, up to 3 percent on all securities transactions, is criticized by investors but is a valued source of $1.4 billion in government revenue. A popular election last year failed to abolish it, but a plebiscite is due in 1992.
"The stamp duty has a negative impact on Switzerland as a financial center and on the smaller banks," says Georg Soentgerath, an official of Credit Suisse. "The big banks can easily operate outside Switzerland."
Credit Suisse manages its mutual funds from Luxembourg which - unlike Switzerland - is a member of the European Community and offers tax advantages for investment funds. At least partly because of the stamp duty, 15 to 30 percent of blue-chip Swiss shares are traded in London.
"There are currently over 160 foreign banks operating in Switzerland," says Mr. Soentgerath, "and this competition has gotten stronger." But more importantly, Zurich risks losing its unique position as financial centers blos-som in neighboring countries.
"Formerly," Soentgerath says, "Switzerland was one of the few countries combining stability, free-capital flow, and a multilingual work force." Other countries offer the same framework today.
Are the Swiss banks any weaker than they were several years ago?
"Depends which ones you are speaking of," says Andrews of IBCA. "The Big Three are as strong as ever and are excellent in international comparison. IBCA is not giving them any downgrading at this point." Though the image of the hallowed Swiss banks may have suffered slightly, "Aa1 is still an extremely good rating," Andrews says.