Big banks set to make record profits

Both big Swiss banks can look forward to bumper figures swissinfo.ch

UBS and Credit Suisse, the numbers one and two of Switzerland’s banks, look well on their way to achieving record financial figures this year.

Second-half figures from UBS on Tuesday and last week’s interim report from Credit Suisse have shown that the banks are solid as rocks and can look forward to the future with confidence.

If there is a potential Achilles heel it has to be at Credit Suisse, which when announcing its half-year figures said it had put aside SFr624 million ($495.8 million) for possible litigation risks in the United States.

“We’re very favourable towards the Swiss banks at the moment. We think they’ve put in a cracking performance in the first half of the year and we do expect this to continue,” senior global equity analyst Andy Penman at Barclays Stockbrokers told swissinfo.

First-half net profit at UBS was SFr4.77 billion ($3.8 billion), while Credit Suisse recorded net income of SFr2.83 billion.

Acquisitions

UBS, the world’s largest manager of private wealth, has made more than a dozen private banking acquisitions since the start of last year, cementing its position as the address for wealthy individuals to park their money.

But Credit Suisse is also doing well in its private banking business.

“Both companies should see revenues flowing better in the second half of the year which is typically what happens when we’ve seen a big accumulation of assets under management,” Penman said.

However, he believes UBS could perform a little stronger than its Zurich rival.

“We think that UBS offer a little bit better upside in terms of exceeding expectations within the private banking operation,” he added.

Reaping harvest

Analyst Christoph Ritschard at Zurich Cantonal Bank argues that the major strength at UBS is that it is reaping the harvest of past investments.

“Most of the growth in profits is really coming from businesses that were not there five years ago, so what is very impressive at UBS is that where they are investing, they are really now getting profits,” he told swissinfo.

While the analysts’ pendulum seems to swing in favour of UBS performing better than Credit Suisse, the latter is by no means underrated as it enters a phase of reorganisation.

In the second quarter, Credit Suisse announced that it was taking steps to build an “integrated” bank operating under a new Credit Suisse brand from the beginning of next year.

“You have turnaround potential at Credit Suisse which is one of the key strengths for investors,” Penman commented.

“Expectations remain fairly low into how successful they’ll be with the reorganisation and I do think that offers some good medium-term potential for investors,” he explained.

Cloud

But a cloud has to be hanging over what might be termed “sins” and alleged sins of the past, including litigation involving the collapse of Enron.

Credit Suisse has been grappling with legal charges after the collapse of the technology-stock boom of the 1990s when the US Securities and Exchange Commission and the US Justice Department began investigations.

These probed how investment arm Credit Suisse First Boston allocated shares to investors in initial public offerings under former star banker Frank Quattrone.

Credit Suisse says its reserves now adequately cover potential IPO litigation as well as lawsuits over allegedly biased research.

Analyst Penman in London is cautious. “Whenever you mention the US and litigation risk, you can’t say with any degree of certainty what the outcome is going to be. It is very much up in the air so I think that is a particular potential weakness.”

China

With banks looking around the globe to manage more assets, it is hardly surprising that the big two of Switzerland have joined others in sizing up the potential of China.

UBS said in June it was negotiating with Bank of China (BOC) about a future partnership, adding there was also “the possibility” that it would invest about $500 million to become a strategic investor in BOC.

And Credit Suisse announced at the end of the June that it was opening a representative office in Guangzhou in the south of the country.

“I think both banks are looking towards China. That’s where in the last quarter for example quite a bit of net new money flows came from,” analyst Ritschard said.

“But we have to see that these moves into China are strategic and long-term moves so we should not expect too much too quickly.”

swissinfo, Robert Brookes

Key facts

First-half net profits:

UBS – SFr4.77 billion ($3.8 billion)
Credit Suisse – SFr2.83 billion

The share price of UBS has risen by about nine per cent this year.
Credit Suisse stock has increased by more than 11 per cent.