Does size matter for bankers?

Credit Suisse seems to be showing the way out of the current financial crisis AFP

Earlier this year Credit Suisse overtook UBS as Switzerland's "biggest bank" in terms of market capitalisation, or the value of all its shares combined.

But just how do you properly judge the size of a bank and – apart from bragging rights – does it really matter how much a financial institution is worth when there is absolutely no intention of selling up?

Credit Suisse effectively became the most expensive Swiss bank to buy in early summer of this year and since then it has increased this margin on UBS as share growth outpaces its rival. On Friday, Credit Suisse was worth SFr58 billion ($54.4 billion) compared to UBS’s valuation of just over SFr45.5 billion.

Credit Suisse is also quantitatively outperforming UBS in terms of profits and revenues. But there are other ways of testing the size of a bank, such as number of employees and the amount of assets under management, that gives UBS the upper hand.

But in the current uncertain and highly volatile economic climate, it is clear that clients and investors are less impressed with a bank’s size than what it can do.

“UBS might still be larger in terms of pure volume of business, but when you look at the quality of this business we clearly have a much better view of Credit Suisse,” Bank Sarasin analyst Rainer Skierka told swissinfo.ch.

“If we look at opportunities and business momentum it is clear that UBS is lagging behind its competitor.”

Size of risk

Zurich Cantonal Bank analyst Andreas Venditti agrees that size is no longer the paramount issue for the market.

“You can have small banks run very well, very profitably and with a better share price performance than bigger banks,” he told swissinfo.ch.

In fact size has become a negative issue for regulators in Switzerland and other countries. Questions have been raised about how sensible it is to have banks that are “too big to fail” – in short, banks that could bring down an economy if they collapsed.

In today’s turbulent financial times, regulators are taking a long hard look at the size of risk rather more closely.

Both UBS and Credit Suisse have been reducing both the amount of risk they are taking now and the number of risky products they have on their books. Credit Suisse took on less risk to start with and is now receiving plaudits for its profitable safety first strategy that is reaping rewards.

UBS managed to dump most of its toxic assets into a special “bin” created by the Swiss National Bank. But gauging the exact extent of risk in any bank can be a tricky business as they use different accountancy procedures and often bury unpalatable news deep inside complex reports.

Valuation gap to remain

“Risky assets are not only hard to value, they are also hard to find. Banks have only recently started to show these in reports. Some of the information to assess risks is just not there,” said Venditti.

Getting back to the notional value of each bank, it is clear that UBS’s share price has been depressed in part by an ongoing law suit by the United States tax authorities demanding the release of confidential client data.

But both Skierka and Venditti are sceptical that the bank’s share price would rise sharply even if this matter were cleared up satisfactorily.

“The difference in valuation [between the two banks] is high. I would not go as far as to say that if the US [legal]problems were solved this would make up the capitalisation gap because [UBS] still has a lot of other problems,” Skierka said.

For the meantime, Credit Suisse can claim the high ground as Switzerland’s biggest bank, but its ability to churn out quality results while reducing risk appears to impress the market more than size.

Matthew Allen, swissinfo.ch in Zurich

How the figures match up

With UBS yet to release its second quarter results, here is how the Q1 figures of each bank stack up:

The UBS group made a net loss of SFr1.975 billion.

Total income: SFr5.95 billion

Assets under management: SFr2.18 trillion. Reported net new outflows of SFr23.4 billion in Wealth Management and Swiss Bank.

Employees: 76,206

Credit Suisse made a profit of some SFr2 billion

Total income: SFr7.4 billion

Assets under management: SFr1.12 trillion with net new asset inflows of SFr11.4 billion

Employees: 46,700