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The crown crisis mainly threatens small and medium-sized companies. At the moment, this is only moderately concerning for banks. SME loans represent only a small part of their loan volume. A real estate crisis would be much more threatening, as up to nine out of ten francs francs lead to mortgages.
The largest volume of bank loans comes from mortgages. Most self-occupied condominiums and homes serve as collateral, and experience has shown that their owners go out of their way to repay their home loan, even in tough times.
The situation is serious, but it is not alarming at the moment. Swiss banks feel fit enough to survive the crown crisis without falls that threaten their livelihood, at least that’s the impression that comes after a request from several cantonal and regional banks. Although the institutes assume that the earnings situation will deteriorate, they do not expect the loss zone to slide. This cautiously optimistic scenario is based on the assumption that the Crown crisis has peaked in Germany and that the restrictive regime that is restricting economic life can be gradually eased in the coming weeks and months.
Banks face the greatest danger if their private and corporate clients become insolvent and can no longer repay their loans. Such defaults make amortizations necessary, have a negative impact on the annual result and, if a bank writes in red for an extended period, they reduce the capital base. A second channel of contamination is the financial investments that banks maintain in their own account and risk on the balance sheet. The fall in prices makes value adjustments necessary and, like credit defaults, have a negative impact on results.
Stable credit portfolios
Currently there is little evidence of deterioration in the quality of the credit book. A main reason: up to 90% and more of the volume of credit is secured with mortgage backing in institutions with an internal focus. Most owner-occupied apartments and houses serve as collateral. Experience has shown that homeowners do their best to pay off their home loan, even in tough times, because no one wants to lose the roof over their heads. A bank can hardly have better debtors.
Furthermore, due to banks’ prudent lending policies, loan amounts must be sustainable for debtors, even in difficult times. And that should continue to be the case in the near future, because borrowers have “tied” historically low interest rates on fixed-rate mortgages for years to come. The strong state of the property market is also supported by the fact that the Swiss National Bank (SNB) has freed banks from maintaining a countercyclical capital buffer. This was introduced to urge institutions to adopt a more restrictive policy in the mortgage business. There is almost no such need at the moment because the corona crisis has eliminated any risk of overheating.
Corporate loans, and even more so Covid loans made as part of federal and cantonal aid programs, only represent a small part of banks’ loan portfolio. Case in point: 2,100 applications for mostly “small” Covid loans received by the regional banking group Valiant on Tuesday night totaled around CHF 240 million or just under 1% of the bank’s total volume of outstanding loans. This is no less than an indication that most companies, albeit with sector-specific differences, are healthy and largely dependent on external capital. “Most SMEs have achieved good or very good results in recent years and have been able to get the right mattress. This can also be seen in the deep use of established limits, “says Marianne Wildi, director of the Lenzburg mortgage bank. It must be assumed that an increasing need for value adjustments in the business of corporate clients would have an impact on the profitability of banks, but it would hardly have what it takes to put them in existential danger.
Low risk of failure
This applies even more to Covid loans. Because they are fully guaranteed by the federal government (up to CHF 0.5 million) or up to 85% (more than CHF 0.5 million) and therefore hardly cause default risks for banks. After the announcement of the federal program, the banks’ first concern was not the ability of SMEs to pay for Covid’s funds, but the use of its liquid funds. They feared that they would not be able to continue their ordinary loan business to the desired degree. Thanks to the SNB’s willingness to temporarily grant bank loans in exchange for its Covid loan claims, these refinancing fears evaporated.
For banks and the federal government as guarantors, fears that Covid’s facilities could be misused to make illegal use of the 40 billion boats provided would outweigh the creditworthiness of SMEs. These fears are mainly based on the fact that all sole proprietorships and 80% of joint stock companies and limited liability companies forego the services of an external auditor. Generally, you can call this exclusion clause if you have fewer than ten employees on average per year. This makes it difficult for banks to verify the legality of information on subsequent loan applications. To protect the taxpayer, Expert Suisse, an association of experts for audits rooted in the world of SMEs, is committed to opening and reviewing the books of Covid borrowers.
Do not panic
The “infection” of banks’ business results is likely to occur more quickly than loan defaults due to falling prices in financial markets. The Luzerner Kantonalbank (LUKB) quarterly financial statements are an example of this. In the first three months of this year, it had to make valuation adjustments of CHF 16.7 million on its financial assets, although the Covid crisis only became virulent in the second half of March. As a result, quarterly profit fell a good 7% compared to the previous year. However, the bank expects earnings in the last three financial years for the current year. Institutions like Postfinance have a particular challenge because they cannot lend on their own and therefore have large amounts of financial assets. At the end of 2019, they totaled CHF 60 billion, a multiple of LUKB’s investment portfolio.
All in all, there is no need to panic. National banks, which have already proven to be anchors of stability in the 2007/08 financial crisis, have the prerequisites to weather the Corona crisis well. Their equity ratios are even higher than those of large banks, and their lower “dependency on exports” and closer proximity to customers could be additional advantages in today’s environment.
However, the following applies: This cautiously optimistic scenario can only be represented on the condition that the economy works again in the coming weeks and months and that no further waves of corona infections occur. If the crisis persisted, the problem could no longer be ruled out from the real economy to the financial system.
