While the move makes sense with regards to the financial stability of Switzerland (in particular the necessity to reduce the balance sheet size of the central bank), the consequences of a higher Swiss Franc on the Swiss economy may be ultimately negative. The two large banks’ profitability and shareholders’ equity should be hit, on Scope Ratings’ estimates. Scope nevertheless expects lower-to-positive impact of the SNB move on UBS’s and Credit Suisse’s regulatory capital ratios (both CET1 and leverage), but the sudden strengthening of the CHF raises questions about the sustainable profitability of the Swiss-based Private Banking business model.

The discontinuation by the SNB of the minimum exchange rate is a sign that the central bank is choosing financial stability over economic growth: the size of the SNB’s balance sheet was becoming too large versus GDP and the impending QE move by the ECB would have forced the Swiss central bank to buy even more EUR to protect the CHF peg and ultimately sustain more losses. Last week’s unexpected decision therefore emphasises the SNB’s focus on protecting Switzerland’s financial stability first and foremost, in our view.

The impacts to be sustained by the two large Swiss banks are likely to be far-reaching. Scope estimates that the impact of a 20% strengthening of the CHF against the USD and the EUR could impact UBS’s underlying annual pre-tax profits by -19%, while a similar appreciation on Credit Suisse’s 9m 2014 earnings would have led to a -38% hit. Bar the immediacy of the numbers (which need to be taken with the appropriate care), it is necessary to raise additional questions on (1) the long-term impact of lower economic growth on the banks’ Swiss asset quality; (2) the impact of a -0.75% interest rate on deposits held at the central bank; and (3) the sustainable profitability of a Private Banking business model applied in a country with an excessively strong currency.

Scope also concludes that a 20% appreciation of the CHF over the EUR and the USD has a significant impact on the two large banks’ shareholders’ equity (-6% estimated for UBS, -14% for Credit Suisse). Conversely, Scope believes that the impact will be low to marginally positive on the two banks’ regulatory capital ratios (both CET1 and leverage ratios) as we explain in this report.

Increased pressure on Credit Suisse’s long-term ratings. The more pronounced negative impact of the CHF appreciation on Credit Suisse’s metrics is due to the weight of the bank’s capital denominated in USD and in EUR. This aspect, combined with the likelihood of more stringent leverage rules stemming from the Brunetti Report (on which Scope wrote a detailed report dated 8 December 2014) and the opening of an investigation from the New York attorney general on fraudulent RMBS transactions are maintaining negative pressure on Credit Suisse’s A+ long-term ratings (which already carry a negative outlook).

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