September 2006 Banking Barometer Economic Trends in the Swiss Banking industry

Transcription

1 September 2006 Banking Barometer 2006 Economic Trends in the Swiss Banking industry

2 Banking Barometer 2006 Economic Trends in the Swiss Banking industry Contents Executive Summary Macroeconomic trends World economy Swiss economic performance Capital markets Interest and exchange rates Stock markets Bank earnings earnings performance Balance sheet and credit business Balance sheet Credit business Managed assets Performance of managed assets in Employment in Switzerland employment survey of the Swiss banks This report was commissioned by the Swiss Bankers Association and prepared at the end of August 2006 by BAK Basel Economics (authors: Alexis Körber and Martina Schriber).

3 Executive Summary Thanks to favourable market conditions, the earnings of banks in Switzerland grew 17 percent in Managed assets had increased by as much as one quarter by the year end. On the employment side, an increase of 1 percent hopefully hints at a trend reversal. In 2006, we can expect a slight slowing of the rate of earnings growth and a similar but stronger pattern for managed assets. The positive change in staffing levels should continue through the year according to the survey of the Swiss Bankers Association: by the end of the first half of 2006, numbers employed had already risen by 1 percent. 17% earnings growth in 2005 Asset management boom Flat profits in the credit business Employment trend reversal Expectations for 2006 as a whole positive Thanks to an excellent market environment with low interest rates, rising share prices and consequently lively trading on the financial markets, the Swiss banks achieved a 17 percent increase in overall operating income - now standing at almost 70 billion Swiss francs - in 2005 compared with the previous year. The growth can be put down to increased income from the commission and services business (+13%) and trading (+62%), whilst net earnings from interest margin-based activities were flat. In 2005, asset management benefited from the upswing on the equity markets and from the positive mood of investors. This produced a twenty-five percent rise in the value of managed assets by the end of the year, with foreign customers contributing more than domestic clients. There was also a higher than average rise in the collectively invested assets of institutional customers. By contrast, the credit business continued to suffer from tough competition, although by the end of 2005 the volume of credit was around 4 percent higher than in the previous year thanks to favourable mortgage rates. The good overall profit performance had a positive effect on the labour market: staff levels at the end of 2005 were one percent higher than at the end of 2004, which leads us to hope that the employment trend in the banking sector is reversing. In the first quarter of 2006, the uptrend on the equity markets drove up managed assets and earnings from asset management and trading. But the share price correction in May-June greatly slowed the pace of growth. At the end of June, managed assets were only 2.4 percent above the level they had reached at the end of In the meantime however, the situation has already improved again and for the second half of the year we can expect the momentum of growth for both earnings and managed assets to pick up. Moreover, this year, investment banking is developing very positively thanks to buoyant demand in the IPO and M&A business. On the other hand, conditions have not improved in the credit business in the year to date. Despite a higher credit volume (+3% in the first six months of 2006), there is still no growth in income. Banking Barometer

4 Employment survey in the first half of 2006: +1.1% Further increase in employment levels by the end of 2006 The employment situation is looking positive for 2006: according to the survey of the Swiss Bankers Association, staff levels in the Swiss banks had increased by a good 1 percent, or around 1,100 jobs (full-time equivalents), by mid-2006 compared with the end of The level has fluctuated greatly however, due to the uneven pattern of development of the various businesses. The trend is forecast to continue positive through to the end of 2006: 37 percent of the banks surveyed expect a higher staffing level in comparison with the mid-year. The majority of banks (57%) have broadly similar assumptions about the employment level. When broken down into business activities, the survey indicates that the biggest increase in jobs should be in private banking. All in all, the SBA survey suggests that by the end of 2006 compared with the end of 2005, the numbers employed in banks in Switzerland will grow again, probably by around 1 percent as in the previous year. Banking Barometer

5 1. Macroeconomic trends Despite persistently high commodity prices, the global economy is still on an impressive growth trajectory. In national economies like Japan, the euro zone or Switzerland, real gross domestic product grew even more markedly in the first half of 2006 than previously expected. In the coming months however, we must expect the momentum for growth to be more moderate, especially as regards the USA. In other words, now that monetary policy has been tightened up again, it is increasingly producing the desired effect. The overall result, it seems, is that the growth trajectory of the mature economies has begun to tail off, in line with the trend that can be expected to prevail long-term World economy Strong growth in the first half During the first half of 2006, global economic activity continued to be brisk and accelerated slightly. This is essentially a reflection of the fact that economic recovery has now also swept through to Japan and the euro zone. But the most important driver of global economic growth is still, and increasingly, China because of its dominating role in world trade. Apart from Japan, the other emerging economies of Southeast Asia benefited especially from China s high import needs. Real Gross Domestic Product Percentage change against previous year Labour force Percentage change against previous year 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% USA Euro Zone Japan % 1.5% 1.0% 0.5% 0.0% -0.5% USA Euro Zone Japan Source: OEF But the peak seems to have been passed Oil price still a risk factor However the high point of the current growth cycle must have been passed. That is particularly true of the USA. In that country for example, now that monetary policy has been tightened up again, it is increasingly achieving the desired effect. The overall result is that the growth trajectory of the global economy has started to tail off, in line with the trend that can be expected to prevail long-term. One drawback of the persistently strong global economy is to be found in the continuing high price of commodities. The oil price is also adversely affected at the moment by special factors such as the current crisis in the Middle East. All in all, however, the inflationary potential resulting from those factors seems manageable. Banking Barometer

6 1.2. Swiss economic performance Definitely livelier start to the year The Swiss economy looked really lively at the start of According to the quarterly estimates of the Swiss State Secretariat for Economic Affairs (seco), real gross domestic product increased 3.5 percent in the first quarter of 2006 compared with the previous year. The last time a similarly high growth rate was a- chieved was in The dynamic start to the year was the result of very buoyant foreign trade and a substantial increase in capital investment. In addition, a big contribution to growth came from private consumption in the first quarter. Real Gross Domestic Product in Switzerland Percentage change vs. same quarter of previous year 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004Q1 Q3 2005Q1 Q3 2006Q1 Labour force in Switzerland Percentage change vs. same quarter of previous year 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% 2004Q1 Q3 2005Q1 Q3 2006Q1 Source: seco, BfS Indicators point to lively economic conditions for the second quarter Consensus outlook for Switzerland much higher since the beginning of the year Swiss labour market benefiting from good general economic conditions The available indicators also suggest a very lively pattern of economic activity for the second quarter. According to the survey of the Swiss customs authorities, Swiss exports continued to grow strongly between April and June. Swiss industry especially is benefiting from the high foreign demand. This is also confirmed by the Swiss Purchasing Managers Index (PMI), which in July reached 65.1 points, and therefore stands at only one point below its 2000 historic record level. Given the good general economic conditions, the mood of Swiss consumers has also got better and better through 2006 and at present is again at a historic high. It is true that Switzerland s economy could lose some of its dynamic quality over the next few months in the wake of more moderate global economic activity, but the overall economic trend is still clearly up. In view of the changes we describe, it is hardly surprising that the consensus outlook for 2006 has been markedly upgraded since the beginning of the year. Though a 2.0 percent increase in real GDP was already expected here in Switzerland in January, the consensus in June stood at a remarkable 2.9 percent. Fortunately the good overall economic environment is now also having visibly positive effects on the Swiss labour market. In the first half of 2006, the number of people in the labour force was higher than in the same period the year before. The seasonallyadjusted unemployment rate has gone down noticeably during the year to date and was 3.3 percent in June after a 3.8 percent annual average for Early indicators such as the Index of job Banking Barometer

7 vacancies and the Manpower employment barometer indicate that the trend towards recovery will firm up further in the coming months. Banking Barometer

8 2. Capital markets The previously low interest rates are now being continually increased by the central banks, especially in the USA. Therefore overall, it seems that the period of extremely low interest rates is over. After the share price correction in May and June 2006, the equity markets are again moving upward and trading volumes are reaching record levels. IPO and M&A activity, which only slowed slightly, are showing great potential Interest and exchange rates Generally tighter monetary policy... For many years inflation rates in most industrialized countries were distinctly low. But the commodities price rise and strong global economic growth over a long period of time have accelerated price increases lately. The central banks have consequently raised their base rates, which for a long time have been unusually low, to match. Even the Japanese central bank has put a stop to its zero-interest rate policy after five years, and at least one further step up is expected before the end of this year. Despite the very recent change in pattern, the price rises have been moderate the SNB expects the inflation rate to be 1.2%. Swiss Confederation Bond Yields and 3-month Libor, percentages year Swiss Confederation Bonds 3-month Libor Jan03 Apr03 Jul03 Okt03 Jan04 Apr04 Jul04 Okt04 Jan05 Apr05 Jul05 Okt05 Jan06 Apr06 Jul06 Source: SNB and higher bond yields The tighter monetary policy and the slight increase in inflationary expectations are also reflected in the much higher international bond market yields since the beginning of the year. 10-year Swiss Confederation bond yields were around 0.5 points higher at the end of August 2006 than in January. If the Swiss economy continues its strong performance, further rate hikes can be expected from the SNB. Banking Barometer

9 Depreciation of the dollar, stable Swiss franc-euro rate of exchange During the first half of 2006, the dollar depreciated against the euro and the Swiss franc. On the other hand, the hope of a rapid improvement in the flexibility of the Chinese rates of exchange was not fulfilled - Beijing has so far prevented the yuan from appreciating quickly against the dollar. The Swiss franc fluctuated in April but has since remained more or less stable against the euro. The real export-weighted external value of the Swiss franc, which takes account of inflationary differences between currencies, changed hardly at all both in relation to the 24 most important trading partners and the euro zone Stock markets Stock market upswing in Switzerland and Europe greater than in the USA Stock exchange indexes (Jan = 100)) SPI Dow Jones Industrial Stoxx50E Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Source: various stock exchanges Low interest rate environment underpinned the equity markets in the euro zone and Switzerland After share price losses in May-June 2006 From autumn 2004 until April this year a strong, almost uninterrupted upward movement of share prices was observed worldwide. This is particularly true of the newly industrialized countries, where headlong economic growth increased the demand for investment opportunities. The marked upward movement was however also a feature of Japan, Switzerland and various European stock markets, where pleasing corporate results and an environment with still comparatively low interest rates spread a positive mood among investors. In the USA on the other hand, the ongoing base rate rises put a brake on the performance of the equity markets, although the general economic situation was better than in Europe. Share indexes in the USA have moved sideways since the beginning of 2004, with minimal upward movement. The 16th rise in the US federal funds rates in May 2006, together with the weakness of the dollar and high oil price, had a strongly negative impact on the equity markets especially outside the U- SA: the fear of further rate rises led to a correction of the equity markets worldwide. And in Switzerland too, the SPI dropped 10 percent in one month. Banking Barometer

10 equity markets recover remarkably quickly Strong increase in stock market turnovers, and IPOs and M&A The global political situation, oil price and interest rates are still risk factors Admittedly, the stock markets have produced a surprisingly rapid recovery since July despite the crisis in the Middle East and the record oil price. Particular grounds for optimism are positive corporate results and the general economic figures for the first half of In the USA, however, the equity markets were still volatile and investors are sceptical and insecure. Overall, share trading has become much brisker since 2004, resulting in an 18 percent increase in turnover in 2005 for the Swiss stock exchange and over 50 percent in the first half of Twodigit growth rates were also recorded by most European stock markets. Underwriting was also very brisk as was the mergers and acquisitions (M&A) business. In 2005, the volume of share issues in Switzerland increased by 40 percent, and the European stock markets experienced growth of over 50 percent. The number of mergers & acquisitions increased strongly in 2005, especially in Britain, but also in Switzerland and Germany. This market is gathering momentum in Europe this year, due especially to the fact that there is great potential for cross-border mergers and acquisitions. In view of the record oil price, the crisis in the Middle East and the recently foiled terrorist attacks in Britain and other terrorist alerts, the equity markets are proving to be surprisingly robust; however there is a great deal of nervousness and volatility and any worsening of these risk factors or further increase in US interest rates could once again adversely affect the good mood of investors. Banking Barometer

11 3. Bank earnings Up 17 percent, the earnings of Swiss banks amounted to almost 70 billion Swiss francs in The market conditions for asset management, trading and investment banking were excellent. Thanks to the positive mood of investors and a strong economic situation, a further rise in earnings is to be expected for % earnings growth in 2005 Total earnings as high as in record year 2000 Thanks to superb market conditions, the earnings of Swiss banks grew more in 2005 than they have done since the record year of Total net earnings rose 17.3 percent compared with 2004 and reached CHF 68.6 bn, a sum that was also last reached in the year This is in line with a definite acceleration of the positive growth phase that began in Sectoral earnings performance, in millions of CHF 70'000 60'000 50'000 Other ordinary earnings Trading earnings Net commission earnings Interest-earning business 40'000 30'000 20'000 10' Source: SNB High growth even excluding other earnings streams Strong trading business Commission and services business underpin growth If other earnings of CHF 6.9 bn, which in 2005 essentially consisted of income from subsidiaries and associates contributed by the big banks, is excluded, this leaves an operational growth rate for the banking business of around 13.7 percent in 2005 (2004: +8%). The earnings increase was strikingly high in the trading and commission business, whilst interest income remained flat. The headlong rise in the share prices (SPI : +35%) and commodity prices stimulated the trading business of the Swiss banks in 2005 and enabled income in this sector to grow by a good 60 percent, following a similar development back in Trading s share of overall earnings rose from 12 percent to 16 percent. Asset management is establishing itself more and more clearly as a core business for Swiss banks. With growth of around 13 percent in 2005, income from the commission and services business amounted to CHF 28 bn and thus contributed over 40 percent to overall earnings. Asset management clearly benefited from the above-expectation upswing on the equity markets in The earnings growth in 2005 was underwritten by all the banking groups, but to a significant extent by the big banks (+16%), which Banking Barometer

12 Low margins and flat income in the interest-earning business have a market share of 50 percent. Asset management also developed substantially at the Raiffeisen banks, although it does not belong to their core business. The foreign banks in Switzerland were able to uphold their market share of just under 20 percent. Demand from abroad also contributed to the growth of commission earnings: commissions from abroad increased 8 percent compared with the previous year, thanks to a very positive second half. An important earnings stream in 2005 was the services business, where investment banking in particular benefited from the brisk demand for underwriting and M&A. In the interest margin-based activities, trading conditions did not improve to any great degree in 2005: as expected a year ago, income from this business remained flat despite higher credit volumes. Strong competition and the slight rise in refinancing costs in the fourth quarter kept the interest margin down. This is not a true picture for all banks, but it certainly applies to the major banks, which brought stagnation to the whole sector with an 8 percent decline in income from the interest-earning business. On the other hand, the cantonal banks, the Raiffeisen banks and the other banks posted an increase in interest-earning income, leading us to conclude that there are differences in credit and pricing policies. The performance of the last two years shows that on the one hand conventional banking is a stable source of earnings but on the other hand its significance with regard to total income decreases markedly when stock markets are bullish (from 42 percent in 2003 to 33% in 2005) earnings performance Lively growth continued during the first quarter of 2006 Only a slight slowing in the second quarter In the first quarter of 2006, the excellent performance of the equity markets and the good overall economic situation had a markedly stimulating effect on the asset management and trading businesses. The good mood positively influenced demand in the private and investment banking sectors. Thanks to rising share prices, asset-dependent earnings increased considerably and in addition more private and institutional money flowed towards the banks. Altogether, earnings from both managed assets and commission and services increased markedly compared with the previous year. In the second quarter, market conditions were somewhat marred by the stock market correction, but the negative impact on bank earnings was less than at first feared. Asset management demand recovered as quickly as the equity markets. At the same time, trading continued along the path of success almost without a hitch. Thanks to the good overall economic situation, investment banking also recovered; there were 4 flotations in Switzerland and increasing demand in the M&A sector. In the interestearning business, there was no discernible change in the trend. As in 2005, the earnings of the big banks decreased, while the Banking Barometer

13 Full year 2006 expected to be positive cantonal and Raiffeisen banks continued to be successful. Overall, interest margins remained low. Because investors are in a good mood again, further opportunities for growth in asset management can be considered to exist for the second half of 2006, although the possibility of a stock exchange consolidation might slow the pace. In investment banking, IPOs and M&A should also perform well. In the credit business, there is still no clear growth potential to be found, although gradual interest rate rises by the banks should bring a slight improvement compared with For 2006 as a whole, growth is again expected to come out at around 10 percent in the commission and services business. Similarly, despite the slowing of the trading business, there should still be double-digit growth in the end; in the interest-earning business, once again we can count on flat growth. In 2006, the total earnings of the banks in Switzerland should rise again, probably at a rate only slightly lower than in Banking Barometer

14 4. Balance sheet and credit business Because of the marked expansion of the banks foreign positions, their balance sheet total rose 14 percent in Thanks to the continuing favourable conditions in the Swiss mortgage lending business, domestic demand for mortgage loans increased by 5 percent, just as it had already done in the previous year Balance sheet 1 Balance sheet up 14 percent in 2005 Bank assets and liabilities The balance sheet total for the banks in Switzerland was CHF 2,846 billion at the end of 2005, or 14 percent higher than the previous year. The foreign positions grew most (+20% approximately), whilst assets and liabilities in respect of the domestic positions increased by 3.7 percent and 6.8 percent. The appreciation of the dollar was primarily responsible for the strong growth of the foreign positions. Breakdown of assets, end 2005 Other assets Cash Securities Breakdown of liabilities, end 2005 Other liabilities Equity finance Liabilities to banks Customer receivables debentures and bonds Mortgage loans Money market liabilities Bank receivables Money market receivables Other liabilities to customers Liabilities to customers in the form of savings and investments Source: SNB Assets: big rise in trading portfolio Liabilities: shift to term investments On the assets side, the trading portfolio grew considerably (+26%) last year, as did customer and bank receivables (+18% and +14%). Mortgage loans, which account for almost one quarter of the assets, grew 8 percent in 2005 (foreign and domestic borrowers). On the liabilities side, customer time liabilities increased markedly, whilst sight deposits and savings and investments posted lower growth. This is due to higher interest rates on term deposits and confirms the trend towards a shift of customer money to time deposits. 1 The balance sheet business gives some insight into the sources of refinancing (liabilities) and the breakdown of receivables (assets) of the banks. The balance sheet is of interest especially for the interest margin-based activities. Banking Barometer

15 Banking group share of balance sheet Growth of balancesheet total in all banking groups Number of institutions Balance sheet total, CHF m Increase Cantonal banks ' ' % Big banks 3 2 1'643'506 1'910' % Regional banks and savings '492 83' % banks Raiffeisen banks ' ' % Other banks ' ' % Of which foreign banks ' ' % Branches of foreign '925 17' % banks Private bankers '807 17' % Total '490'768 2'846' % Source: SNB This past year, the increase in the balance sheet total occurred almost exclusively in the foreign positions. This is reflected in the figures for the international banking groups: the balance sheet total of the big banks (which account for two thirds of the balance sheet total) and the foreign banks increased disproportionately in 2005 (+16% and +25%). However, the cantonal banks, which operate essentially at national level, also increased their balance sheet total by 4 percent Credit business CHF 660 bn credit at the end of 2005 Pattern of take-up loans in Switzerland by type, in CHF bn Building loans Other loans Mortgage loans Source: SNB Increasing demand for mortgages Credit, a balance sheet business, is an important fundamental in the financing of the non-monetary economy. The total volume demand for domestic credit was around CHF 660 bn at the end of 2005, or a growth rate of 4.2 percent compared with the previous year (growth in 2004: +3.7%). As in the previous year, mortgage loans posted the highest increase in demand in 2005: due to the fact that mortgage interest rates continue to be favourable, these loans grew by around 5 percent in Because of the record Banking Barometer

16 low mortgage interest rates (they fell still further in the course of the year), only fixed interest mortgage receivables increased. On the other hand, thanks to the economic recovery, other forms of credit recorded an increase for the first time since 2000 (+1.3%). Majority of loans are mortgages granted by the big banks and the cantonal banks Breakdown of lending by type of loan, 2004 Other forms of credit Building loans Breakdown of lending by bank group, 2005 Other banks Regional banks Cantonal banks Mortgage loans Big banks Source: SNB Mortgage loans as a proportion of the total volume demand for credit among the Swiss banks stuck at 82 percent at the end of 2005, whilst other forms of credit accounted for only 17 percent as in the previous year. In this latter category, which mainly comprises credit facilities for small and medium-sized enterprises (SME), only just over 50 percent of all the loans granted were taken up. For mortgages in contrast, the ratio between loans granted and loans taken up is still 97 percent. The credit split between the banking groups is overwhelmingly in favour of the big banks (36% share) and the cantonal banks (33%). 2/3 of credit facilities go to private households Two thirds of all credit taken out, and as much as three quarters of mortgages, went to private households in 2005, whilst less than one third were received by companies. Domestic credit volume by business sectors, m CHF Credit volume 1 Total Mortgages Other forms of credit End 2005 Change vs previous year End 2005 Change vs. previous year End 2005 Change vs. previous year Private households 441' % 406' % 31' % Companies 182' % 122' % 57' % Public sector 36' % 13' % 23' % Total 659' % 541' % 112' % 1 Credit facilities taken out according to credit volume statistics. Source: SNB, Monthly Statistical Bulletin Private household borrowing increased the most In the past year, private household borrowing increased by 6.3 percent and company borrowing by 1.4 percent. Corporate loans have thus been losing relative importance for years. In 2005, there was even a definite decline in public sector borrowing (public authorities, schools, health and social security). Banking Barometer

17 In 2006, slower rise in borrowing In the first half of 2006, interest rates were again very low and the level of credit taken out correspondingly increased by a further 3 percent compared with the end of 2005, mainly accounted for by the increase (+8%) in other forms of borrowing (mortgages: +2%). The rise in borrowing in the first half of 2006 was around 3 percent both for private households and for corporates. The high level of borrowing, the saturated property market and expected slight rise in mortgage interest rates lead us to expect a slowing of the growth in mortgage lending for 2006 as a whole compared with the previous year. However, the economic recovery should continue to uphold the other forms of borrowing (personal consumer credit and business credit for companies). Banking Barometer

18 5. Managed assets 2 Due particularly to the upswing on the equity markets, customer portfolio holdings increased by a quarter in The rise was also due to the influx of new money, however. The rate of growth definitely slowed in the first half of 2006, but should pick up slightly in the second half of the year. Excellent growth of managed assets in 2005 is underpinning a core business of the Swiss banks 2005: one quarter increase in customer security deposits... Never since the beginning of these statistics (1998) has the growth of customer portfolio holdings in Swiss banks been so high: asset deposits were one quarter higher at the end of 2005 than in the previous year. This extraordinary result is definitely due to the excellent performance on the equity markets, with the result that the willingness of both private and institutional customers to invest has improved. Wealth and asset management, a core business of the Swiss banks, which focuses on the management of customer assets, benefited particularly from this positive performance. The important contribution of customer assets invested in shares and collective capital investments to the total managed asset growth can be seen in the graph below. On the other hand, bond values have barely changed for years. Pattern of customer security deposits, by type, CHF bn 4'500 4'000 3'500 3'000 2'500 2'000 1'500 1' Other Collective capital investments Shares Bonds thanks to stock market performance, new money and locational advantages Position at year end. Source: SNB At the end of 2005, the value of securities held for clients in custody accounts amounted to CHF 4,410 bn, which is 20 percent higher than in the last record year of In addition to rising share prices, the influx of new money also contributed to the marked 2005 increase, as can be seen in the annual reports of the leading Swiss banks. A further finding is that, as suspected a year ago, Switzerland as a financial centre has not lost its attractiveness to foreign customers following the entry into force of the 2 Although there are not yet accurate statistics concerning managed assets in Switzerland, customer portfolio holdings can be regarded as a good indicator. Banking Barometer

19 Strongest growth among foreign customers Greater significance of foreign, institutional deposits taxation of savings income agreement with the EU. The regulatory and tax advantage of the location enabled it to stand its ground against international competition. Managed asset growth in 2005 was greater among foreign customers (+30%) than among domestic customers (+18%). This is true of both private and institutional customers. Overall, at the end of 2005, just under 60 percent of managed assets were held in the portfolios of foreign customers. Just as high at 55 percent was the importance of foreign currencies in the portfolios, especially the euro and the US dollar, a result due both to foreign and domestic customers. Pattern of deposits by type of customer, 2005 Domestic, institutional Foreign, private and by type of currency, 2005 Others Foreign, commercial USD CHF Domestic, commercial Domestic, private Foreign, institutional EUR Collective capital investments booming Bonds losing their attraction Fiduciary deposits up Position at end 2005 Source: SNB In terms of asset classes 3, 2005 was a year in which the volume of collective investments grew the most (+49%), which points to the growing interest of investors for mutual investment funds. It is also a sign that investment and pension trust funds are again putting more money into capital investments. There was high growth in the other assets category, which mainly comprises structured products, whilst shares in customer securities portfolios grew at the average rate for all securities. Bonds were flat and thus again lost ground due to their strong decline in the private customer portfolios; on the other hand the holdings of institutional investors expanded in this class of investment too. In addition, fiduciary deposits not in the securities portfolios and managed by the banks grew by nearly 20 percent in 2005 and at the end of the year amounted to CHF 377 bn. The increase is essentially a consequence of the higher short-term interest rates. 3 Note that in 2005 the survey was slightly revised, making comparison with the previous year more difficult in terms of the asset classes. However it is possible to draw conclusions about trends. Banking Barometer

20 5.1. Performance of managed assets in 2006 Growth flattened in the first half of 2006 Competitive pressure still high After the extremely dynamic growth of 2005, the pace of asset expansion slowed in the first half of 2006: at the end of June, the portfolio holdings in Swiss banks were only 2.4 percent higher than at the end of The slowdown can be explained primarily by the correction to the equity markets in May-June, which mainly affected the performance of shares and collective capital investment instruments. In contrast, structured products were able to cope well with the fall in share prices and again increased substantially. On the other hand, bonds as a share of domestic customers securities holdings went down. If the stock markets do not fall further, a slight increase in the rate of growth of managed assets can be expected for the second half of the year. In addition, competition for new customers in Switzerland and in neighboring foreign countries is strong. Banking Barometer