The takeover of Credit Suisse by UBS relies partly on direct state guarantees. Now another banking group wants to set up shop in the Swiss market, in which the state is the most important owner.

The state is currently looming over Swiss banking. First, there was the rescue of Credit Suisse at the behest of the federal government and supervisory authorities, where UBS had to take over its nearly insolvent competitor in March.

It is difficult to deny that the state itself is in the middle of the merger because the federal government guarantees liquidity loans amounting to 100 million Swiss francs as well as possible losses amounting to at least nine billion francs ($10.1 billion). It also exerts a direct influence on things such as salary payments to Credit Suisse bankers.

Dividends to Governments

While the state is deeply exposed to risk in the takeover, elsewhere it is earning good money from «its» banks. Zuercher Kantonalbank (ZKB), the largest of the Swiss cantonal banks, topped the billion-franc profit mark for the first time in the past fiscal year. This paid off handsomely for the owner, with ZKB distributing almost half a billion francs to the canton and Zurich municipalities.

The development is evident elsewhere. In total, the 24 cantonal banks generated around 4.3 billion francs in profits in 2022. Of this, they returned 1.8 billion francs to the cantons and municipalities in the form of profit transfers, compensation for equity capital, dividends, compensation for the state guarantee, and taxes.

This fountain of money should be appreciated given the lack of distributions from the Swiss National Bank this year amounting to 211 francs per Swiss inhabitant.

The Comfort of State Guarantees

State guarantees places proved particularly useful for the institutions which have them. Panic-stricken Credit Suisse customers primarily took their money to banks operating with federal government backing, and the Cantons have a particularly good credit rating as does Postfinance, the banking subsidiary of the Swiss postal service.

It is hoped that another bank with state backing can benefit from the same structure: The Liechtensteinische Landesbank (LLB), in which the Principality holds a majority stake.

Thanks in part to this owner, the bank has a very good credit rating of Aa2 from Moody's. «This high level of stability is currently particularly important for bank clients,» LLB Group CEO Gabriel Brenna told a media conference yesterday.

Cantonal Bank Alternative

A good credit rating is particularly important for the bank's plans in Switzerland. As Brenna further explained, the LLB Group wants Switzerland to be its most important market and is taking specific aim at corporate- and private banking. To accomplish this, LLB will fold its Swiss subsidiary Bank Linth into the group by the fall.

Although both Bank Linth and LLB have been active in Switzerland for a long time, over 170 years for Linth, its growth ambitions structure are new. «We want to position ourselves as a good alternative to the cantonal banks,» Brenna explained.

The Swiss' Favorite Banks

That makes people sit up and take notice. While private and cooperative banks have lobbied successfully to keep the state-owned Postbank in check in Switzerland and to deny it direct lending, they will be able to do little against the ambitions of LLB Group. Now the industry has to brace itself for another state-owned bank pursuing supra-regional plans in Switzerland.

The supremacy of such players is overwhelming. According to a recent study by the University of Lucerne, state-owned institutions are the principal bank for over half of the Swiss. The Raiffeisen Group comes in at 21 percent, UBS and CS together at 19 percent, and state-owned Postfinance follows at 17 percent.

Sergio Ermotti is Right

UBS CEO Sergio Ermotti who is responsible for the takeover of Credit Suisse, did not miss the opportunity to counter criticism of the size of the emerging UBS-CS with the power of the cantonal banks. He pointed out, the cantonal banks have a larger share of the mortgage business than the two banks together.

Apart from the fact that one state banker is criticizing the others, Ermotti is not wrong. If the viability of a combined major bank for Switzerland is being discussed, then there should also be talk of those institutions where the state is already at risk or enjoy advantages in financing for an acquisition backed by a state guarantee.

Finma Sees Red

The situation at Postfinance underlines the dilemma. The Swiss Financial Market Supervisory Authority (Finma) recently concluded that systemically important Postbank does not have a plausible plan to implement an emergency plan in the event of a crisis. Posfinance disputes this. 

But if the supervisory authority there sees red, Switzerland should not view the entanglement of state and banks only through rose-colored glasses.