The profitability of Swiss banks may come under added pressure as a result of the Swiss central bank’s surprise decision to abandon the euro/franc ceiling, Fitch Ratings says.
The rating agency says the full impact of the move will depend on where the exchange rate settles, and the effectiveness of the banks’ hedging strategies. It notes that some banks hedge against foreign-currency moves, “but many do so only partly or not at all. This will put pressure on earnings reported in Swiss francs.”
“The sharp appreciation of the franc, which rose by 27% against the euro at one point on Thursday before settling around 13% higher, will test the solidity of the banks’ hedging strategies, which will probably need adjustment,” it notes.
Fitch also says that the primary effect of the appreciation of the Swiss franc will probably be on bank profits, rather than on the banks’ balance sheets, and their regulatory capital and leverage ratios, where the effects are likely to be limited and in some cases might even be positive.
Additionally, the rating agency says that the potential negative impact on exports presents downside risk to its gross domestic product (GDP) growth forecasts for Switzerland. Growth risks may also emerge as franc appreciation adds to deflationary pressures, it notes.