Swiss Banking Handbook 2010: Continuing Credit Growth Instead of Credit Crunch

Credit Suisse Study on the Financing of Companies in Switzerland

In many countries, the recent financial and economic crisis has exposed weak points in the supply of credit to companies and has given rise to fears of a credit crunch arising in Switzerland too. Against this backdrop, the economists at Credit Suisse who produced this year's edition of the Swiss Banking Handbook examined the way Swiss companies are financed.

They conclude that corporate financing has looked much more stable during the past recession than in the crisis years 2001-03. Neither bank loan financing nor capital market IPOs have seen any dramatic fall-off. It would therefore be wrong to talk of a credit crunch in Switzerland. In fact, Switzerland has seen continuing credit growth during the recession – an unprecedented situation.

This year's Swiss Banking Handbook from Credit Suisse is primarily devoted to an analysis of the way in which Swiss companies obtain financing and how the various sources of finance have weathered the crisis. Corporate financing systems vary greatly from one country to another. Switzerland is a hybrid case that combines a "relationship-based" system in which financial transactions are effected via banking relationships and the "arm's length system" of financing via the capital market. Although the corporate finance sector is currently stable in Switzerland, a number of risks do exist: Interest rates could rise, for example, and financial market turbulence could develop and have a variable impact on the different types of corporate financing models.


Dominance of Stock Market Financing in Switzerland

At more than 200% of GDP, Switzerland has a higher proportion of stock market financing than any other country examined. Other, much larger countries – such as Germany, France, and the US – and also some similarly small trading nations (such as Ireland and Austria) do not get anywhere near this figure. Abroad, bank loans are generally the most (or second-most) important form of financing – except in the US, where capital market financing has historic roots and is easily the most common model.


SMEs Obtain Most Financing via Equity or Bank Loans

While small and medium-sized enterprises (SMEs) with up to 250 employees obtain most of their financing by way of bank loans (unless they operate purely with their own equity), large corporations turn mostly to the capital market for funding. It is therefore not surprising that 90% of commercial loans in Switzerland go to SMEs. According to analyses and surveys conducted among SMEs, however, more than two-thirds of these companies also operate mainly on the basis of equity. The larger the company, however, the more likely it is to obtain funding via bank loans.


Capital Market Financing Mostly for the Large Companies

The capital market proves to be highly concentrated: In the market for Swiss corporate bonds, the five biggest issuers – with the exception of cantons, municipalities, and financial-sector companies – account for 55% of the volume of bonds. In addition to bond issues, share issues are also a popular source of finance for large companies. The Swiss equity market is highly concentrated in terms of sector structure: According to market capitalization, the pharmaceutical companies, food manufacturers, banks, and industrial goods companies account for the biggest share of the market.


Continuing Credit Growth Despite Recession

The corporate financing situation in Switzerland has looked much more stable during the past recession than in the crisis years 2001-03. Growth in corporate lending has tailed off, but there was never any marked decline in the credit limits granted. In fact, we have seen continuing credit growth during the recession – an unprecedented situation for Switzerland. Not only during the dotcom recession, but also during the 1975 recession and the stagnation of the 1990s, credit growth showed a pro-cyclical correlation with real GDP; in other words, loan volumes declined in line with negative economic developments. In the recent recession, however, credit volumes rose by more than 2% in each quarter despite a fall-off in GDP. The robustness of the credit business during the recent financial and economic crisis can be ascribed primarily to the fact that the majority of banks were relatively untouched by the crisis and enjoyed a strong influx of customer deposits, plus the fact that interest rates have been at historically low levels.


Record Level of Bond Issues in 2009

The bond market in Switzerland also performed surprisingly well during the past recession. In fact, the Swiss bond market saw record levels of new issues in 2009, in contrast to the recessionary trends between in 2001 and 2004. That period saw a sharp fall in issuing and net borrowing, even though refinancing costs (i.e. yields) fell by a similarly large margin. The stable trend of the bond market was attributable to the upheavals in the equity markets which prompted investors to switch their capital increasingly into fixed-interest investments. As a result of this strong demand for bonds and the measures taken by the Swiss National Bank – which also emerged as a buyer of corporate bonds – yields fell significantly, thus reducing the cost of refinancing. Many companies took advantage of this situation and issued bonds at relatively favorable conditions.


Fall-Off in Issuing Activity Much Less Marked than in 2001

With the stockmarkets in turmoil and investor confidence shaken by the financial crisis, the number of IPOs in Switzerland decreased substantially. Once adjusted for external factors (listing of the Julius Baer Group), it is clear that the total amount raised by companies via share flotations fell between 2008 and 2009. This means that during the financial crisis there was a decline not only in the number of IPOs but also in the inflow of funds generated. At least in qualitative terms, therefore, developments have mirrored those in the dotcom recession; compared to the 2001 slump, however, the setbacks are very minor. The sharp increase in the aggregate market value of IPOs this year can be attributed to the big Transocean flotation in April as well as to Orior's going public. The Swiss IPO market currently presents a rather subdued picture by international standards.


Switzerland the "Golden Mean"

From the economic point of view, it is interesting to examine the pros and cons of the various financing systems and the questions of what constitutes the best "mix." During an economic downturn, a relationship-based system should ensure greater stability. Considerable weight is given to maintaining business relationships, so that bridging facilities can be granted in the event of financing bottlenecks. With the arm's length system, vulnerability to shocks and the threat they pose to financial stability are high, but so too, evidently, is its ability to adjust and recover. At present, the fact that the epicenter of the financial crisis was in the US – with the crisis being accentuated not least of all by the US arm's length system itself – does not appear to be impairing the American economy's ability to recover. It is a different picture in Europe with its traditionally more relationship-based systems: The importance of the banks to the economy, and indeed the general legacy of the crisis, are holding back recovery and putting a brake on new lending. Switzerland, with its hybrid system, lies somewhere in between – here, there was no real "crunch" either in the provision of bank loans or in the capital markets.