Press Release from 12 February 2010

ZKB year-end results 2009: Profitable Zurich Cantonal Bank

Zurich Cantonal Bank (ZKB) can look back on a successful year. It increased its profitability noticeably year-on-year and reported an excellent result. Operating earnings rose by CHF 344 million to a record high of CHF 2.2 billion (+18.2%). Compared to the prior year gross profit was up by +44.6% to a total of CHF 1,001 million. Consolidated net income amounted to CHF 751 million (+49.4%). Moreover, its capital ratio (tier 1) of 14.1% gives it a very sound capital base; ZKB is extremely well equipped for the future. Thanks to this very comfortable position, profit distribution to the canton and local authorities can be increased once again. They will receive at total of CHF 330 million.

In a very challenging environment, Zurich Cantonal Bank (ZKB) achieved an excellent result for the 2009 business year. Its strategic focus on three earnings pillars has proved its worth. 23% of operating earnings was generated by trading operations. The commission and fee business also contributed 23% to operating earnings. The earnings contribution from the Bank's traditional interest business decreased from 70% to 50%.

Gains for commission and fee business

In view of the adverse market environment and unlike the general trend in our sector, a very good result was achieved in the commission and fee business. The commission and fee income of CHF 508 million was up 8% on the prior year (2008: CHF 471 million). The measures implemented as part of ZKB's growth strategy - especially the expansion of the private banking segment to form an independent ZKB entity and focusing on its investment business in general - proved effective and led to higher income.

Other ordinary income rose by CHF 46 million to CHF 90 million. This increase is attributable to the sale of financial investments.

Broad-based income from trading operations

With its broad-based trading operations and its role as a reliable partner, ZKB was already well positioned in the adverse market environment in 2008. This proved to be an advantage for the Bank in 2009. The customer base grew strongly in all sectors. After the negative result of CHF -211 million in the prior year, ZKB returned to the profit wedge with a plus of CHF 56 million. Trading in bond, credit and interest derivatives improved on the prior year's result, adding a further CHF 10 million to reach a total of CHF 191 million. A very good result amounting to CHF 148 million (2008: CHF 109 million) was also reached in foreign exchange, banknotes and precious metals trading. Overall, compared to the prior year, income from trading operations rose by CHF 455 million to CHF 508 million. ZKB's trading activities are guided by clear client focus and a balanced risk/earnings ratio. It was this focus together with less volatile financial markets that led to lower market risks in the trading book (value at risk for a holding period of 10 days). With a total of CHF 16 million at end 2009 they were substantially lower than in the prior year (end 2008: CHF 46 million).

Historically low interest level burdens interest business

ZKB's traditional interest business generated an income of CHF 1,128 million (-15%). The historically low interest level impacted strongly on the result. Apart from the high costs involved in hedging the balance sheet structure against rising interest rates and the lower margins in the deposit business, there was a lack of profitable investment opportunities for the Bank's excess liquidity.

New jobs created - IT costs reduced

Operating expenses increased less than proportionally by 3% to CHF 1,234 million. Personnel expenses rose by 16% to CHF 850 million, primarily because of the targeted enhancement of the Bank's client support activities, general compensation adjustments and higher profit-linked compensation components. Part-time adjusted, ZKB had 4,825 employees at end 2009, 140 or 3% more than at end 2008. Other operating expenses decreased by CHF 80 million or 17% to CHF 384 million. The measures implemented in mid 2008 to optimize IT costs had the desired effect.

Gross profit of one billion francs

Thanks to the strengthened trading operations, noticeable progress in the commission and fee business and substantially lower other operating expanses, gross profit increased by 44.6% to CHF 1,001 million (2008: CHF 692 million).

After the amount of CHF 133 million had been earmarked for allowances, provisions and losses in the first half of 2009, only a further adjustment of CHF 48 million was required in the second half of the year so that at year end this item in the income statement reached CHF 181 million.

Extraordinary income totalled CHF 12 million (2008: CHF 60 million). In the prior year the sale of ZKB's majority holding in homegate AG increased extraordinary income substantially.

With consolidated net income of CHF 751 million, ZKB surpassed the prior year's result by 49.4 % (2008: CHF 503 million).

Unchanged risk policy

At end 2009, ZKB's balance sheet total reached CHF 117.2 billion (+3.5%). Loans to clients, which rose by 5.2% to CHF 67.8 billion, account for more than half of the total assets. The share of mortgage lending in the loans to clients item totalled CHF 58.0 billion at the end of the year. Thus ZKB's total mortgage lending increased by CHF 4.1 billion or 7.6%. This very satisfactory, above-average growth in no way touched on the continuing high quality of the Bank's mortgage portfolio. Given the current interest rate environment and the attractive conditions offered, our clients opted for fixed-term mortgages, with the result that the share of variable mortgages in the portfolio fell noticeably.

ZKB's initiative to promote environmentally friendly building was successful: Lending in the form of ZKB environmental loans rose in the reporting year from CHF 255 million to CHF 441 million (+73%).

ZKB continued to focus on continuity in its credit policy. In the 2009 business year the demand for loans fell slightly because of declining investment in plant and equipment and the return to more advantageous refinancing opportunities on the capital market. The due from clients item amounted to CHF 9.7 billion. Credit limits for domestic corporate clients rose by CHF 1.5 billion to CHF 28.7 billion, an increase of 5.5% year-on-year. This includes financing of 134 traditional start-ups with a credit volume of CHF 29 million, 21 innovative start-ups with credit limits in excess of CHF 10 million, and a total of 58 venture capital loans in the amount of CHF 43 million. The high quality of ZKB's credit portfolios is reflected in the unchanged low level of nonperforming loans totalling CHF 0.2 billion.

Conficence in the investments business

At the end of 2009, ZKB's assets under management rose by 10.5% to CHF 134.3 billion (2008: CHF 121.5 billion), which makes ZKB the seventh largest banking institution in Switzerland in terms of assets under management. The increase resulted from a net inflow of new funds totalling CHF 3.5 billion and from a CHF 9.3 billion higher stock-exchange valuation of the assets. CHF 4.6 billion of the new funds is attributable to private persons. During the same period corporate and institutional investors withdrew CHF 1.1 billion. This took the form of reducing money market investments (call money and fixed-term deposits) on the one hand and, on the other, moving a substantial share of the assets to their corporate accounts within ZKB.

ZKB has continually enhanced its strengths in the investment and asset management business. At the beginning of February 2010 the function of Chief Investment Officer was created. He is responsible for defining investment policy at strategic level and, among other things, for making investment recommendations for ZKB's client advisers.

The confidence clients have in ZKB is also reflected in the Bank's asset management activities. The assets in the funds business together with assets from private and institutional asset management have now surpassed the 30 billion threshold (CHF 31.8 billion). Over the past three years ZKB has had the third highest inflow of assets of all fund managers, and it now ranks sixth in the Swiss fund market.

Interbank market has eased

The situation on the interbank market eased over the course of the past year, so that larger volumes were again traded directly between banks and less via central banks. Thus in the reporting year the funds due to and due from banks rose strongly. The due to banks item increased by CHF 4.6 billion (+24.9%). The funds due from banks, most of which are collateralized, were up by CHF 6 billion (+37.1%).

Equity base strengthened further

ZKB's equity base was strengthened further. At the end of 2009 the capital ratio (tier 1) was 14.1% (2008: 12.9%). Thus the Bank has a very sound equity base, particularly compared with banking institutions outside Switzerland. ZKB uses no hybrid or subordinated instruments, so that its equity is exclusively core capital (tier 1). As one of the few banks worldwide, ZKB has again been given an AAA or Aaa rating by the three main international rating agencies.

High profit distribution

ZKB is the bank for the population of Zurich and they participate directly in the Bank's success via its profit distribution. The excellent result and its sound capital base allow ZKB to increase its profit distribution by 10% to CHF 330 million. The canton of Zurich will receive CHF 220 million (2008: CHF 200 million). Zurich's 171 local authorities will receive CHF 110 million direct (2008: CHF 100 million).

Thus each local authority in the canton will receive roughly CHF 82 per inhabitant (2008: CHF 75). Additionally, the canton will receive CHF 51 million to settle its costs for the endowment capital.

Well positined for the future

The Bank's broadly-based full service bank strategy has proved its worth and will be pursued further. ZKB is exceptionally well positioned for the challenges to come; it expects the economy to pick in 2010 - if somewhat haltingly. Despite the continuing uncertainties on the financial markets, the Bank has started into 2010 with confidence. It anticipates a challenging year and a good business result.

Zürcher Kantonalbank, Press Department
Tel. +41 (0)44 292 29 79 Fax +41 (0)44 292 38 23