Stable profitability at Zürcher Kantonalbank
In a challenging market environment Zürcher Kantonalbank (ZKB) reached a consolidated net income for the first six months of 2011 of CHF 357 million, only marginally below the result for the first half of 2010 (- 2.9%). During this period ZKB's interest business as well as its commission and fee activities developed well, whereas its trading operations were subject to market and foreign exchange turbulences and thus lost some momentum. For the first six months ZKB reported a net inflow of new funds in the amount of CHF 2.4 billion, which means that the inflow of new funds has slowed down somewhat compared to the previous year.
Despite considerable uncertainties on the markets, cautious investors and low interest rates, Zürcher Kantonalbank (ZKB) maintained its profitability in the first half of 2011. Year-on-year, operating income was only down by CHF 24 million to CHF 1.0 billion (- 2.3%). The interest business proved to be the most profitable source of income and contributed 56% to total operating income; commission and fee activities generated 27%, trading operations 15% and other ordinary income accounted for 2%.
Higher income from ZKB's interest business and commission and fee activities
Compared to the all-time low in the first six months of 2010, ZKB increased interest income by CHF 34 million to CHF 563 million (+ 6.6%).
ZKB's commission and fee business also did well in the first half of the year. With income of CHF 273 million (+ 0.3%), the prior year's result was surpassed marginally although, in view of the uncertain prospects, clients were naturally still very cautious in their investment decisions. The lion's share of commission and fee income was generated through securities and investment transactions.
Lower income from trading operations
In the reporting period the financial markets were extremely erratic. The passivity of the investors impacted on ZKB's trading operations, which are strongly client orientated. Although income from trading operations in the amount of CHF 151 million was hardly lower than the CHF 155 million reached in the second half of 2010, it fell by CHF 60 million compared to the first six months of 2010 (- 28.3%). With an average of CHF 23 million, the market risks in the trading book (value-at-risk with a 10 day holding period) remained at a low level in the reporting period (average in the first six months of 2010: CHF 21 million).
Cost discipline
Operating expenses, which comprise personnel and other operating expenses, increased slightly year-on-year and totalled CHF 610 million (+ 1.3%). Personnel expenses rose by CHF 8 million to CHF 426 million (+ 1.9%). Today the Bank has 67 more employees than at the end of December 2010. Group wide and part time adjusted the total number of employees at 30 June 2011 was 5,039. Thanks to stringent cost control, other operating expenses remained practically unchanged year-on-year at CHF 184 million (- 0.2%).
CHF 401 million gross profit
Primarily because of lower income from trading operations in the first half of 2011, gross profit for the reporting period fell by 7.4% to CHF 401 million compared to the first half of 2010. In view of the challenging economic environment this is a very respectable result.
In the first half of 2011 the allowances, provisions and losses item only amounted to CHF 3 million (first half of 2010: CHF 33 million). This very satisfying result is attributable to ZKB's judicious risk management, but also to the continuing good economic climate in Switzerland and an unchanged stable real estate market in the Greater Zurich area. Depreciation and amortization of fixed assets amounted to CHF 42 million, CHF 6 million more than in the first six months of 2011 (+ 16.4%).
Consolidated net income at prior year's level
ZKB's bottom line for the first six months of 2011 shows consolidated net income of CHF 357 million. Apart from lower allowances, the fact that this result is only marginally below the prior year's level (- 2.9%) can, once again, be put down to ZKB's good earnings mix. In the reporting period the cost-to-income ratio (operating expenses together with depreciation and amortization of fixed assets) was 64.6%, very slightly higher than ZKB's defined target range of 58% to 64% (first half of 2010: 61.7%).
Slower growth of mortgage portfolio
Compared to the end of December 2010, the balance sheet total increased by CHF 3.7 billion to CHF 130.1 billion (+ 2.9%). Loans to clients accounted for more than half of total assets, which rose by CHF 2.3 billion to CHF 73.4 billion (+ 3.2%). The mortgage portfolio grew by CHF 1.5 billion to CHF 63.5 billion (+ 2.4%). Compared to the prior year, growth has slowed down slightly. Given the low interest rates and attractive conditions, clients tended to opt for fixed-term or Libor mortgages. The share of mortgages without a fixed term (variable mortgages) is now only 4% (end December 2010: 5%).
Growing credit demand
As the bank of choice for corporate clients in the Greater Zurich area, ZKB was in demand as a partner during the reporting period. The volume of credit commitments in the corporate clients portfolio increased noticeably in the first half of 2011 by CHF 2 billion to CHF 35.4 billion. Credit was primarily taken up by larger companies with more than 250 employees. However, client interest not only focused on credits, but also on the expertise offered as part of ZKB's trading services - primarily with regard to currency and interest-rate hedging. In the reporting period foreign exchange issues became increasingly critical for export-orientated companies. The due from clients balance sheet item increased by CHF 792 million to CHF 9.9 billion (+ 8.7%).
Lively activity on the interbank market
Funds due from banks rose by CHF 2.9 billion to CHF 22.4 billion (+ 14.7%). At the same time, funds due to banks increased almost as strongly by CHF 2.4 billion to CHF 30.4 billion (+ 8.5%). In general, ZKB undertakes investments in the interbank market against collateral in the form of securities. Thus the majority of funds due from banks are secured.
CHF 1.5 billion was added to the securities and precious metals trading portfolio, which now amounts to CHF 13.9 billion (+ 12.4%). Total financial investments fell by CHF 1.2 billion to CHF 7.9 billion (- 13.1%).
Assets under management close to CHF 166 billion
Assets under management rose by CHF 0.7 billion to CHF 165.8 billion. The net inflow of new funds amounted to CHF 2.4 billion, whilst lower prices on the stock exchange reduced the value of assets under management by CHF 1.7 billion. In the first six months of 2011, total inflow of funds was CHF 5.3 billion. Of the total assets under management, CHF 86.2 billion is attributable to private persons and CHF 79.6 billion to corporate and institutional investors.
The balance sheet illustrates that ZKB is regarded as one of the safest banks worldwide. Total funds due to clients increased by CHF 1.5 billion to CHF 75.4 billion (+ 2.0%). A further CHF 409 million was added to funds due to clients in savings and investment accounts, which now amount to CHF 38.8 billion (+ 1.1%) and CHF 633 million to other amounts due to clients, which now total CHF 25.2 billion (+ 2.6%). ZKB acquired additional funds through issuing bonds (CHF 335 million) and Pfandbrief bonds (CHF 271 million). There was less demand for medium-term notes, where the portfolio decreased by CHF 157 million to CHF 1.2 billion (- 11.5%).
Robust capital base
ZKB has a very comfortable capital base. At 30 June 2011 the Bank's eligible capital amounted to CHF 7.6 billion compared to the minimum required capital of CHF 4.5 billion. The eligible capital is exclusively core (Tier 1) capital and includes no supplementary (Tier 2) or additional (Tier 3) capital. The capital ratio was lower than at end December 2010 (14.1%). The drop to 13.0% is primarily attributable to the new Capital Adequacy Ordinance which took effect on 1 January 2011; among other things, it requires substantially higher capital adequacy for market risks. It must also be taken into consideration that current profits are not included in the ratio calculation until the end of the year. The return on equity (ROE) was 9.1% (first half of 2010: 9.7%), which is within the Bank's defined target range of 9 - 12%.
Outlook
ZKB does not expect the clouds in the market environment to disperse in the second half of the year. Despite this and on the basis of current information, the Bank anticipates that it will reach as good a result for the year as it did in 2010. ZKB is firmly anchored in the economically healthy greater Zurich business area and can depend on its diversification strategy - proven strengths, which are also recognized by the rating agencies. Fitch, Standard & Poor's and Moody's all awarded ZKB the top AAA or Aaa rating.
Zürcher Kantonalbank, Press Department
Tel. +41 (0)44 292 29 79 Fax +41 (0)44 292 38 23
+41 (0) 44 292 29 79
