Press Release from 27 February 2009

Despite the adverse economic climate Zurich Cantonal Bank (ZKB) presented a satisfactory result for the 2008 business year. Nevertheless, the extraordinary turbulences and uncertainties on the financial markets are clearly reflected in the income statement. Operating earnings (- 11.1%) and gross profit (- 27.6%) were both down against the previous year. Moreover, in view of rapidly deteriorating economic prospects, ZKB raised its allowances for credit risks substantially in the reporting period. Consequently, consolidated net income fell to CHF 503 million (- 40.4%). With its healthy capital base, ZKB can keep profit distribution to the canton and local authorities at the high level of CHF 352 million (- 12%). The net inflow of new funds of CHF 16.4 billion and robust growth of the main balance sheet items shows how firmly ZKB is established in Zurich's business community and also reflects the bank's good medium-term earnings potential.

The past year was shaped by the exceptionally difficult situation on the financial markets which, as expected, is reflected in ZKB's business result. There was a steep decline in income from trading operations and the fourth quarter proved to be a veritable endurance test. The result for the commission and fee business was good, only down 7.0% on the previous year. The interest business was the strongest earnings contributor, up by 8.5% on 2007. Costs were mainly generated through the implementation of the growth initiative, measures to enhance the IT platform, and through provisions in the credit business.

Pleasing interest business

ZKB acquitted itself well in its interest business, which was less prone to fluctuations than other banking sectors and, in the past business year, contributed 70% (2007: 57%) to operating earnings. Interest income amounted to CHF 1.3 billion (+ 8.5%). This pleasing result is attributable to ZKB's strong roots in the local market and to a larger income contribution from Asset & Liability Management. ZKB reacted with substantial interest rate cuts to the steadily declining economy in the reporting period. The bank believes that such interest rate signals will stimulate the Swiss real estate market and also small and medium-sized enterprises (SMEs).

Respectable result from commission and fee business

Commission and fee income totalled CHF 471 million (- 7.0 %). This is a good result given the adverse stock market climate. Although income from credit and other services operations was up by some CHF 6 million, commission income from securities and investment transactions fell by CHF 42 million. Nevertheless, ZKB strengthened its position in the investment sector in the past year, as is clearly demonstrated by the inflow of CHF 16.4 billion in new funds. In the reporting period the bank's innovative products aroused considerable interest. ZKB's precious metals ETFs, for example, which have also been made available to the bank's retail clients since May 2008, were especially popular among investors.

Acid test for trading operations

2008 was a year of extremes for trading operations. After CHF 18 million in the first half of the year, income from trading operations at year end amounted to CHF 52 million. This was clearly below the prior year's result (- 84.7%). However, developments in the various trading sectors differed considerably. Whereas top results were reached in trading in bond, credit and interest derivatives as well as in foreign exchange, banknotes and precious metals, trading in securities and security derivatives remained below expectations. There were also high price losses in the region of CHF 40 million on the Ascom portfolio.

Other ordinary income totalled CHF 45 million (- 24.1%). The decrease of CHF 14 million is primarily attributable to lower valuation of financial investments.

Investing in the future

Operating expenses for 2008 rose by a total of 2.5% to CHF 1.2 billion. With CHF 735 million, personnel expenses were CHF 30 million lower than in 2007 (- 3.9%). The profit-related variable compensation components decreased noticeably in line with income developments and amounted to CHF 116 million (- 31%). Part-time adjusted, ZKB had 4,685 employees at end 2008 (2007: 4,446). ZKB is focusing on growth in its investment and asset management operations and wants to strengthen its client support. Hence the bank has created more than 200 new jobs (+ 5.4%) in this sector.

Other operating expenses increased by CHF 59 million to CHF 464 million (+ 14.5%). Particularly high investments were required to implement the new IT strategy, where the target is to update the bank's own IT platform to the latest standard. In view of the changed economic environment, ZKB will renew its IT infrastructure on a step-by-step basis.

Judicious allowances policy

The rapidly deteriorating economic climate led ZKB to increase its allowances for credit risks. In line with a future-orientated risk policy, CHF 166 million was earmarked for allowances, provisions and losses - roughly four times as much as in 2007.

Extraordinary income amounted to CHF 60 million (2007: CHF 13 million). A major contributor here was the sale of homegate AG. Thus for the 2008 business year the Group's net income totalled CHF 503 million, CHF 340 million lower than in the previous year (- 40.4%).

Substantial growth of the credit business

ZKB's total assets rose strongly year-on-year reaching CHF 113.2 billion at end 2008 (+ CHF 10.1 billion or + 9.8%). The loans and advances to customers item rose by 6.0% to CHF 64.4 billion. CHF 53.9 billion (approx. 84%) of this total is attributable to mortgage lending. Total mortgage lending increased by CHF 1.7 billion or 3.3% (2007: CHF 0.7 billion). The share of variable mortgages in total mortgage lending fell from 21% to 18%.

The demand for loans rose substantially in 2008. In line with its mandate to support SMEs in Greater Zurich and its promise to be a reliable partner even in economically difficult times, ZKB increased its due from clients item by CHF 1.9 billion to CHF 10.5 billion (+ 22.4%). At the same time, credit limits for corporate clients rose by CHF 3 billion to CHF 27.2 billion (+ 12.4%). Within the scope of this growth ZKB financed 101 traditional start-ups in the amount of CHF 45 million, 21 innovative start-ups with credit limits in excess of CHF 10 million, and granted 76 venture capital loans totalling CHF 97 million. The nominal value of nonperforming loans remained at an unchanged low level of CHF 0.2 billion.

Safe investments are trumps

In view of the clear indications of a global recession, investors were primarily defensive, preferred safe investments and opted for competence and the ability to weather the current crisis. In the reporting period the due to clients item rose by CHF 13.7 billion or by almost one quarter to CHF 72.0 billion. The due to clients in savings and investment accounts item alone increased by CHF 7.3 billion to CHF 30.7 billion (+ 31.0%). The other amounts due to clients, which included fixed-term deposits of CHF 15.9 billion and call deposits of CHF 13.7 billion, was up CHF 6.3 billion to CHF 29.6 billion (+ 27.0%). Medium-term notes were seen as a safe investment and, with an increase of CHF 830 million, reached a total of CHF 3.0 billion (+ 39.1%). In the past year, bonds and Pfandbrief bonds proved less attractive as a refinancing instrument so that these portfolios decreased overall by CHF 648 million to CHF 8.8 billion.

CHF 16.4 billion in new funds

At the end of 2008, ZKB's assets under management amounted to CHF 122.1 billion - CHF 2.9 billion more than at end 2007. The decline of assets under management resulting from stock exchange losses in the amount of CHF 13.5 billion was more than compensated by the net inflow of new funds totalling CHF 16.4 billion (2007: CHF 2 billion). CHF 7.5 billion of this total is attributable to private persons and CHF 8.9 billion to corporate and institutional investors.

Hazardous interbank business

On various occasions, the bank crisis almost brought interbank operations to a standstill in 2008. The share of bank funds in the balance sheet total declined rapidly in the reporting year: the due to banks item decreased by CHF 9.5 billion to CHF 18.6 billion (- 33.8%) and funds due from banks fell by CHF 7.2 billion to CHF 16.3 billion (- 30.6%). Of these the decline in foreign currencies was particularly noticeable (- 44.5%). Conversely, funds due from banks in Swiss francs rose slightly (+ 0.3%). Loans to banks were generally on a much shorter-term basis.

Money market placements amounted to CHF 10.6 billion (2007: CHF 124 million). This item includes SNB bills which the Swiss National Bank has issued since October 2008 to manage liquidity on the money market.

Financial investments rose by CHF 1.4 billion to CHF 3.7 billion (+ 58.9%). This increase is primarily attributable to taking over Pfandbriefe (covered bonds) from the Pfandbriefbank der schweizerischen Hypothekarinstitute. The trading portfolios for securities and precious metals decreased by CHF 2.6 billion to CHF 7.0 billion (- 26.9%).

Comfortable equity base

At end 2008, ZKB had an equity base of CHF 7.4 billion (+ 1.4%). Whereas, by law, the minimum BIS ratio is 7%, ZKB had a ratio of 12.9% (2007: 13.3%). The return on equity was 7.2% (2007: 12.5%).

High profit distribution

A healthy capital base and the bank's very respectable result considering its wide-ranging trading operations allow a more than proportional distribution of profit in the amount of CHF 352 million (- 12%). This includes the canton's costs of CHF 52 million for the endowment capital of CHF 1.925 billion (2007: CHF 55 million). CHF 200 million will be paid into the treasury of canton Zurich (2007: CHF 230 million). CHF 100 million (2007: CHF 115 million) has been earmarked for Zurich's 171 local authorities. Thus each local authority in the canton will receive roughly CHF 75 per inhabitant (2007: CHF 90).

Uncertain economic development in 2009

ZKB started well into the new year. In view of the numerous imponderables with regard to the world economy, however, ZKB has prepared itself for a challenging year. The bank will grasp any opportunities for growth that arise, focusing primarily on wealthy private clients, pension funds and external asset managers. ZKB also believes that, in a difficult year, it will be able to enhance its position in the corporate banking sector. Thus the bank has a good basis for further sustainable growth.

Zürcher Kantonalbank, Pressestelle
Tel. 044 292 29 79 Fax 044 292 38 23