Press Release from 28 August 2009

Zurich Cantonal Bank reported very satisfying six month results

Zurich Cantonal Bank (ZKB) successfully mastered the first six months of the year. Despite a very challenging market environment, ZKB reported an excellent result for the first half of 2009 thanks to a good earnings mix and to a noticeable customer confidence bonus in all the bank's business segments. Gross profit rose year on year by 63.4% to CHF 581 million, and consolidated net income by 37.0% to CHF 414 million. Further grounds for satisfaction were the continuing net inflow of new funds in the amount of CHF 3.7 billion and the extremely healthy capital base with eligible capital of CHF 7.0 billion.

Although the Swiss economic environment was anything but rosy, Zurich Cantonal Bank (ZKB) clearly increased its profitability in the first half of 2009 compared to the same period in 2008. Operating income rose by CHF 302 million to CHF 1.2 billion (+ 33%) - a new record level. Although the share of interest income in total operating income fell from 69% to 47%, the share of income from non-interest banking transactions rose strongly from 28% to 48%, primarily because of the exceptional result from trading operations.

Opportunities in trading fully exploited

With income from trading operations up by CHF 331 to CHF 349 million compared to the first six months of 2008, earnings development in this business segment was more than satisfactory. Thanks to higher credit spreads and wider margins, interest trading (bonds, interest-rate and credit derivatives) generated high income contributions at low risk. As major competitors in investment banking were noticeably cautious, ZKB was very much in demand as a reliable market maker during the reporting period. Currency and foreign exchange trading also benefited from the advantageous climate in the first six months, in which high volumes were generated. Finally, ZKB returned to the profit wedge with its securities and security derivatives trading portfolios.

Lower income from interest operations

Income from interest operations decreased by 10.5% to CHF 575 million. Lower margins from customer transactions, the lack of investment opportunities for excess liquidity and the high cost of securing the balance sheet structure against increasing interest rates impacted negatively on interest income in the first half of the year.

Good results from the commission and fee business

Income development for the commission and fee business was very reassuring, rising by 2.2% to CHF 246 million as against the prior year. The bank's efforts within the scope of its growth initiative launched last year are beginning to pay off. Despite a challenging market environment income from securities and investment transactions remained largely at the prior year's level. Moreover, commission income from lending activities increased.

Other ordinary income amounted to CHF 58 million (first six months 2008: CHF 24 million). The increase is attributable to the sale of financial investments.

Enhanced client support

Operating expenses in the first half of the year rose by 13.5% to CHF 648 million. Personnel expenses rose steeply by 21.7% to CHF 446 million because the total number of employees increased by 183 or 4% (at mid 2009, ZKB personnel part-time adjusted totalled 4,725 people group-wide), pay adjustment were undertaken, and higher profit-related payments are expected at year end. Other operating expenses amounted to CHF 202 million, 1.3% down on the prior year. This decrease is a first result of cost optimization efforts in ZKB's IT and logistics.

Marked increase in gross profit

As the 33% increase in operating income was substantially higher than the rise in operating expenses (+ 13.5%), ZKB reported an impressive CHF 225 million increase in its gross profit. This totalled CHF 581 million (+ 63%), the second highest result ever reached since ZKB started operations almost 140 years ago.

Higher allowances and provisions

As a bank with strong international links, the crisis on the financial markets inevitably also impacted on ZKB. This situation, together with a judicious allowances and provisions policy in line with economic developments, led to an increase in the allowances, provisions and losses item to a total of CHF 133 million (first half 2008: CHF 62 million). However, ZKB still regards its risk situation as comfortable. In proportion to client lending in excess of CHF 66 billion, the provisions made are a modest 0.2%, even when viewed over the long term. The average provision for credit risk measured against credit volume made by European banks over the past 15 years ranges between 0.3 and 0,7%.

At mid 2009, extraordinary income amounted to CHF 6 million (mid 2008: CHF 51 million).

Impressive six-month net income

With group net income of CHF 414 million, ZKB surpassed the result for the first six months of 2008 by more than one third (+ CHF 112 million or + 37.0%). This good six-month result demonstrates that the bank's diversification strategy with its three main pillars - interest operations, commission and fee operations, trading operations - is correct, not least in a period of recession.

Strong growth of balance sheet total

Compared to the end of 2008, ZKB's total assets rose strongly by CHF 9.5 billion to CHF 122.7 billion (+ 8.4%) in the reporting period. This is primarily attributable to increased activity on the interbank market and the gratifying inflow of client deposits. Client loans rose by CHF 2.0 billion to CHF 66.4 billion (+ 3.1%). At mid year, the share of mortgages in client loans amounted to CHF 56.0 billion (84.3%). While maintaining its high quality, the mortgage portfolio increased in the first half of the year by a very satisfactory CHF 2.1 billion (+ 3.9%). An environmental initiative launched by ZKB contributed to this success. The bank supports energy-related modernisation of properties by granting reduced interest rates. As interest rates are low and the conditions are attractive, many clients changed their variable mortgages into fixed-term or Libor mortgages.

Clear commitment to the credit business

The funds due from clients item amounting to CHF 10.4 billion remained practically unchanged compared to the end of 2008 (- 0.9%). Although credit limits for enterprises were increased from CHF 27.2 billion to CHF 28.5 billion, many companies were very cautious in their investments in view of the uncertain economic development. Moreover, various public corporations repaid substantial loans.

The securities and precious metals trading portfolio rose in the first six months of 2009 by CHF 912 million to CHF 7.9 billion (+ 13.0%). Precious metals accounted for CHF 1.1 billion.

Interest bearing investment of excess liquidity

With the aim of gradually reducing its excess liquidity, ZKB has placed substantial liquid funds in financial investments. These investments were made in Pfandbrief bonds issued by the Pfandbriefbank schweizerischer Hypothekarinstitute as well as in first-class bonds with short maturities and fixed coupons. At the end of June 2009 financial investments amounted to CHF 9.4 billion (+ CHF 5.7 billion or + 154.5%).

Interbank market returns to normal

After a long period of sluggishness the situation on the interbank market has largely normalised. Thus funds due to banks, which are mainly secured, rose strongly in the first half of 2009 by CHF 6.0 billion to CHF 22.3 billion (+ 37%). This also applied to funds due from banks on the liabilities side, which increased by CHF 7.3 billion to CHF 25.9 billion (+ 39.0%). At the same time, money market placements - primarily short-term SNB bills - were reduced by CHF 8.5 billion to CHF 2.1 billion (- 80.4%).

ZKB draws investment clients

Thanks to its robustness, its competence, and its accessibility, ZKB is a veritable magnet for investment clients. Assets under management rose in the first six months by CHF 7.3 billion to CHF 128.8 billion (+ 6.0%). This makes ZKB the eighth largest asset management institute in Switzerland. The net inflow of new funds amounted to CHF 3.7 billion. CHF 3.6 billion is attributable to appreciation on the stock exchanges. CHF 4.9 billion of new funds were deposited by private persons. Conversely, companies and institutional investors reduced their call and fixed-term deposits by CHF 1.2 billion.

The bank's asset management has benefited from ZKB's good current position in the investment business. The assets under management in this business segment passed the CHF 30 billion threshold for the first time. The assets, which comprise funds from institutional asset management (CHF 15.8 billion), fund operations (ZKB funds and ETFs totalling CHF 12.8 billion), and private wealth management (CHF 2.5 billion), show annual average volume growth of 23%. Over the past three years ZKB registered the second highest inflow of funds of all fund providers. ZKB now ranks sixth in the Swiss fund market.

Strengthened confidence

The confidence ZKB currently enjoys in the Swiss banking environment is also reflected on the liabilities side of its balance sheet. In mid 2009, customer deposits totalled CHF 73.3 billion - CHF 1.3 billion more than at the end of 2008 (+ 1.7%). There were some marked volume shifts according to segment. Because of the low interest rates, many clients moved their matured fixed-term deposits to savings accounts. Thus funds due to clients in savings and investment accounts increased by CHF 4.7 billion to CHF 35.4 billion (+ 15.4%), whereas the remaining funds due to clients, which include fixed-term deposits, fell by CHF 2.8 billion to CHF 26.8 billion (- 9.4%). Taken together, the portfolio of long-term client deposits such as medium-term notes, bonds and Pfandbrief bonds decreased by CHF 0.7 billion as against the end of 2008.

Solid equity base

At mid June 2009 ZKB's eligible capital amounted to CHF 7.0 billion. The minimum required capital would be CHF 3.9 billion. This extremely solid equity base resulted in a capital requirement covering ratio of a very healthy 177.9%, and the BIS ratio was 12.5%. The return on capital for the first six months of 2009 was 11.5% (first half 2008: 8.6%).

Equipped for the future

As Switzerland's largest cantonal bank and the leading provider of financial services in Greater Zurich with more than one million clients, ZKB is well equipped in every way to meet the challenges of the future. Although the economic environment will certainly remain demanding in the next few months, ZKB anticipates a better year-end result than for 2008.

Zurich Cantonal Bank, Press Department
Tel. 041 (0)44 292 29 79 Fax +41 (0)44 292 38 23