Moody's changes Swiss banking system's outlook to stable from negative

Moody's Investors Service has raised the outlook on the Swiss banking system to stable from negative, reflecting the rating agency's expectation that government support assumptions for senior creditors will not diminish further over the next 12-18 months.

The main driver of the Swiss banking system's outlook change to stable are the revised government support assumptions, which are now fully reflected in Swiss banks' ratings.

"The stable outlook also reflects our view of a resilient operating environment for Swiss banks with Swiss GDP forecasted to grow 0.8% in 2015 and 1.5% in 2016. However, sustained property-price inflation, persistently low interest rates and potential negative effects from the stronger Swiss franc form key challenges for Swiss banks over the next 12-18 months," says Michael Rohr, a Senior Credit Officer at Moody's.

Swiss banks solid financial profiles display very low problem loan ratios, strong and rising capital ratios, limited reliance on wholesale funding in most cases, and substantial loss absorption capacity through earnings and loan-loss reserves.

In Moody's view, the stronger Swiss Franc will only have limited effects on Swiss banks' operating conditions. However, the low-interest rate environment will continue to exert pressure on Swiss banks' revenue bases. At the same time, rising asset margins coupled with effective hedging policies at most banks will help sustain sound earnings generation capacity, stabilising Swiss bank's capital ratios at high levels.

Negative interest rates and the country's role as a safe haven for investment led to increased demand for domestic real-estate assets during the first half of 2015 that has refuelled property price inflation. The imbalance between mortgage-loan growth and GDP growth is therefore likely to persist during Moody's outlook horizon and may start to exert pressure on banks' asset quality and -- ultimately -- credit profiles in the case of a larger-than-anticipated housing-market downturn.