Swiss banks hammered as earnings face hit from currency surge

By Steve Slater

LONDON (Reuters) - Shares in Switzerland's two big banks UBS and Credit Suisse slumped as much as 15 percent on Thursday after a massive strengthening in the Swiss franc raised the threat that reported earnings will be hit hard.

The Swiss National Bank (SNB) shocked financial markets by scrapping a three-year-old cap on the franc, sending it soaring nearly 30 percent against the euro. The SNB also cut interest rates, which were already negative, to minus 0.75 percent.

Analysts said that both factors could dent profits at the banks. Swiss banks derive much of their earnings overseas, which translates into lower reported earnings in francs, and have a greater share of costs in francs.

"We estimate that the sharp Swiss franc appreciation will potentially negatively impact forward earnings by about 7-10 percent. With interest rates going into deeper negative territory, there could be further margin pressure," Citi analyst Kinner Lakhani said.

Credit Suisse shares were down 10.6 percent at 20.75 Swiss francs and UBS was down 10.8 percent at 14.88 francs by 1414 GMT. Both had slumped by more than 15 percent at one stage, which dragged Credit Suisse shares to a two-year low. Julius Baer shares were down 12.4 percent.

A 10 percent appreciation in the Swiss franc against the U.S. dollar would have knocked 277 million francs ($271 million) off Credit Suisse's pre-tax income in the first nine months of last year and a 10 percent appreciation against the euro would have hit it by 180 million Swiss francs, the bank said in its third-quarter results.

'ADVERSE IMPACT'

"The appreciation of the Swiss franc in particular and exchange rate volatility in general have had an adverse impact on our results of operations and capital position in recent years and may have such an effect in the future," it warned.

About 19 percent of Credit Suisse's revenue and 27 percent of its costs were in Swiss francs last year. About 69 percent of revenue was in U.S. dollars and euros, compared with 52 percent of expenses.

Next year only 20 percent of Credit Suisse's earnings, 25 percent of UBS's and 14 percent of Julius Baer's are expected to be in Swiss francs, analysts at Barclays estimated.

Adding in the impact of higher costs -- especially in wealth management -- UBS could take a 14 percent earnings hit, Credit Suisse 15 percent and Julius Baer 30 percent, Barclays said.

On the flipside, Swiss banks' capital and leverage ratios should receive a slight lift from the currency moves.

The amount of their capital in francs would decrease, but their assets would go down by a greater amount (as they have more assets in overseas currencies), which would improve capital ratios.

UBS has said that a 10 percent appreciation of the Swiss franc against other currencies would improve its common equity capital ratio by 15 basis points.

Credit Suisse has said that a 10 percent appreciation against the U.S. dollar would improve the bank's core capital ratio by 10 basis points and its Swiss leverage ratio by 3.2 basis points.

(Editing by David Goodman)