Corporate banking
Corporate banking is a key component of Swiss banks’ business models. Corporate finance, financial transactions and capital markets business are of vital importance for the Swiss economy. Providing liquidity and access to financing and other services for growth investments, exports and capital markets is an essential prerequisite for Switzerland’s economic competitiveness and high productivity. Switzerland’s outstanding corporate banking industry makes it attractive as a base for companies or a location for their financing activities.
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Corporate finance
Various financing options are available to companies in Switzerland. The traditional “relationship banking” model is based on long-standing relationships between a bank and its customers and encompasses a wide range of products designed to meet a variety of customer needs. Bank loans are thus the most important source of debt capital for most Swiss companies. By contrast, corporate banking in other countries is more heavily dependent on other forms of financing such as capital markets business or private debt without the involvement of banks.
Corporate lending volume growing much faster than GDP
Currently, banks in Switzerland have granted credit facilities totalling more than CHF 700 bn for corporate loans. Over half of all loans were granted to micro-companies with up to nine staff. Since these account for approximately 26% of the Swiss labour force, they are thus much more dependent on lending than larger companies. In addition, there are credit limits for small and medium-sized enterprises, large companies and public corporations. Smaller Swiss communes and intercommunal entities in particular traditionally finance their investments through bank loans. At the start of the COVID-19 pandemic, the Federal Council worked swiftly with banks and authorities to introduce a loan programme in March 2020 that provided the companies affected with fast and straightforward access to liquidity. The credits of up to CHF 500,000 were 100% guaranteed by the federal government. Loans above this amount are 85% guaranteed by the federal government, up to a maximum of CHF 20 mn per company. This programme of credits backed by joint and several guarantees was developed jointly by the authorities, banks and the SBA and incorporated into ordinary law in December 2020 via the COVID-19 Joint and Several Guarantee Act. The credits were initially interest-free. Following the turnaround in interest rates, however, they accrue interest in line with the SNB’s headline rate. The federal government publishes an overview of COVID-19 bridging credits that is updated on an ongoing basis.6 The high economic importance of corporate lending is clear from the fact that the total volume increased by more than 4.5% a year between 2010 and 2021, whereas Swiss GDP grew by around 1.2% a year on a nominal basis over the same period. This is especially true for SMEs, which account for the largest share of lending growth. In this segment, roughly 85% of all loans are secured by mortgages, which strengthens borrowers’ risk capacity. The fact that lending volume is rising steadily clearly illustrates that the supply of credit is assured in Switzerland. Unlike other countries, Switzerland was not confronted with a credit crunch in the midst of the financial crisis or the COVID-19 pandemic. This is clear from the findings of the SNB’s company surveys.7
Broad range of financing solutions for companies
A number of other financing instruments are available to Swiss companies besides bank loans, including factoring (see above), leasing and mezzanine finance, each of which has advantages for companies in specific situations. Banks also offer services tailored to exporters, such as buyer and fabrication loans. Structured finance is an umbrella term covering financing instruments that are more complex than conventional loans, e.g. securitisation, acquisition finance and sale-and-lease-back contracts.
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Transaction banking
Transaction banking comprises products and services for companies that cover the financial flows arising from their business activities. These range from processing millions of customer payments every day to bespoke trade finance in which the bank secures international financial flows. From the customers’ perspective, transaction banking facilitates liquidity and capital planning and reduces transaction costs. Banks can also reduce counterparty risks in international trade through their networks of foreign correspondent banks.
Mass-market and bespoke transactions
In 2022, banks processed approximately 2 bn domestic debit and credit card payments for Swiss-based vendors with a total volume of CHF 102,220 bn. Card payments are a typical form of highly automated mass-market business. Their advantage from a company’s perspective is that they reduce the costs and risks associated with standard payments. Almost 30% of transactions in Switzerland are still carried out using cash. Banks therefore continue to offer payment services geared to companies that accept cash.
Letters of credit reduce risks in global goods trading
Another example of a transaction banking product is the letter of credit, which is primarily used in international trade. It is a conditional guarantee under which the bank agrees to cover, for example, a payment owed by an importer to an exporter. The exporter is thus assured payment, while the importer is assured delivery. The bank only executes the payment when the exporter can prove that the goods have been delivered using the documentation defined in the letter of credit. From the bank’s perspective, a letter of credit constitutes a contingent liability as the bank is obliged to pay the exporter when the agreed documentation is provided. Banks in Switzerland had liabilities from documentary letters of credit totalling CHF 28.1 bn in 2021. After falling by an average of 0.9% a year over the course of a decade, this volume rose again in 2021. Foreign banks have the largest share of this business. The big banks are also key providers of these products. Access to a functioning documentary foreign business is vital to the Swiss economy, which is heavily dependent on foreign trade. Documentary foreign business means transactions that are not executed until the bank receives certain documents relating to the flow of goods, e.g. delivery notes. In particular, it includes documentary letters of credit and documentary debt collection. Through this business, banks offer companies security in global goods trading and help to safeguard Switzerland’s competitiveness in foreign trade. Other transaction banking services besides customer payments and documentary foreign business include cash management, deposit and money market business for corporate customers.
Capital markets business
Whereas SMEs are financed mainly by bank loans and private transactions, larger companies are focused on the capital markets, where larger sums can be raised on (mostly) more attractive terms. In contrast to the English-speaking world, capital markets business is less important than bank loans for Swiss companies in terms of issuance volumes. Public-sector borrowers are thus typically the biggest bond issuers in Switzerland.
Capital markets enable issuance and trading of shares and bonds
Issuing shares via the stock exchange allows a company to spread its equity capital among a wider group of investors. Banks can support an initial public offering or IPO, for example, with various services such as financial analysis, transaction structuring, bookbuilding and setting the issue price. The bond market, meanwhile, allows companies to place debt capital. Banks also support bond issues with specific services. Issuance of CHF-denominated bonds has fluctuated between CHF 9 bn and CHF 25 bn per quarter every year since 2010, the average figure being just over CHF 17 bn. With an average share of about one third, foreign issuers constituted the largest borrower category during this period, although their share has fallen steadily over the years. Central mortgage institutions, meanwhile, saw their share grow steadily over the period – it averaged 24%. The federal, cantonal and communal governments together accounted for 13% of all bonds. Utilities, industrial firms, insurers and other service providers were responsible for 17%, banks for 13%.
Capital market continues to fulfil its role in times of crisis
Capital market demand goes up and down in line with companies’ financing needs. In the previous decade, net demand from domestic borrowers peaked at CHF 15 bn per quarter. This changed during the COVID-19 pandemic as a result of increased demand for financing in both the public and private sectors. In the second quarter of 2020, new CHF bond issues from domestic borrowers amounted to CHF 20.4 bn. Issuance was thus around twice the historical average, although it returned to more normal levels in the quarters that followed. This shows that the Swiss capital market fulfils its role as a provider of liquidity even in challenging times and thus contributes to the stability and prosperity of Switzerland’s economy. At the same time, however, its role in financing companies remains small by international standards. This is due to a number of factors, including stamp duty and withholding tax, which make Swiss securities unattractive for foreign investors and continue to place the Swiss capital market at a considerable disadvantage internationally.
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