Swiss zero rate squeeze on banks may lead to bumpy ride for borrowers

By Oliver Hirt, John Revill and Ariane Luthi

ZURICH (Reuters) -Banks in Switzerland will be searching for other ways to squeeze borrowers as their lending margins are hit by the central bank's introduction of zero rates, analysts say, suggesting banking services and some types of credit may soon get costlier.

The Swiss National Bank's June decision to cut its benchmark rate to zero took the country's borrowing costs to the lowest level among major economies - far lower than the neighbouring European Central Bank's key 2.0% deposit rate, for example.

Following the SNB's two rate cuts this year, banks may see their net interest income fall by about 660 million Swiss francs ($830 million) this year, Daniel Geissmann from banking consultancy zeb estimates. Banks made roughly 20 billion francs from this business in 2024.

"Zero interest rates are the worst-case scenario for banks," Geissmann said. "The banks lose because they can't pass on the rate cut to deposits."

When interest rates were last around 0% between 2011 and 2015, Swiss banks' net interest rate margin fell from 1.4% to 1.1%, hitting profits, SNB data show.

Geissmann estimated banks lost out on nearly 4 billion francs between 2011 and 2014, but noted the effect would likely be less pronounced this time because lenders are starting from a lower margin level.

Reluctant to pass the cost on to depositors via sub-zero rates, if banks want to protect their profits they must make up for the missing revenues elsewhere.

Martin Hess, chief economist of the Swiss Bankers Association (SBA), said credit could become more expensive as banks have to rely on costlier sources of funding such as capital market instruments instead of deposits.

"Ultimately, this will be passed on to the real economy and customers," he said, pointing to higher mortgage costs.

PROPERTY

Ultra-low interest rates tend to fuel demand for property, with the 2011 to 2015 period seeing house prices jump by 15%, triple the rate in 2000-2005, SNB data show.

"This increased risks in the property market of overvaluations and a correction, although it didn't happen last time," said GianLuigi Mandruzzato, an economist at EFG Bank.

"These risks could emerge again."

It was also challenging for insurers and pension funds, which found it hard to generate returns to cover their commitments as yields from bond investments plunged, he noted.

UBS economist Maxime Botteron said that banks may also become increasingly reluctant to lend if the yield curve flattened further or inverted with rates at zero.

The stock market is also not immune to the impact of the SNB's zero rates. With official rates well below those of other central banks in Europe and North America, shares of Switzerland's main listed banks have already begun to underperform those of their rivals.

Shares of UBS, which faces tougher capital rules following its 2023 takeover of Credit Suisse, are up just 2.2% in 2025, while Julius Baer's shares are down 6.7% as new management seeks to draw a line under a recent run of setbacks.

The Stoxx European Banks Index, by contrast, has risen 29.3% this year, highlighting the Swiss underperformance.

Savings and loans banks are likely to be most affected by the erosion of lending margins.

Banks that primarily collect deposits and issue mortgages such as Raiffeisen and Valiant generate more than 70% of their revenue from their interest business, company data show.

Less affected are outright wealth and asset managers like Julius Baer and Vontobel, which derive only around 10% from interest income. Diversified lenders like UBS at about 15% and ZKB with 54% lie in between.

Vontobel banking analyst Andreas Venditti said that how hard banks are hit by zero rates will ultimately depend on how long those rates stay in place.

"The problem gets worse if you stay at zero for a longer period of time," he said. "Interest margins in Europe and especially in the U.S. are much higher."

($1 = 0.7966 Swiss francs)

(Reporting by Oliver Hirt, Ariane Luthi and John Revill; Additional reporting by Balazs Koranyi in Frankfurt; Writing by John Revill; Editing by Dave Graham and Hugh Lawson)