Financial Services

Hesitant recovery from the financial crisis
A sluggish economy, interest rates at a record low and sustained pressure on margins in the banking sector: these three essential elements represent what was generally a difficult business year, although there were also a few rays of hope. The central banks are now more than ever the dominant factor for the development of the financial markets. In 2012 they intensified their expansive monetary policy yet again, for instance by the massive purchase of government bonds. As a result, interest rates, including in Switzerland, reached new historic lows. In December the yield on ten-year Swiss government bonds, i.e. bonds/debentures with a term to maturity of 10 years issued by the Swiss National Bank, occasionally fell below 0.4%.

The Swiss National Bank successfully defended the minimum rate of CHF 1.20 to the euro introduced in September 2011. This measure has helped to prevent a heavier fall in growth: GDP was up by about 1%. Inflation remained in the negative zone. Equities achieved a better than average result in 2012: the Swiss Performance Index climbed by 17.7% to its highest level in over four years, while the MSCI World stock market index increased by 13.2%.

Encouraging trend for loans
In the 2012 financial year, customer lending by Migros Bank grew by 5.6% or CHF 1.7 billion to CHF 32.7 billion. Migros Bank has nevertheless consistently adhered to its cautious risk policy, and the bank was already meeting the more stringent requirements imposed by the Federal Government at the beginning of July 2012 for the granting of mortgage loans before they were introduced. In the year under review, there was further improvement in the high credit quality of the mortgage portfolio. At the balance sheet date, the portfolio of mortgages on residential properties totalled approximately CHF 26 billion, based on current market values, and 96.9% of the total consisted of first mortgages, with a loan-to-value rate of up to 67%. The proportion of second mortgages with a loan-to-value rate of up to 80% was just 2.9%, while 0.2% of the mortgage volume had an even higher rate. An unmodified, cautious loan check was also initiated for private loans, which is why the default rate has been maintained below the normal sector values. In 2012 the volume of private loans increased by 8.0% to CHF 1.1 billion.

Strong inflow of savings deposits
The total volume of customer deposits increased in 2012 by 7.4% or CHF 2.0 billion to CHF 29.4 billion. Savings and investment deposits in particular reported a sharp rise of CHF 1.7 billion to CHF 24.7 billion. By contrast, the volume of medium-term bonds fell by about CHF 200 million to CHF 1.4 billion. Customer deposit values increased by 2.4% to CHF 11.0 billion.

Operating income at record levels
The information given in the income statement of Migros Bank complies with the standard accounting regulations for banks in accordance with RRV-FINMA and shows the net income from financial services, which is independent of market interest rates, rather than total income. In a challenging environment, Migros Bank managed to increase its operating income by 0.4% to CHF 593 million, which represents the highest level in the company’s history. Although in the case of mortgages there was intense pressure on prices, interest income rose by 2.6% to CHF 478 million. Because of the persistently low stock market trading levels, commission income fell by 2.9% to CHF 74 million. Trading income was down by 9.5% to CHF 34 million. Operating expenses increased by 3.0% to CHF 281 million. The 5.9% rise in material expenses to CHF 106 million was especially crucial, and among other things was attributable to investments in e-banking. Personnel costs increased by 1.4% to CHF 175 million. At the end of the year, the number of employees, measured in full-time positions, was 1375 (compared to 1395 at the end of 2011), 89 of whom were trainees. There was a slight fall of 1.9% in Migros Bank’s gross profit to CHF 312 million.

Proactive payout of retrocession fees
Migros Bank is the first financial institution to take the decision to repay retrocession fees on asset management agreements retroactively over the last ten years. Compensation to existing customers will be done automatically. The entitlement covers about 2700 asset management customers who will receive a refund without having to make a claim. Provisions totalling CHF 4.2 million have therefore been set up in the 2012 annual financial statements. Compensation amounts for selling received in the future will be paid out to mandate clients at yearly intervals. Migros Bank is therefore consistently applying the leading decision by the Federal Supreme Court of 30 October 2012, whereby retrocession fees taken by the bank under the terms of an asset management agreement are due to the customer.

Sustainable development: prudent risk policy
For Migros Bank, sustainable trading means above all adopting a prudent risk policy. This endeavour not only supports the company’s long-term success, it is also in the interests of the lender, and helps to prevent a mis-allocation of macroeconomic resources. In 2012 a net total of CHF 27.9 million had to be spent on valuation adjustments, provisions and losses. Measured against overall lending to customers, this is equivalent to a loss ratio of just 0.09%.

Goals and outlook
Migros Bank is taking a cautiously positive view of the prospects for the 2013 financial year, even though market growth is declining and there is intense competition on pricing. Because of the basis of strong trust among customers, the conservative risk policy and effective cost management, Migros Bank is well equipped to further increase its share of the market.