Banks Switzerland Zuercher Kantonalbank Full Rating Report Key Rating Drivers Ratings Long-Term IDR Short-Term IDR AAA F1 Viability Rating Support Rating a+ 1 Sovereign Risk Foreign-Currency Long-Term IDR Local-Currency Long-Term IDR AAA AAA Outlooks Foreign-Currency Long-Term Stable Rating Sovereign Foreign-Currency Long- Stable Term IDR Sovereign Local-Currency LongStable Term IDR Financial Data Zuercher Kantonalbank 30 Jun 15 Total assets (USDm) Total assets (CHFm) Total equity (CHFm) Operating profit (CHFm) Operating ROAA (%) Operating ROAE (%) Fitch Core Capital ratio (%) Fitch Eligible Capital ratio (%) Loans/client deposits (%) 31 Dec 14 173,962 160,137 161,819 158,392 10,139 9,487 364 665 0.46 0.43 7.48 7.16 16.8 16.1 18.4 17.1 104.8 104.9 Support Drives IDRs: Zuercher Kantonalbank’s (ZKB) Issuer Default Ratings (IDRs) are driven by institutional support from its owner, the Canton of Zurich (AAA/Stable). Fitch Ratings believes the canton has a very high propensity to use early stabilisation measures to ensure ZKB’s viability, if needed. This is mainly driven by ZKB’s important role for the local economy as reflected in its high deposit and mortgage lending market shares, the canton’s guarantee of ZKB’s non-subordinated liabilities and the constitutional obligation to maintain a cantonal bank. Adequate Ability to Support: ZKB’s balance sheet is large relative to the canton’s budgetary resources. However, we believe that the bank’s stable business model and strong capitalisation would trigger manageable recapitalisation needs in a realistic stress scenario. Given ZKB’s systemically important bank (SIB) status, we would expect the Swiss National Bank (SNB) to cover unexpected liquidity needs should these exceed the canton’s resources. Strong Standalone Profile: ZKB’s stable and resilient business model and leading local franchise underpin its Viability Rating (VR). Zurich has Switzerland’s largest, and one of the most diversified, local economies. This mitigates the bank’s limited geographic diversification resulting from its mandate to serve the canton’s economy. ZKB’s franchises in private banking, asset management (strengthened by Swisscanto Holding AG’s acquisition) and largely clientdriven trading diversify its revenues from its focus on residential mortgage lending in Zurich. Sound Asset Quality: ZKB’s NPL ratio was a very low 0.7% at end-2014 following five years of net releases of loan loss reserves. We expect loan impairment charges (LICs) to remain low in the near term, supported by the resilient Swiss economy and the prevailing borrower-friendly low interest rates. In the medium term, we expect LICs to rise moderately but to remain manageable in light of the bank’s generally low risk appetite and cautious risk management. Interest Rate Pressure: ZKB’s profits have been fairly stable through the cycle but will be increasingly pressured by the negative interest rates introduced by the SNB in 1Q15. The bank (like most competitors) has reacted by raising price discipline in mortgage lending but has not started to charge negative rates on deposits, except for short-term funds from large corporates. ZKB’s balance at the central bank is partly subject to the negative interest rates. Related Research Zuercher Kantonalbank - Ratings Navigator (December 2015) Fitch Affirms ZKB's IDR at 'AAA'/Stable; Viability Rating at 'a+' (November 2015) Fitch Affirms Canton of Zurich at 'AAA'; Outlook Stable (February 2016) Strong Capitalisation: Capitalisation benefits from the particularly high regulatory requirements imposed on Swiss SIBs. Internal capital generation is adequate, even though ZKB distributes typically about half of its net income to the canton and its municipalities. The CHF575m undrawn portion of its endowment capital committed by the canton supports the VR as we would consider a drawdown as ordinary institutional support. Fitch Affirms Switzerland at 'AAA'; Outlook Stable (October 2015) Rating Sensitivities The Swiss Residential Housing and Mortgage Market (May 2015) Severe Property Market Correction: Changes to the canton’s IDRs, ability or propensity to support could trigger a downgrade. The VR is mostly vulnerable to large losses potentially arising from a sharp correction of residential property prices in Zurich, which could dent ZKB's capitalisation. However, we view this scenario as unlikely in the near term. Analysts Patrick Rioual +49 69 768076 123 patrick.rioual@fitchratings.com Maria Shishkina +44 20 3530 1379 maria.shishkina@fitchratings.com www.fitchratings.com US Tax Settlement: The sound capitalisation and profits could absorb a material cost from a settlement of the US authorities’ investigations into ZKB’s legacy US offshore wealthmanagement business. However, a fine significantly exceeding our expectations could put pressure on the VR by reducing the bank’s financial flexibility and damaging its reputation. 2 March 2016 Banks Operating Environment Figure 1 Swiss Banks' Deposit Rates Sight deposits Savings deposits 12-month time deposits >CHF0.1m (%) 0.20 0.15 0.10 0.05 0.00 -0.05 -0.10 -0.15 Jul 15 May 15 Jan 15 Mar 15 Nov 14 Jul 14 Sep 14 May 14 Mar 14 Jan 14 SNB rate cut Source: SNB Figure 2 Swiss Banks' Mortgage Rates 10-Year Fixed (%) 3.0 SNB rate cut Concentration on the Small but Wealthy and Diversified Zurich Region ZKB is predominantly active in the Canton of Zurich, Switzerland's largest region, which accounts for over a fifth of the country’s GDP and a fifth of the total population (about 1.5m). The region is wealthy and economically diversified, creating a stable and resilient environment that adequately mitigates ZKB’s modest geographic diversification. Fitch expects solid GDP growth for Switzerland of 1.6% in 2016 and 1.8% in 2017 despite the Swiss franc’s strength, but rising household debt/GDP exposes retail clients to potential economic downturns. Market Discipline Mitigates Pressure from Negative Interest Rates The SNB’s unexpected removal of the Swiss franc’s ceiling against the euro in January 2015 triggered a sharp appreciation of the franc despite the simultaneous cut of short-term rates into negative territory. Most Swiss banks, including ZKB, have not passed on negative rates to retail depositors. Instead, they have mitigated the resulting margin pressure by maintaining solid market discipline, raising fees and margins on mortgage lending. Trading income has also benefited from rising market volatility following the SNB’s move. However, this may be insufficient in the long term. Moreover, a significant share of the bank’s large cash balance at the SNB is subject to negative interest rates, which further depresses profitability. 2.5 2.0 Company Profile 1.5 Largest Cantonal Bank and One of Five Swiss SIBs 1.0 ZKB, by far the largest of Switzerland’s 24 cantonal banks, is a public-law institution owned by the Canton of Zurich. Its stable business model is primarily underpinned by solid market shares in retail deposit and mortgage lending in the Zurich region of 28% and 35%, respectively. It is also Switzerland’s third-largest bank by assets (the fourth largest if the unconsolidated cooperative Raiffeisen banks are considered as a single group). The SNB categorises ZKB as one of Switzerland’s five SIBs – alongside Credit Suisse Group AG (A/Stable), UBS Group AG (A/Positive), PostFinance AG and Raiffeisen – due to its sizeable retail franchise. This status imposes particularly stringent regulatory capital and liquidity requirements. 0.5 Jul 15 May 15 Mar 15 Jan 15 Nov 14 Sep 14 Jul 14 May 14 Jan 14 Mar 14 0.0 Source: SNB Figure 3 Loans by Borrower Types CHF89bn at end-1H15 Retail/small SMEs Swisscanto Acquisition Improves Business Diversification Corporates Public sector (CHFbn) 80 The acquisition of Swisscanto, completed in 1Q15, has further diversified ZKB’s business scope beyond its core regional retail banking franchise. Following the acquisition, ZKB became Switzerland’s third-largest investment fund provider and fourth-largest asset manager. 60 Small Private Banking Franchise 40 ZKB began to develop its domestic and international private banking franchise a decade ago. Its core European markets are Germany, the UK, Italy, Spain, Austria and the Czech Republic, with its core emerging markets being the United Arab Emirates and Hong Kong. The bank monitors the tax compliance of its international private banking clients, which accounted for only 5% of the unit’s CHF64bn assets under management at end-2014. 20 0 Other loans Source: ZKB Mortgages Figure 4 Assets Under Management (End of period in CHFbn) 1H15a 2014 2013 Managed by ZKB 73 34 31 Managed mandate 56 31 28 Other client assets 133 134 134 Total client assets 262 199 192 O/w double-counted 35 20 18 Net new money 2.5 -2.3 -0.2 a Including Swisscanto Source: ZKB Related Criteria Management and Strategy Public Service Mandate Defines Strategy ZKB’s public mandate set out in a dedicated cantonal law, the ZKB Law, governs its focus on the Zurich region. The law prescribes the sustainable provision of comprehensive banking services to local households and SMEs, and the support of the canton’s economic and social development by fostering home ownership and construction of affordable housing. Beyond Zurich, ZKB lends mostly to Swiss SMEs and export-focused companies. International expansion is likely to remain modest due to the US tax investigations and the uncertainty in the eurozone. We expect private banking and asset management to grow most given ZKB’s high local market shares in retail and corporate banking and constraints imposed by the ZKB Law. Global Bank Rating Criteria (March 2015) Zuercher Kantonalbank March 2016 2 Banks We view management’s experience and execution record as solid. This is evidenced by the bank’s fairly stable performance, notably during the financial crisis. Corporate governance is effective, with neutral rating implications. Risk Appetite Robust Risk Controls and Prudent Risk Appetite Credit risk is by far ZKB’s major source of risk, accounting for 59% of its capital at risk (CaR) at end-2015. Market and operational risks accounted for 28% and 13%, respectively. ZKB has tightened its conservative underwriting standards in recent years amid concerns over inflating residential property valuations in Switzerland, and in Zurich in particular. The bank switched to a more conservative loan-to-value (LTV) calculation by adjusting market values of properties for depreciation and increasing market standards. Risk limits are conservative and the ZKB Law limits risk appetite. Risk-management controls and parameters are robust and subject to regular reassessment. Management is assisted in the implementation and monitoring of risk policies by a committee chaired by the chief risk officer (CRO), who reports directly and regularly to the supervisory board. The CRO produces quarterly reports covering significant risk areas. ZKB also carries out periodic stress testing and scenario analyses. Capital allocation is calculated using a CaR model. Below-Average Mortgage Lending Growth We view ZKB’s asset growth (5.5% a year since the start of the financial crisis) and new business volumes as sustainable relative to its steady internal capital generation. Mortgage loans, which make up the bulk of ZKB’s credit exposures, have grown at below-market rates since 2011. Management expects total assets to continue growing below market rates in the coming years. Litigation Cost from US Tax Investigation Manageable in Our Base Case Figure 5 Below-Average Growth Swiss domestic mortgage loans Stock - Swiss banksᵃ (LHS) Stock - ZKB (LHS) Growth yoy - Swiss banksᵃ (RHS) Growth yoy - ZKB (RHS) (CHFbn) 1,200 900 (%) 6 Rising Interest-Rate Risk in the Banking Book 4 ZKB controls its interest-rate risk in all currencies by using value-at-risk (VaR; 99% confidence interval, 20-day holding period) and CaR approaches and sensitivity analyses. Fitch considers that ZKB’s exposure to interest-rate risk in the banking book, which is almost entirely driven by Swiss franc-denominated assets and liabilities, has increased. At end-9M15, a one basis-point parallel shift in the yield curve would have resulted in a CHF7.6m change in the value of equity, which implies a sensitivity of about 7% of Fitch Core Capital (FCC) for a 100bp shift. 600 300 0 2011 2012 2013 2014 1H15 a Domestic lending only Source: Fitch, ZKB, SNB ZKB’s main source of operational and reputational risk is the US Department of Justice’s investigation since 2011 into Swiss banks’ (including ZKB) alleged assistance to US citizens’ tax evasion. ZKB’s provision appears conservative relative to other banks’ known settlements but the final cost is impossible to predict. ZKB’s solid profits and capital could absorb a sizeable fine, although pressure could arise on the VR if the cost significantly exceeds our base case as this could erode ZKB’s financial flexibility and damage its reputation. The bank has verified the tax compliance of its international private banking clients. The regulatory pressure to do so for the domestic client base is also gradually building up. 2 0 Moderate Traded Market Risk Market risk arises from the trading book (CHF10bn at end-1H15), which mainly consists of bonds, precious metals (also linked to ZKB’s issuance of structured products, warrants and ETFs) and equity-linked securities. Management has adopted a more cautious approach to traded market risk following trading losses during the financial crisis. Since 2007, it has reduced equity trading and largely focused on client-driven activities and products, mostly foreign exchange (mainly francs to euros), interest-rate swaps, and franc and euro bonds. ZKB controls market risk in its trading book by setting daily VaR limits (99% confidence interval, 10-day holding period, 365-day observation period) and running sensitivity and CaR analyses. Trading VaR utilisation including diversification effects was a low CHF14m at end-1H15. ZKB Zuercher Kantonalbank March 2016 3 Banks did not breach its VaR limit in January 2015 despite the market volatility driven by the SNB’s removal of the franc’s ceiling against the euro, which however caused backtesting exceptions. Figure 6 Asset-Quality Metrics (%) 2014 2013 2012 Loan growth 7 2 7 NPL ratio 0.7 0.9 1.1 NPL coverage 50 50 58 Unreserved NPLs/ 3 4 4 FCC LICs/gross loans -0.03 -0.07 -0.03 Source: ZKB, Fitch Figure 7 Loan Impairment Development 2007-2014 Impaired loans (LHS) Impaired/gross loans (RHS) (CHFbn) (%) 1.8 1.5 1.2 0.9 0.6 0.3 0.0 2014 2013 2012 2011 2010 2009 2008 2007 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2013 was restated to CHF674m following the change from customer to product view Source: ZKB; Fitch ZKB also calculates a stressed VaR weekly to determine its capital-adequacy requirements. At end-1H15, the total stressed VaR in the trading and banking books (defined as the sum of modelled total risk and the risk premium for trading products not fully modelled) was a low CHF38m (CHF36m at end-2014). Open currency positions are kept limited. Asset Quality Strong Metrics but Unsustainably Low Impairment Charges Impaired loans have declined since 2011 to a low 0.7% of gross loans and 6.4% of FCC at end-2014, triggering a net release of loan loss reserves during the period. Specific loan loss provisions of CHF302m covered 50% of impaired loans, which we view as adequate in light of the high degree of collateralisation and despite the collateral values’ significant downside. At end-2014, 79% of total assets and 96% of client loans were domestic, mostly in the Zurich area. Mortgage loans are mostly to households and small SMEs, and generally granular as a result. The robust economic forecast for 2016-2017 limits short-term risk despite headwinds given the strong franc. However, the current extremely low risk costs are, in our opinion, unsustainable over the longer term. Residential Property Valuation Risk Loan quality benefits from ZKB’s focus on the strong Zurich area, strict underwriting standards, periodic collateral revaluation and quarterly loan-impairment tests with special attention to commercial loans. The non-payment risk associated with interest rate fluctuations is mitigated by the bank’s high share of fixed-rate mortgages (three-quarters of all mortgages at end-1H15). We believe loan quality would be resilient to moderate declines in residential property values but is likely to suffer significantly from a severe price correction. The SNB considers that the residential property market’s imbalances did not increase in 2015 but remain high. Pressure is most likely to arise from excess demand from institutional investors and households searching for higher-yielding investments. Figure 8 ZWEXa 1980-3Q15 Index (1Q80 = 100) 300 250 200 150 a 3Q15 2010 2005 2000 1995 1990 1985 1980 100 ZWEX (Zurich residential propety index) calculated by ZKB using observed Canton of Zurich real estate transaction values Source: ZKB This is exacerbated by the fact that, thus far, macro-prudential stabilisation measures have predominantly addressed the owner-occupied segment. These measures include the revision of self-regulation rules for mortgage lending, increase of risk weights for high LTV mortgages and the activation (in 2013) and a subsequent increase (in 2014) of the countercyclical capital buffer. A high share of ZKB’s residential mortgage portfolio relates to buy-to-let properties, reflecting the relatively low owner-occupancy in the Swiss property market. Earnings and Profitability Negative Interest Rates Put Rising Pressure on Earnings Low and falling interest rates have burdened ZKB’s profits moderately in the past seven years. Its net interest margin (net interest income (NII) over average earning assets) has declined steadily from a modest 1.36% in 2008 to a weak 0.89% in 1H15. Despite the SNB’s rate cut in 1Q15, ZKB kept its deposit rates positive, except for large short-term corporate deposits. As long as the domestic banking sector considers negative rates on retail deposits unacceptable, the scope for downward repricing will be very limited, making the banks’ NII increasingly vulnerable to further rate cuts by the SNB or the European Central Bank. This will continue to burden ZKB’s NII, whose vulnerability is exacerbated by its large central bank deposits. This was partly mitigated in 1H15 by ZKB’s increased margins on mortgage loans, in line with competitors. Higher fee income also helped to diversify revenues, driven by increased client activity and Swisscanto’s acquisition, although full synergies are unlikely to be realised before next year. Zuercher Kantonalbank March 2016 4 Banks Moreover, ZKB is addressing challenges from regulatory tightening in the asset-management sector, particularly the phasing-out of retrocessions. These fees are generally received by banks for distributing third-party products to clients; sometimes from client funds and are based on arrangements that the regulators often consider as opaque. We expect the new regime to have a manageable impact as ZKB is responding by adjusting its remuneration structure. Interest Income Is the Main, but Not Dominant, Source of Revenues Figure 9 Operating Revenue Interest income from retail and corporate banking generates half of ZKB’s total revenues. Asset management and wholesale banking also generate significant fee and trading income. Other operating income Net fee income Net trading income Net interest income 100% 80% 60% 40% 20% 0% 2011 2012 2013 2014 1H15 Trading income fluctuates between CHF250m and CHF400m a year, representing 15% to 20% of total operating income. ZKB trades securities, currencies, precious metals and commodities on behalf of clients. It is also an established market maker and a sizeable issuer of structured products and warrants in the Swiss market. Almost half of trading income in 1H15 (CHF213m, or 20% of total operating income) came from foreign exchange and precious metals, a third came from bonds, interest rate and credit derivatives and the rest being derived from equity and structured products. Source: ZKB, Fitch Moderate but Fairly Stable Profits Despite Regulatory and Investment Costs Figure 10 The operating ROAE (7% to 10% since 2008) is adequate in light of its fairly low volatility even amid adverse markets and the bank’s large equity base. The Swisscanto acquisition is triggering staff and integration cost and linear goodwill impairment under Swiss GAAP while the social mandate attached to the cantonal bank status limits the flexibility to cut staff. Profit Distribution 2009-2014 Retained earnings Endowment capital costs Distribution to municipalities Distribution to Canton Retained earnings/annual profit (RHS) (%) (CHFm) 1,000 60 50 40 30 20 10 0 500 0 2009 2010 2011 2012 2013 2014 Source: ZKB, parent company view ZKB, which started to remunerate (CHF21m a year) the canton’s guarantee in 2015, is exempt from corporate tax but typically distributes about half of its profits to public authorities, of which two thirds goes to the canton and one third to the municipalities. Its focus on the mature Zurich region and the ZKB Law restraining risk-taking should moderately constrain revenue growth. Profitability remained resilient in 2015 despite the challenging operating environment. NII was broadly unchanged, but the integration of Swisscanto (included in ZKB’s accounts from 2Q15) increased net fees and commissions while higher market volatility and client activities improved the trading result. This more than offset the higher operating costs from the acquisition, allowing for an increase in net income by 12% to CHF722m yoy. Capitalisation and Leverage Strong Capitalisation Benefits from High Regulatory Requirements Figure 11 Capitalisation (%) FCC ratio FEC ratio Tangible equity/tangible assets Tier 1 ratio CET1 ratio Internal capital generation Basel leverage ratio 1H15 2014 2013 2012 16.8 16.1 15.9 15.1 18.4 17.1 16.9 16.1 6.2 6.0 6.2 5.8 17.1 15.6 16.2 15.2 16.1 14.6 7.8 3.9 4.5 2.5 6.0 Source: ZKB, Fitch 5.8 5.73 n.a. Capitalisation is strong by international comparison. As an SIB, ZKB must maintain a minimum total capital ratio of 14.7%, including a 0.7% countercyclical buffer and 13% Tier 1 capital. Its 17.9% total capital ratio at end-2015 exceeds this requirement by a solid margin. The CHF575m undrawn endowment capital could add almost 100bp to the ratio, offering additional protection against a deteriorating property market or unexpectedly large US settlement costs. Capital is of good quality, predominantly consisting of endowment capital and retained earnings complemented with Basel III-compliant high- and low-trigger convertible capital. The hightrigger instrument is a CHF590m perpetual Tier 1 bond issued in 2012 to which we assign 100% equity credit in our Fitch Eligible Capital (FEC). We assign 50% equity credit to the two low-trigger bonds (CHF185m and EUR500m) issued in 2015. This explains the difference to FCC, which excludes hybrid instruments. Comfortably Fulfils Proposed New Pillar II Capital Requirements In 4Q15, the Swiss Federal Council proposed to amend the Capital Adequacy Ordinance to bolster the SIBs’ resilience. Under the new too-big-to-fail proposals, total capital and leverage requirements would comprise going-concern and gone-concern capital. ZKB expects its goneconcern capital requirement to be set in 2017 once its contingency plan is finalised (see below). Zuercher Kantonalbank March 2016 5 Banks The going-concern capital requirement proposed for ZKB is a minimum Tier 1 ratio of 12.86%, to be phased in from mid-2016 to end-2019. Up to 4.3% (currently 3%) can consist of additional Tier 1 (AT1) capital with a high conversion trigger at 7% CET1 ratio. The proposed goingconcern leverage ratio requirement is 4.5% (up from 3.53%), which ZKB comfortably fulfilled with its 7% at end-2015. The gone-concern capital would cover the total loss-absorbing capacity requirements in accordance with the Financial Stability Board’s standards. The amount to be covered could be substantial, as suggested by the high gone-concern capital requirements of 14.3% proposed for UBS Group and Credit Suisse Group. It is still unclear which instruments ZKB would use. Swisscanto’s integration primarily affects ZKB’s regulatory capital ratios by moderately increasing operational risk, which the bank calculates using the basic indicator approach. The deduction of Swisscanto’s goodwill reduces ZKB’s total capital ratio by less than 30bp. Internal Capital Generation Adequate but Limited by Dividend Payments ZKB is not legally obliged to pay dividends, but we understand that the canton and its municipalities budget stable payouts. In our view, this constrains ZKB’s financial flexibility. From 2009 to 2013, it distributed CHF220m to the canton and CHF110m to the municipalities annually. In 2014, this was cut to CHF164m and CHF82m, respectively, to accommodate ZKB’s lower profits but remained in line with the long-term 45% payout ratio. In 2015 as profits recovered, ZKB distributions increased to CHF200m and CHF100m, respectively. In addition, the remuneration of the endowment capital of CHF2.4bn amounted to CHF26m. Funding and Liquidity Sound Liquidity and Funding Profile Benefits from Canton’s Guarantee A large and mostly granular deposit base (despite some concentrated corporate deposits) underpins ZKB’s funding. Client funds, which are roughly equally split between deposits and bonds, accounted for 66% of non-equity funding and fully covered client loans at end-1H15. The large high-quality liquid assets (monthly average of CHF35bn in 3Q15) predominantly consist of cash at the SNB. This is needed to fulfil the 100% liquidity coverage ratio (LCR) requirement, which came into force for Swiss SIBs on 01.01.2015. ZKB’s LCR stood at 128% (monthly average) in 4Q15. It does not disclose its Net Stable Funding Ratio but reports it monthly to the regulator. Good Access to Interbank und Capital Market Funding ZKB has been consistently perceived as a safe haven during market volatility. This enables it to attract unsecured funds from commercial and central banks with rising maturities, a material share of which is dollar-denominated. As a result, interbank liabilities were a high CHF34bn or 22% of non-equity funding at end-1H15 (CHF16bn net of interbank exposures, which are predominantly to highly rated international banks on a secured basis). Capital-market instruments are relatively well diversified by currency (francs and euros) and investors’ geography (mostly Switzerland and the EU). Wholesale maturities in 2016 and 2017 will be close to the CHF3bn redeemed in 2015. This is comfortable in light of ZKB’s good market access underpinned by its strong standalone profile and its owner’s guarantee. Its funding profile also benefits from high-quality and granular assets backing its covered bonds. Support Canton’s Strong Incentive to Support Several factors drive the canton’s high propensity to ensure ZKB’s viability as a going concern rather than winding it down, in our view: the canton’s guarantee of ZKB’s non-subordinated liabilities and its constitutional requirement to maintain a cantonal bank; the bank’s important role for the regional economy, including leading retail deposit market shares; and negative repercussions of a default on the canton’s reputation and on the Swiss financial markets. Zuercher Kantonalbank March 2016 6 Banks Canton’s Adequate Ability to Support ZKB’s strong standalone profile makes a severe stress triggering large and sudden needs for capital or liquidity support unlikely. Given its residential mortgage lending focus, we would expect any recapitalisation needs to arise gradually from asset-quality erosion rather than large unexpected single losses. The high SIB buffers would trigger early stabilisation measures well before the point of non-viability, mitigating the need for capital injections. This should allow the canton to provide timely and sufficient recapitalisation. We believe that the canton could also provide substantial liquidity support in a fairly timely manner. However, in case of large unexpected liquidity outflows, ZKB may rely on liquidity injections by the SNB, which should be forthcoming given ZKB’s SIB status and the absence of regulatory constraints on central bank support. Contingent Capital from the Canton Is a Key Element of Resolution Planning As an SIB, ZKB must prepare a contingency plan that requires approval from the FINMA, the Swiss financial market supervisor, and the canton in its capacity as sole potential contributor of capital support. We expect that the plan may require the canton to commit a large volume of contingent capital relative to its own resources. However, we do not expect this to jeopardise the canton’s (and hence ZKB’s) IDRs or trigger a reassessment of our support assumptions underpinning ZKB’s IDRs. Zuercher Kantonalbank March 2016 7 Banks Peer Analysis We compare ZKB’s metrics to those of European universal banks with VRs of or close to ‘a+’. Figure 12 Peer Table Long-Term Issuer Default Rating Outlook Viability Rating Income statement (CHFm) Net interest income (NII) Net fees and commissions Total non-interest operating income Total non-interest expenses Pre-impairment operating profit LICs Operating profit Pre-tax profit Net income Balance sheet (CHFbn) Gross loans Reserves for impaired loans Impaired loans Loans and advances to banks Total securities Total earning assets Total assets Total customer deposits Total long term funding Total funding Total equity Fitch Core Capital Asset quality (%) Growth of gross loans Growth of total assets Impaired loans/gross loans NPL coverage ratio Unreserved impaired loans/FCC Impaired loan reserves/gross loans RWA/total assets LICs/av gross loans Earnings & profitability (%) NII/earning assets Non-interest income/ gross revenues Cost income ratio Pre-impairment operating RoE Pre-impairment operating RoA LICs/ pre-impairment operating profit Operating RoE Operating RoA Operating RoRWA Net RoE Net RoRWA Capitalisation & leverage (%) Tangible common equity/tangible assets Tier 1 ratio Total capital ratio Core Tier 1 ratio Equity/total assets FCC/RWA Internal capital generation Funding & liquidity (%) Loans/deposits Interbank assets/interbank liabilities Client deposits/total funding Zuercher Kantonalbank AAA Stable a+ Jun 15 Dec 14 CM11-CIC Danske Bank AS A+ A Stable Stable a+ a+ Jun 15 Dec 14 Jun 15 Dec 14 Swedbank AB A+ Positive a+ Jun 15 Dec 14 ABN AMRO Bank N.V. A Stable a Jun 15 Dec 14 549 318 539 731 370 6 364 400 393 1,070 531 844 1,294 641 -24 665 647 647 2,734 1,643 4,138 4,280 2,665 419 2,240 2,206 1,387 6,828 3,423 7,549 9,061 5,401 1,100 4,354 4,335 2,900 2,375 755 995 1,695 1,719 20 1,699 1,699 1,314 5,592 1,586 1,871 4,122 3,359 610 2,748 1,266 621 1,363 631 719 928 1,211 8 1,203 1,199 903 3,001 1,432 1,886 2,283 2,729 61 2,675 2,688 2,105 3,181 964 1,276 2,566 1,904 299 1,605 1,605 1,191 7,232 2,031 2,380 6,365 3,308 1,406 1,902 1,856 1,362 88.8 n.a. n.a. 16.2 14.1 119.1 161.8 84.7 13.6 132.4 10.1 10.0 86.7 0.3 0.6 16.3 27.1 129.8 158.4 82.6 11.6 146.9 9.5 9.5 314.5 8.7 13.9 50.6 171.9 530.7 583.6 252.4 59.6 434.7 37.4 32.3 355.1 10.2 15.7 41.7 85.4 582.2 652.9 278.6 69.6 486.1 41.9 27.4 232.6 5.1 9.3 17.5 162.2 458.0 481.6 117.1 144.7 396.3 20.7 16.5 264.1 6.6 11.6 10.3 220.5 545.7 557.9 124.1 163.9 462.1 23.8 19.0 154.0 0.3 0.6 9.1 46.5 226.8 259.7 89.4 80.7 219.8 12.9 11.3 172.0 0.4 0.8 12.3 49.9 252.1 271.2 84.5 69.8 231.3 15.0 13.2 282.5 4.9 7.5 16.0 109.7 403.4 427.4 239.7 72.3 402.7 16.5 16.3 320.2 5.7 9.1 18.0 114.6 447.1 464.6 259.4 82.3 437.2 17.9 17.0 2.4 2.2 n.a. n.a. n.a. n.a. 36.8 0.0 7.3 5.8 0.7 49.9 3.2 0.4 37.1 0.0 2.2 3.1 4.4 62.9 15.9 2.8 0.0 0.3 4.0 6.6 4.4 64.8 20.2 2.9 33.4 0.3 2.0 0.0 4.0 54.7 25.4 2.2 25.9 0.0 0.5 7.0 4.4 56.9 26.5 2.5 25.1 0.2 1.3 8.4 0.4 55.3 2.5 0.2 17.7 0.0 10.2 16.3 0.5 52.0 2.9 0.2 19.5 0.0 1.8 6.2 2.7 65.0 16.1 1.7 28.0 0.2 1.8 4.0 2.9 62.6 20.1 1.8 28.3 0.4 0.9 49.5 67.2 7.6 0.5 1.6 7.5 0.5 1.2 8.1 1.3 0.9 44.1 67.6 6.9 0.4 -3.7 7.2 0.4 1.1 7.0 1.1 1.1 60.2 62.3 14.6 0.9 15.9 12.3 0.8 n.a. 7.6 n.a. 1.2 52.5 63.0 13.4 0.9 19.4 10.8 0.7 2.0 7.2 1.3 1.0 29.5 50.3 16.8 0.7 1.2 16.6 0.7 2.8 12.9 2.1 1.1 25.1 55.2 14.0 0.6 18.2 11.5 0.5 2.0 2.6 0.4 1.2 34.5 44.6 19.2 1.0 0.6 19.0 1.0 5.3 14.3 4.0 1.3 38.6 46.7 19.4 1.1 2.0 19.1 1.1 5.1 15.0 4.0 1.6 28.6 57.6 24.0 0.9 15.7 20.2 0.8 2.7 15.0 2.0 1.7 24.8 66.2 19.4 0.7 42.5 11.1 0.4 1.4 8.0 1.0 6.2 17.1 18.2 16.1 6.3 16.8 7.8 6.0 15.6 16.6 14.6 6.0 16.1 3.9 5.6 n.a. n.a. 14.6 6.4 n.a. 7.5 5.6 14.4 17.5 14.4 6.4 12.6 6.4 4.0 16.5 18.7 14.3 4.3 13.3 12.8 4.0 16.7 19.3 15.1 4.3 13.6 -1.2 4.4 25.0 28.2 22.4 5.0 24.6 14.1 4.9 22.4 25.5 21.2 5.5 24.9 3.3 3.8 14.6 18.3 14.2 3.9 13.6 11.0 3.7 14.6 19.7 14.1 3.9 12.9 4.9 105 48 64 105 48 63 125 280 59 127 182 59 199 109 33 213 50 31 172 57 42 204 58 38 118 86 64 123 95 65 Source: Fitch Zuercher Kantonalbank March 2016 8 Banks Zuercher Kantonalbank Income Statement 1. Interest Income on Loans 2. Other Interest Income 3. Dividend Income 4. Gross Interest and Dividend Income 5. Interest Expense on Customer Deposits 6. Other Interest Expense 7. Total Interest Expense 8. Net Interest Income 9. Net Gains (Losses) on Trading and Derivatives 10. Net Gains (Losses) on Other Securities 11. Net Gains (Losses) on Assets at FV through Income Statement 12. Net Insurance Income 13. Net Fees and Commissions 14. Other Operating Income 15. Total Non-Interest Operating Income 16. Personnel Expenses 17. Other Operating Expenses 18. Total Non-Interest Expenses 19. Equity-accounted Profit/ Loss - Operating 20. Pre-Impairment Operating Profit 21. Loan Impairment Charge 22. Securities and Other Credit Impairment Charges 23. Operating Profit 24. Equity-accounted Profit/ Loss - Non-operating 25. Non-recurring Income 26. Non-recurring Expense 27. Change in Fair Value of Own Debt 28. Other Non-operating Income and Expenses 29. Pre-tax Profit 30. Tax expense 31. Profit/Loss from Discontinued Operations 32. Net Income 33. Change in Value of AFS Investments 34. Revaluation of Fixed Assets 35. Currency Translation Differences 36. Remaining OCI Gains/(losses) 37. Fitch Comprehensive Income 38. Memo: Profit Allocation to Non-controlling Interests 39. Memo: Net Income after Allocation to Non-controlling Interests 40. Memo: Common Dividends Relating to the Period 41. Memo: Preferred Dividends Related to the Period Exchange rate Zuercher Kantonalbank March 2016 30 Jun 2015 6 Months - Interim CHFm Unaudited 31 Dec 2014 Year End CHFm Unqualified 31 Dec 2013 Year End CHFm Unqualified 31 Dec 2012 Year End CHFm Unqualified 678.0 33.0 0.0 711.0 0.0 162.0 162.0 549.0 213.0 3.0 0.0 0.0 318.0 5.0 539.0 470.0 261.0 731.0 13.0 370.0 6.0 0.0 364.0 0.0 36.0 0.0 0.0 0.0 400.0 7.0 0.0 393.0 0.0 0.0 0.0 0.0 393.0 0.0 393.0 0.0 0.0 1,448.0 73.0 n.a. 1,521.0 n.a. 451.0 451.0 1,070.0 287.0 3.0 n.a. n.a. 531.0 23.0 844.0 816.0 478.0 1,294.0 21.0 641.0 (24.0) n.a. 665.0 n.a. 42.0 60.0 n.a. n.a. 647.0 n.a. n.a. 647.0 n.a. n.a. n.a. n.a. 647.0 n.a. 647.0 280.0 n.a. 1,490.0 72.0 n.a. 1,562.0 n.a. 445.0 445.0 1,117.0 340.0 56.0 n.a. n.a. 551.0 27.0 974.0 851.0 477.0 1,328.0 26.0 789.0 (53.0) n.a. 842.0 n.a. 218.0 263.0 n.a. n.a. 797.0 0.0 n.a. 797.0 n.a. n.a. n.a. n.a. 797.0 n.a. 797.0 369.0 n.a. 1,628.0 94.0 n.a. 1,722.0 n.a. 568.0 568.0 1,154.0 379.0 14.0 n.a. n.a. 536.0 25.0 954.0 1,020.0 496.0 1,516.0 15.0 607.0 (25.0) n.a. 632.0 n.a. 33.0 71.0 n.a. n.a. 594.0 0.0 n.a. 594.0 n.a. n.a. n.a. n.a. 594.0 n.a. 594.0 374.0 n.a. USD1 = CHF0.930 USD1 = CHF0.9891 USD1 = CHF0.89150SD1 = CHF0.91660 9 Banks Zuercher Kantonalbank Balance Sheet 30 Jun 2015 6 Months - Interim CHFm 31 Dec 2014 Year End CHFm 31 Dec 2013 Year End CHFm 31 Dec 2012 Year End CHFm 72,370.0 0.0 0.0 0.0 16,459.0 0.0 88,829.0 88,829.0 0.0 0.0 59,042.0 12,347.0 n.a. n.a. 15,321.0 302.0 86,408.0 86,710.0 605.0 n.a. 57,650.0 12,008.0 n.a. n.a. 11,124.0 360.0 80,422.0 80,782.0 727.0 n.a. 55,800.0 11,570.0 n.a. n.a. 11,674.0 492.0 78,552.0 79,044.0 844.0 n.a. 16,162.0 0.0 10,058.0 0.0 0.0 0.0 148.0 3,933.0 14,139.0 0.0 0.0 0.0 0.0 0.0 119,130.0 16,302.0 n.a. 11,394.0 11,501.0 n.a. n.a. 163.0 4,027.0 27,085.0 n.a. n.a. n.a. n.a. n.a. 129,795.0 14,612.0 n.a. 13,284.0 6,511.0 n.a. n.a. 161.0 3,768.0 23,724.0 n.a. n.a. n.a. n.a. n.a. 118,758.0 17,185.0 n.a. 14,532.0 8,619.0 n.a. n.a. 203.0 3,659.0 27,013.0 n.a. n.a. n.a. n.a. n.a. 122,750.0 29,185.0 0.0 0.0 755.0 173.0 1.0 0.0 0.0 0.0 12,575.0 161,819.0 27,069.0 n.a. n.a. 723.0 n.a. 1.0 n.a. n.a. n.a. 804.0 158,392.0 29,553.0 n.a. n.a. 698.0 3.0 2.0 n.a. 0.0 n.a. 693.0 149,707.0 26,093.0 n.a. n.a. 670.0 6.0 3.0 n.a. 0.0 n.a. 1,172.0 150,694.0 38,703.0 46,031.0 0.0 84,734.0 33,812.0 0.0 312.0 118,858.0 13,558.0 0.0 n.a. 0.0 13,558.0 0.0 0.0 132,416.0 37,021.0 45,624.0 n.a. 82,645.0 33,870.0 n.a. 3,005.0 119,520.0 11,569.0 n.a. n.a. n.a. 11,569.0 15,823.0 n.a. 146,912.0 37,101.0 43,992.0 n.a. 81,093.0 31,788.0 n.a. 2,031.0 114,912.0 12,156.0 n.a. n.a. n.a. 12,156.0 11,423.0 n.a. 138,491.0 36,450.0 44,455.0 n.a. 80,905.0 31,813.0 n.a. 1,061.0 113,779.0 11,631.0 n.a. n.a. n.a. 11,631.0 14,474.0 n.a. 139,884.0 0.0 0.0 702.0 0.0 0.0 544.0 0.0 0.0 16,727.0 150,389.0 n.a. n.a. 321.0 400.0 n.a. 265.0 n.a. n.a. 419.0 148,317.0 n.a. n.a. 379.0 309.0 n.a. 284.0 n.a. n.a. 447.0 139,910.0 0.0 n.a. 517.0 100.0 0.0 294.0 n.a. n.a. 525.0 141,320.0 1,291.0 0.0 588.0 n.a. 589.0 n.a. 590.0 n.a. 10,139.0 0.0 0.0 0.0 0.0 10,139.0 161,819.0 9,974.0 10,912.5 9,487.0 n.a. n.a. n.a. n.a. 9,487.0 158,392.0 9,486.0 10,074.0 9,208.0 n.a. n.a. n.a. n.a. 9,208.0 149,707.0 9,203.0 9,792.0 8,784.0 n.a. n.a. n.a. n.a. 8,784.0 150,694.0 8,775.0 9,365.0 Assets A. Loans 1. Residential Mortgage Loans 2. Other Mortgage Loans 3. Other Consumer/ Retail Loans 4. Corporate & Commercial Loans 5. Other Loans 6. Less: Reserves for Impaired Loans 7. Net Loans 8. Gross Loans 9. Memo: Impaired Loans included above 10. Memo: Loans at Fair Value included above B. Other Earning Assets 1. Loans and Advances to Banks 2. Reverse Repos and Cash Collateral 3. Trading Securities and at FV through Income 4. Derivatives 5. Available for Sale Securities 6. Held to Maturity Securities 7. Equity Investments in Associates 8. Other Securities 9. Total Securities 10. Memo: Government Securities included Above 11. Memo: Total Securities Pledged 12. Investments in Property 13. Insurance Assets 14. Other Earning Assets 15. Total Earning Assets C. Non-Earning Assets 1. Cash and Due From Banks 2. Memo: Mandatory Reserves included above 3. Foreclosed Real Estate 4. Fixed Assets 5. Goodwill 6. Other Intangibles 7. Current Tax Assets 8. Deferred Tax Assets 9. Discontinued Operations 10. Other Assets 11. Total Assets Liabilities and Equity D. Interest-Bearing Liabilities 1. Customer Deposits - Current 2. Customer Deposits - Savings 3. Customer Deposits - Term 4. Total Customer Deposits 5. Deposits from Banks 6. Repos and Cash Collateral 7. Commercial Paper and Short-term Borrowings 8. Total Money Market and Short-term Funding 9. Senior Unsecured Debt (original maturity > 1 year) 10. Subordinated Borrowing 11. Covered Bonds 12. Other Long-term Funding 13. Total LT Funding (original maturity > 1 year) 14. Derivatives 15. Trading Liabilities 16. Total Funding E. Non-Interest Bearing Liabilities 1. Fair Value Portion of Debt 2. Credit impairment reserves 3. Reserves for Pensions and Other 4. Current Tax Liabilities 5. Deferred Tax Liabilities 6. Other Deferred Liabilities 7. Discontinued Operations 8. Insurance Liabilities 9. Other Liabilities 10. Total Liabilities F. Hybrid Capital 1. Pref. Shares and Hybrid Capital accounted for as Debt 2. Pref. Shares and Hybrid Capital accounted for as Equity G. Equity 1. Common Equity 2. Non-controlling Interest 3. Securities Revaluation Reserves 4. Foreign Exchange Revaluation Reserves 5. Fixed Asset Revaluations and Other Accumulated OCI 6. Total Equity 7. Total Liabilities and Equity 8. Memo: Fitch Core Capital 9. Memo: Fitch Eligible Capital Exchange rate Zuercher Kantonalbank March 2016 USD1 = CHF0.930 SD1 = CHF0.989 SD1 = CHF0.891 SD1 = CHF0.91660 10 Banks Zuercher Kantonalbank Summary Analytics 30 Jun 2015 6 Months - Interim A. Interest Ratios 1. Interest Income on Loans/ Average Gross Loans 2. Interest Expense on Customer Deposits/ Average Customer Deposits 3. Interest Income/ Average Earning Assets 4. Interest Expense/ Average Interest-bearing Liabilities 5. Net Interest Income/ Average Earning Assets 6. Net Int. Inc Less Loan Impairment Charges/ Av. Earning Assets 7. Net Interest Inc Less Preferred Stock Dividend/ Average Earning Asset B. Other Operating Profitability Ratios 1. Non-Interest Income/ Gross Revenues 2. Non-Interest Expense/ Gross Revenues 3. Non-Interest Expense/ Average Assets 4. Pre-impairment Op. Profit/ Average Equity 5. Pre-impairment Op. Profit/ Average Total Assets 6. Loans and securities impairment charges/ Pre-impairment Op. Profit 7. Operating Profit/ Average Equity 8. Operating Profit/ Average Total Assets 9. Operating Profit / Risk Weighted Assets C. Other Profitability Ratios 1. Net Income/ Average Total Equity 2. Net Income/ Average Total Assets 3. Fitch Comprehensive Income/ Average Total Equity 4. Fitch Comprehensive Income/ Average Total Assets 5. Taxes/ Pre-tax Profit 6. Net Income/ Risk Weighted Assets D. Capitalization 1. Fitch Core Capital/ Risk Weighted Assets 2. Fitch Eligible Capital/ Risk Weighted Assets 3. Tangible Common Equity/ Tangible Assets 4. Tier 1 Regulatory Capital Ratio 5. Total Regulatory Capital Ratio 6. Core Tier 1 Regulatory Capital Ratio 7. Equity/ Total Assets 8. Cash Dividends Paid & Declared/ Net Income 9. Internal Capital Generation E. Loan Quality 1. Growth of Total Assets 2. Growth of Gross Loans 3. Impaired Loans/ Gross Loans 4. Reserves for Impaired Loans/ Gross Loans 5. Reserves for Impaired Loans/ Impaired Loans 6. Impaired loans less Reserves for Impaired Loans/ Fitch Core Capital 7. Impaired Loans less Reserves for Impaired Loans/ Equity 8. Loan Impairment Charges/ Average Gross Loans 9. Net Charge-offs/ Average Gross Loans 10. Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Ass F. Funding and Liquidity 1. Loans/ Customer Deposits 2. Interbank Assets/ Interbank Liabilities 3. Customer Deposits/ Total Funding (excluding derivatives) 4. Liquidity Coverage Ratio 5. Net Stable Funding Ratio Zuercher Kantonalbank March 2016 31 Dec 2014 Year End 31 Dec 2013 Year End 31 Dec 2012 Year End 1.54 n.a. 1.15 0.23 0.89 0.88 0.89 1.73 n.a. 1.23 0.32 0.86 0.88 0.86 1.87 n.a. 1.30 0.32 0.93 0.97 0.93 2.14 n.a. 1.44 0.45 0.96 0.98 0.96 49.54 67.19 0.92 7.60 0.47 1.62 7.48 0.46 1.23 44.10 67.61 0.84 6.90 0.42 (3.74) 7.16 0.43 1.13 46.58 63.51 0.88 8.83 0.53 (6.72) 9.43 0.56 1.45 45.26 71.92 1.06 7.06 0.42 (4.12) 7.35 0.44 1.09 8.08 0.49 8.08 0.49 1.75 1.33 6.96 0.42 6.96 0.42 n.a. 1.10 8.92 0.53 8.92 0.53 0.00 1.37 6.91 0.41 6.91 0.41 0.00 1.02 16.77 18.35 6.16 17.10 18.20 16.10 6.27 n.a. 7.82 16.13 17.13 5.99 15.60 16.60 14.60 5.99 43.28 3.87 15.86 16.88 6.15 16.20 16.20 15.20 6.15 46.30 4.65 15.11 16.12 5.82 15.20 15.20 n.a. 5.83 62.96 2.50 2.16 2.44 n.a. n.a. n.a. n.a. n.a. 0.01 n.a. n.a. 5.80 7.34 0.70 0.35 49.92 3.19 3.19 (0.03) n.a. 0.70 (0.65) 2.20 0.90 0.45 49.52 3.99 3.99 (0.07) n.a. 0.90 12.46 6.19 1.07 0.62 58.29 4.01 4.01 (0.03) n.a. 1.07 104.83 47.80 63.99 124.00 n.a. 104.92 48.13 63.04 n.a. n.a. 99.62 45.97 63.82 n.a. n.a. 97.70 54.02 64.51 n.a. n.a. 11 Banks Zuercher Kantonalbank Reference Data 30 Jun 2015 6 Months - Interim CHFm 31 Dec 2014 Year End CHFm 31 Dec 2013 Year End CHFm 31 Dec 2012 Year End CHFm 0.0 0.0 0.0 0.0 7,128.0 3,524.0 262,074.0 n.a. n.a. 3,323.0 n.a. 7,432.0 563.0 199,095.0 n.a. n.a. 4,116.0 n.a. 6,869.0 648.0 192,070.0 n.a. n.a. 3,827.0 n.a. 7,632.0 724.0 175,762.0 87,769.5 124,462.5 160,105.5 0.0 139,664.0 9,813.0 9,813.0 83,689.5 83,542.3 121,417.0 154,307.7 n.a. 138,836.7 9,290.3 9,290.3 81,882.7 79,873.0 118,089.0 150,073.0 n.a. 134,831.0 8,932.0 8,932.0 80,465.3 76,238.7 119,967.7 143,383.6 n.a. 127,328.7 8,595.0 8,595.0 74,746.7 0.0 0.0 0.0 0.0 22,115.0 11,902.0 32,411.0 19,980.0 18,186.0 9,037.0 34,992.0 18,207.0 17,799.0 10,333.0 35,074.0 15,346.0 0.0 0.0 0.0 0.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 0.0 0.0 0.0 9,098.0 4,240.0 2,659.0 305.0 9,090.0 3,407.0 1,813.0 302.0 9,604.0 5,649.0 1,676.0 256.0 0.0 0.0 0.0 0.0 80,047.0 879.0 951.0 768.0 81,669.0 757.0 957.0 710.0 78,312.0 906.0 911.0 776.0 0.0 0.0 0.0 0.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 0.0 0.0 0.0 27,574.0 3,035.0 2,661.0 600.0 26,719.0 1,774.0 2,450.0 845.0 26,522.0 1,988.0 2,096.0 1,207.0 0.0 0.0 0.0 0.0 n.a. 0.0 0.0 0.0 0.0 0.0 n.a. 0.0 224.0 2,781.0 4,839.0 6,730.0 14,574.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 639.0 1,981.0 6,384.0 5,772.0 14,776.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 821.0 830.0 5,899.0 5,732.0 13,282.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. D. Risk Weighted Assets 1. Risk Weighted Assets 2. Fitch Adjustments to Risk Weighted Assets 3. Fitch Adjusted Risk Weighted Assets 59,481.0 0.0 59,481.0 58,816.0 n.a. 58,816.0 58,020.0 n.a. 58,020.0 58,085.0 n.a. 58,085.0 E. Equity Reconciliation 1. Equity 2. Add: Pref. Shares and Hybrid Capital accounted for as Equity 3. Add: Other Adjustments 10,139.0 n.a. 0.0 9,487.0 n.a. n.a. 9,208.0 n.a. n.a. 8,784.0 n.a. n.a. 10,139.0 9,487.0 9,208.0 8,784.0 10,139.0 0.0 0.0 173.0 1.0 (9.0) 0.0 0.0 9,974.0 938.5 0.0 10,912.5 9,487.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 9,486.0 588.0 0.0 10,074.0 9,208.0 0.0 0.0 3.0 2.0 0.0 0.0 0.0 9,203.0 589.0 0.0 9,792.0 8,784.0 0.0 0.0 6.0 3.0 0.0 0.0 0.0 8,775.0 590.0 0.0 9,365.0 A. Off-Balance Sheet Items 1. Managed Securitized Assets Reported Off-Balance Sheet 2. Other off-balance sheet exposure to securitizations 3. Guarantees 4. Acceptances and documentary credits reported off-balance sheet 5. Committed Credit Lines 6. Other Contingent Liabilities 7. Total Assets under Management B. Average Balance Sheet Average Loans Average Earning Assets Average Assets Average Managed Securitized Assets (OBS) Average Interest-Bearing Liabilities Average Common equity Average Equity Average Customer Deposits C. Maturities Asset Maturities: Loans & Advances < 3 months Loans & Advances 3 - 12 Months Loans and Advances 1 - 5 Years Loans & Advances > 5 years Debt Debt Debt Debt Securities Securities Securities Securities Loans Loans Loans Loans & & & & < 3 Months 3 - 12 Months 1 - 5 Years > 5 Years Advances Advances Advances Advances to Banks to Banks to Banks to Banks < 3 Months 3 - 12 Months 1 - 5 Years > 5 Years Liability Maturities: Retail Deposits < 3 months Retail Deposits 3 - 12 Months Retail Deposits 1 - 5 Years Retail Deposits > 5 Years Other Deposits Other Deposits Other Deposits Other Deposits Deposits Deposits Deposits Deposits from from from from < 3 Months 3 - 12 Months 1 - 5 Years > 5 Years Banks Banks Banks Banks < 3 Months 3 - 12 Months 1 - 5 Years > 5 Years Senior Debt Maturing < 3 months Senior Debt Maturing 3-12 Months Senior Debt Maturing 1- 5 Years Senior Debt Maturing > 5 Years Total Senior Debt on Balance Sheet Fair Value Portion of Senior Debt Subordinated Debt Maturing < 3 months Subordinated Debt Maturing 3-12 Months Subordinated Debt Maturing 1- 5 Year Subordinated Debt Maturing > 5 Years Total Subordinated Debt on Balance Sheet Fair Value Portion of Subordinated Debt 4. Published Equity F. Fitch Eligible Capital Reconciliation 1. Total Equity as reported (including non-controlling interests) 2. Fair value effect incl in own debt/borrowings at fv on the B/S- CC only 3. Non-loss-absorbing non-controlling interests 4. Goodwill 5. Other intangibles 6. Deferred tax assets deduction 7. Net asset value of insurance subsidiaries 8. First loss tranches of off-balance sheet securitizations 9. Fitch Core Capital 10. Eligible weighted Hybrid capital 11. Government held Hybrid Capital 12. Fitch Eligible Capital Exchange Rate Zuercher Kantonalbank March 2016 USD1 = CHF0.930 SD1 = CHF0.989 SD1 = CHF0.891 SD1 = CHF0.91660 12 Banks The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent thirdparty verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. Zuercher Kantonalbank March 2016 13