Monthly Archives: June 2013

Mortgage Rates in Switzerland Accelerating Up

According to the chart below, published by today, mortgage rates are spiking upwards. In the last 6 months the rates for 10-year mortgages in Switzerland have moved up 0,5%. The pace has been accelerating in the past 2 months which saw 0,3% or 60% of the 6 month move. If the pace continues, rates could be at 4% by end 2014, beginning 2015 (also check 2nd chart).

Anecdotal evidence I’ve seen suggest that many high-end properties and large appartements have seen interest fall since spring.  Villas with asking prices 50% above fair value estimates aren’t being scooped up the way they were in 2012.


To give some more perspective here’s the longer term chart:


Elsewhere at the same time:

Marketwatch reports: U.S. sales of new homes rose 2.1% in May, the fastest rate since mid-2008, and the Case-Shiller April home-price index jumped 2.5% in April, the largest monthly growth on record.


Graubündner Kantonalbank (GRKP), UBS, Valiant Bank (VATN) and the SMI over 15 years

Chart of the weekend: Graubündner Kantonalbank (blue) vs UBS (red) and SMI (green) over a 15 year time period. You lost nothing with the SMI, lost more than half your money with UBS. However with Graubündner KB shares you’d have nearly trebled your money.


Also check this chart though: Valiant was going extremely strongly during the whole financial crisis, then fell of a cliff and never recovered. A 12 year track record of regular outperformance nearly wiped out in 3 years.


Julius Baer vs UBS and Basler KB – One Month Comparison

I’m a bit puzzled at how differently banks are performing that are in the focus of the US DOJ. According to Morgan Stanley Julius Baer (BAER) has a low single digit billion amount from US clients (1-2bn? – however in the article only between 0.1 and 1.3bn are mentioned). Basler KB (BSKP) has 600m.

The share price of BSKP has tanked by close to 30% (-900m market cap change) while BAER (-9,65%) has even outperformed the broad based SPI index very slightly (-700m market cap) [Chart 1]. Considering that UBS has solved its US client issue by paying a USD780m fine and BAER has yet to pay anything the disconnect between how the market is treating BSKP on one and BAER, UBS [Chart 2] on the other hand makes little fundamental sense. Unless the market believes the fine will force BSKP to issue more shares to meet capital ratio targets and therefor due to the much larger impact the fine will have on them.

I wonder if the lower liquidity and more negative media coverage have exacerbated the fall at BSKP.




Market Overreaction To Basler KB (BSKP)?

Today Basler KB is worth roughly CHF 2.2bn. That’s down from over CHF 3bn just four weeks ago. That’s a >30% haircut. Now the interesting thing: According to the CEO of the bank, Basler KB only has assets totalling 600m from US clients (1). Even if the worst case fine was to get imposed by the US DOJ, that would mean that the share price has overreacted by over 500m or 20%, as the fine should not be over 40% of assets (240m) even in the most extreme (unlikely) case. Maybe add 10-20m for lawyer expenses.

According to the CEO Guy Lachappelle the bank has a significant number of US clients that are non-US domiciled, meaning they work and pay taxes in Switzerland. That should mean that at least part of the 600m won’t be fined at maximum level (40%). A normal fine level would be 4-6%. A reasonable current level fine maybe 10-15% according to some sources (Moneycab, Morgan Stanley, NZZ)

So either the market thinks there’s a) a chance of not just a fine but also another component like what happened at Wegelin (sale of the business at firesale prices) or b) further fines from elsewhere or c) damage to brand resulting in liquidity drain by clients and correspondant banks effectively forcing the bank into a freeze or d) overvaluation due to other reasons – or a combination of all those possibilities of course.BSKP-BEKN-SPI-21-JUNE-2013

(1) BKB-Chef: «Wir hatten 600 Millionen Franken von US-Kunden»

BKB-CEO Guy Lachappelle
part of: (az Aargauer Zeitung)

Major Swiss Cantonal Banks by Market Cap / Berner Kantonalbank (BEKN) vs UBS (UBSN) and SPI


The chart above shows a selection of swiss cantonal banks by market cap. Note that BSKP (Basler KB) owns a majority stake in BC (Bank Coop). Data as of June 20th 2013. BCV (BC Vaud) and Berner Kantonalbank (BEKN) are #1 and #3 respectively, #4 is Baselland KB, #5 St.Galler KB, #6 Zuger KB, #7 BC Genève.

The 5-year chart below shows that Berner Kantonalbank was outperforming the broad based SPI index (green line) until the end of 2012.  Then the BEKN shares didn’t participate in the rally and when the market turned in May even underperformed. The stellar performance is still in tact vs UBS (red line) for the last 5 years and you didn’t loose any of your investment if you held BEKN shares since the crisis (autumn 2008) in contrast to the 30% loss with UBS shares.

Another point I wanted to make: BEKN has been trading in a way similar to Baselland KB (BLKB) – see previous post for graph of BLKB. That would also indicate that BEKN hasn’t been in focus of market participants worried about the US DOJ issue with US clients.BEKN-UBSN-SPI-5y BEKN-UBSN-SPI-6m BEKN-UBSN-SPI

Basler KB (BSKP), Bank Coop (BC), UBS (UBSN), Baselland KB (BLKB)

Three charts below: First one is Bank Coop (Ticker: BC) vs Basler KB PS (Ticker: BSKP) shares. Bank Coop is majority owned by Basler KB. Both have lost roughly 25% in the past month even though the Chairman of the Board at Bank Coop had said in early May that Bank Coop was only active domestically.

The second charts shows that while the shares of UBS have also lost, they have lost much less value than Bank Coop. As I pointed out in my last post: UBS has solved its issue with the US DOJ regarding US clients. The third chart shows that the Baselland KB (BLKB) shares have only slightly underperformed UBS shares. The market is signaling that the issue of US clients must be non-existant or very insignificant at BLKB or that participants were unaware there could be a problem in respect to US DOJ fines. The shares of BLKB are nonetheless also at a new multi year low (back at 2008 levels).

Bank-Coop-Basler-KB-PS Bank-Coop-UBSN-June-2013 BLKB-UBS-Chart-2013-June

SRI & Thoughts regarding Share Performance of St.Galler KB and Bank Coop vs UBS

St.Galler Kantonalbank vs. UBS - Mai - Juni 2013

This chart shows that the shares of St.Galler Kantonalbank have underperformed UBS (which had solved its issues with the DoJ in 2009 by paying USD 780m) substantially in the last 3-4 weeks. The reason for this of course could be the possibility of a situation like that at Wegelin developing and/or a large fine courtesy of the US DoJ arriving on the doormat of St.Galler KB.

The uncertainity and high possibility of substantial fines have led to a >10% underperformance versus UBS.

As I took part in a lecture by the SRI Head at ZKB (Zürcher Kantonalbank) yesterday as CIIA candidate, in which the impact of corporate governance and unfolding bad news was discussed, this seemed noteworthy as an example of problems caused by mismanagement. Had the corporate governance been geared towards sustainable client relationships (taxed assets only policy) this roadbump would have been avoided.

What this also clearly showed me: Even though ZKB is one of the experts in sustainable and responsible investment, the management obviously didn’t adhere to sustainable client selection in the past. This shows me that the dangers must tend to develop in such a way that it is not easily possible to identify them even for experts and analyst teams that are assumed to adhere to SRI. Or put another way: What was fine for 10, 30 or 50 years can change in the space of months and years. Active management can catch that, but I question if SRI active management can do so more efficiently, any more than other active management. If it can, where’s the evidence? (Intesting study about the current benchmark for sustainable investing, the DJSGI is skewed towards large cap companies and the tech sector when compared to the DJ Global Index.)

Another bank that seems to be in the focus of the DOJ could be Bank Coop judging by its performance in the last month. [Update: In fact they are a subsidiary of Basler KB (Ticker: BSKP) which is being investigated by the DOJ. I assume Bank Coop shareholders feel uneasy about what happens if there’s a larger than expected fine or sudden US Dollar clearing problem as happened at Bank Wegelin]:


I would assume that the leaver list has made its way to the market one way or the other. Interesting to see that both these small banks have seen roughly 10% underperformance vs UBS. Even adjusting for a higher small cap beta that seems to signal a special reason for investor caution.

The market doesn’t seem to be worried about the impact of fines on Credit Suisse, even though they will probably face a substantial one.


A last noteworthy fact: St. Galler KB has NOT outperformed UBS in the last 5 years. You would have lost 30% of your money in both shares. The supposedly conservative and stable, even boring, state-owned Kantonalbank vs UBS with its bonus culture, large fines and bailout. Makes you wonder.


Then I looked at Bank Coop:


You would have LOST MORE money with Bank Coop than with the virtually non-stop headline-making UBS.

Capital Gain Risk – Impact of Interest Rate Change on Bond Price

Today I used the Annuity Present Value Factor to calculate the impact a 1% change in interest rate has on two seperate 2-year coupon bonds. Assumption: Semi-annual payment of coupon. Once with 10% annual coupon, once with 2% annual coupon.



The inspiration and formula came from this website:

Calculating Compound Interest using TI BA II Plus Calculator

An amount of 1500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Find the balance after 6 years.

Using the TI BA II Plus calculator:

Step by Step

1. Calculate number of periods that will be compounded: 6 * 4 = 24 (6 years times 4 quarters)
2. Calculate quarterly interest rate: 4.3 / 4 = 1.075 (note: make sure not to enter interest rate as decimals, the calculator needs non-decimal format!)
3. Note the given present value [PV]: 1500

4. plug the three numbers from 1-3 into the calculator
[N] = 24
[I/Y] = 1.075
[PV] = -1500

5. solution: compute FV to find balance after 6 years
[CPT] [FV] = 1’938.837


CIIA: Security Market Line – Exam 2009 MCQ 2 (Multiple Choice Question) – Solution with Graph

Today I was solving the “Modern Porfolio Theory” exam question “MCQ 2” of the March 2009 CIIA Exam but had trouble visualising it, the graph below added value for me to understand the Security Market Line (SML).

The question was roughly: If you have a non-dividend paying stock, with a Beta value of 0.9 with respect to a market with a 15% expected return, currently quoted at EUR 48 and you expect the stock to be valued at EUR 52 after one year, is the stock over- or undervalued if the risk free rate is at 5%.

To get a visual of the problem I used OpenOffice Calc and entered the information provided, then used the chartin function to get the graph below. The markets E(R) is 15% (0.15). The beta of the market 1. The risk free rate is 5% (0.05) and the beta is 0. Knowing that I expect the stock to be at 52 vs 48 today means that it would return 8.33% (–> (52-48)/48). I also know its beta is 0.9.

That left an unknown: What will the return of the stock be according to the CAPM model. So if I mixed 0.9 parts of 15% with 0.1 parts of 5%, what value would I get.

The formula to get that value is E(Ri)= Rf + B (RM – Rf) = 0.05 + 0.9 (0.15-0.05) = 0.14 or 14%. I then entered those values into OpenOffice Calc as can be seen below. Knowing that the stocks that are below the SML are overvalued leads to the conclusion that the stock is not a good investment.

Input Data SML

CIIA: Security Market Line