Silver Lining for Zurich Bank International (What Credit Crunch?)

Written by by Mark Waterhouse, Head of Banking, Zurich Bank International

Tuesday, 03 March 2009 10:23

The latter half of 2007 was a chilling time for all as the banking crisis began to gather momentum. The markets began to crash and in February 2008 Northern Rock was nationalised. Little did we know that they would be the first of many to be either nationalised or part nationalised. As banks stopped lending to each other due to market fears over exposure to potential losses on high risk US mortgages or through necessity to maintain liquidity for capital adequacy requirements, Libor rates took a turn for the worse and the UK Government was left to try and restore confidence as worried members of the public lost faith in the banking system. However, as the saying goes “every cloud has a silver lining” and this was certainly the case for Zurich Bank International.

Customers were by now beginning to look a lot more closely at the security of banks, including their Parent companies. They also became more aware of the depositors compensation scheme maximum limits, which in the UK was £50,000. As a result customers began to move their deposits either in entirety, due to concerns about the security of their current bank or in part to spread their deposits to ensure they did not exceed the compensation scheme limits. Although some decided the safest place was under the mattress and the sales of home safes rocketed, for many Zurich Bank International in the Isle of Man appeared on their radar for the first time.

From Strength to Strength

As each day passed and other banks and the financial markets fell, Zurich Bank International grew from strength to strength. With the majority of banks struggling to retain deposits, Zurich Bank International was both able to retain existing deposits and attract record levels of new business.

It was also pleasing to note that the competitive interest rates of this business proved attractive to customers, but we never attempted to match the ridiculously high levels of interest offered by one or two banks which we realised were unsustainable. Although a few astute investors realised that there was often a high correlation between high rates and high risks it was not until the collapse of some Icelandic banks that many more realised that it was not worth putting all their deposit at risk for the sake of an extra 1% in interest. Although Zurich Bank International has always prided themselves on their personal levels of service and competitive rates of interest, they realised that in this case their success was primarily due to the financial strength of Zurich.

Parental Strength

Zurich Bank International realised the importance and relevance of its financial strength early on. In order to reassure customers it took out an advert promoting the size of Zurich Financial Services (Zurich Bank International’s ultimate Parent) and compared this to the Parents of its main competitors. The advert ran from August 2008 and provided a table showing market capitalisation as at 19 August 2008 of the following banks.

Zurich	£19.1bn
Kaupthing Bank	£3.4bn
Anglo-Irish Bank Corporation PLC	£3.4bn
Landsbanki Islands HF	£1.8bn
Alliance & Leicester PLC	£1.3bn
Bradford & Bingley PLC	£0.8bn

It was an eerily prophetic sign of things to come, as all the competitor banks have either collapsed, being nationalised or being taken over by another bank. Although this might have been regarded as incredible foresight by Zurich Bank International, it could now be argued that it would be difficult to choose a bank where this has not happened.

Of course it is not just the financial size of the Parent that is important - after all there are not many larger than HBOS, Barclays and RBS. Financial prudence is crucial. For the first time customers were questioning the level of a bank’s exposure to sub-prime debts and other so called toxic assets, such as was the case with Lehmans.

Without doubt much of Zurich Bank International’s recent success is the strength of their ultimate parent company, Zurich Financial Services. With this strength of brand in support customers knew their funds were safe.

Zurich Financial Services is an insurance based financial services provider with a global network of subsidiaries and offices in north America and Europe, as well as Asia Pacific, Latin America and other markets. Founded in 1872 the Group’s headquarters is in Zurich, Switzerland. It employs approximately 60,000 people serving customers in more than 170 countries.

Although credit ratings provided by the credit agencies have also been called into question of late, it is still pleasing to provide this as further evidence of the strength of Zurich. The present Standard and Poor’s counterparty credit rating for Zurich Bank is AA-/stable and the current Moody’s rating is A1/stable.

Further to the security of being backed by Zurich Bank and ultimately Zurich Financial Services, customers depositing funds with Zurich Bank International are also covered by the Isle of Man Depositor’s Compensation Scheme.

Graham Sheward, Managing Director, Zurich Bank International, stated; “The financial strength of Zurich stems from a well diversified portfolio of group investments and the prudent management of its assets. This conservative approach puts us in a good position to weather the current market turmoil. Zurich Bank International expects to build on this strength and to continue offering a secure and competitive range of savings accounts.”

Award winning products

Zurich Bank International’s product range includes Fixed Rate Bonds, Capital Guaranteed Structured Products, Short Term Deposits and Easy Access accounts in Sterling, Euro and US Dollars, including the award winning Zurich Reward Account.

Zurich Bank International has recently been voted ‘Best No Notice Deposit Provider’ by the readers of Investment International. The easy access Zurich Reward Account currently offers an interest rate of 0.25% above the Bank of England Base Rate and an interest rate guarantee that it will be no more than 0.25% below the Bank of England Base Rate until 2010. Graham Sheward, Managing Director of Zurich Bank International, said; “When we originally launched the Zurich Reward Account in August 2006, we knew that the product would be well received by new and existing customers as it offers an uncomplicated way of saving. It has proved to be a great success.”

Future Products

With interest rates at an all-time low, the rates being offered to customers wishing to save have fallen. Customers are therefore looking for products which provide the potential of a higher return but at the same time offer capital guarantees, and consequently are turning more and more to Capital Guaranteed Structured Products. By placing funds in these products customers can benefit from the increases in the underlying stock market without putting their capital at risk. If the commodity value decreases the original capital investment is still guaranteed to be returned at the end of the term.

The FTSE 100 is currently a popular choice of index for this product. The return paid at the end of the term, which is usually between 3 and 6 years, is linked to the rise in the index and therefore there is potential for a significant return on capital. As a minimum the customer is guaranteed to receive the full amount of their capital at the end of the term.

Zurich Bank International also offers a bespoke Capital Guaranteed Structured Product service. They can tailor products to an individuals need and are flexible with what product terms are required. Graham Seward commented “If a customer has a particular savings goal we will work with them to achieve it. Our bespoke service allows the customer to choose the index, commodity and term of the savings product.

Graham continued, “Individuals need to have the equivalent of £1 million to gain access to a bespoke GEB. We also offer the chance to save in other currencies with our Euro and US Dollar Bespoke GEB products. We are willing to work with groups of like-minded private clients or institutions with significant pooled funds that need a safe home and real growth potential.”

“We believe that every customer is unique and that structured products require a special focus. We have an excellent feel for the structured product market place as evidenced by our long experience and consistent sales. We work with customers to select a product that’s right for them.”

What about the future?

Most people are aware that the UK Government has commissioned an independent review of British financial offshore centres within the Crown Dependencies and Overseas Territories. It is said that the review is intended to identify current and future opportunities, risks and mitigation strategies including issues such as financial supervision and transparency in fiscal arrangements; financial crisis management and resolution arrangements and finally international co-operation. Whatever the merits or intentions of the review Zurich Bank International agrees with the Isle of Man Government that the review is welcome. It is another opportunity to prove that the island’s financial services industry is well regulated and financially stable.

Attacking the “offshore sector” seems to be politically popular at the moment. The new administration in the USA is threatening to blacklist countries it describes as “tax havens” or offshore secrecy jurisdictions. Unfortunately, its list of so called “tax havens” does not appear to differentiate between well regulated and transparent jurisdictions such as the Isle of Man, which has anti-money laundering regimes much more rigorous than those in many US and European centres, and less well regulated jurisdictions. Zurich believes this difference needs to be clearly stated, and the UK Government’s review, mentioned above, should assist in clarifying these issues.