UBS Group AG and Credit Suisse Group AG reported strong first-quarter results despite the coronavirus crisis, and analysts predict the Swiss pair will continue to outperform European peers in the second quarter due to their wealth management businesses and their room for maneuver on costs.

With 75% and 40% year-over-year jumps in first-quarter net income, Credit Suisse and UBS pulled in €1.23 billion and €1.45 billion, respectively. HSBC Holdings PLC's net income dropped 51%, while Barclays PLC and BNP Paribas SA posted declines of 32% and 33%, respectively.

Strong securities trading revenues and lower loan loss provisions than peers were the main drivers, but even if capital market volatility abates and provisions increase, the Swiss banks are generally seen as more resilient than others in Europe.

Resilient beyond one-offs

Their low-risk business profile, diversified portfolios, and Switzerland's strong economy are differentiating factors, analysts said. Both UBS and Credit Suisse have also put wealth management in the center of their franchises, which is a good counterbalance to their more unstable securities trading business.

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The extreme volatility in capital markets since late February is not likely to last until the end of the year. Although there may be some boost to second-quarter trading revenues, volatility seems to be petering out and it is not certain if it will return later in the year, Octavio Marenzi, CEO of capital markets management consultancy Opimas, said in an interview.

Coalition, an S&P Global research company, expects a slowdown in trading revenues in the third and fourth quarters.

Banks will therefore have to rely on more stable revenue streams to drive full-year profits and that will depend on their overall portfolio mix, according to analysts. On that measure, both UBS and Credit Suisse score well relative to large rivals, especially those in the EU.

Wealth management edge

Wealth management is a more profitable, less volatile business than traditional universal banking and is the key reason why Morningstar rates Credit Suisse and UBS higher than other European institutions, Johann Scholtz, an equity analyst with the U.S.-based financial services group, told S&P Global Market Intelligence.

Revenues and earnings at their wealth management units should be particularly resilient because both banks target high-net-worth individuals, a client group arguably less affected by the pandemic, Firdaus Ibrahim, a senior equity analyst at CFRA Research, said in a written comment. This revenue stream has become more important as retail banking is impacted by low interest rates and rising provisions due to COVID-19, Ibrahim said.

Loan loss outlook

Lending makes up a much smaller part of the two Swiss banks' business models and revenues, so the impact of increased loan loss provisions on their earnings will likely be more limited compared to traditional European universal banks, Scholtz said.

Both have high lending standards and have not taken big bets on loans in the recent past, reducing their exposure to provisions in the coming quarter, Opimas' Marenzi said.

In the first quarter, the Swiss pair booked lower provisions than many rivals — €240 million in the case of UBS and €520 million for Credit Suisse, compared to more than €2.5 billion for both Barclays and HSBC. Although there are differences in the various banks' loan loss modeling, including around assumptions for the economic backdrop in upcoming quarters, it is unlikely that the Swiss banks will be hit by larger credit losses than they anticipate, Marenzi said.

Equity analysts at Berenberg said May 1 that they expect UBS to post higher credit losses after it completes its review of macro scenarios, estimating the bank's total annual credit loss expense at roughly $1 billion. Still, this amount will be lower than the provisions taken by several of its European peers in the first quarter alone.

Cost flex

Another profit-generation upside for Credit Suisse is cost flexibility, according to equity analyst Magdalena Stoklosa of Morgan Stanley, for whom the bank is the top pick among European lenders. Thanks to a restructuring completed at the end of 2018, it runs on a lower operational cost base, allowing it to continue improving efficiency in the future.

"Even this year, we are likely to see 5% to 7% absolute cost decline in response to a more difficult revenue environment," Stoklosa said during a recent investment banking webinar.

Meanwhile, UBS still expects to cut costs by $1 billion in 2020 and has some cost flexibility to offset a potential decline in revenues late in the year, CFO Kirt Gardner said during the group's first-quarter earnings call.

Both Swiss banks are considered relatively well-capitalized as compared to peers and hold buffers of more than 200 basis points over the 10% common equity Tier 1 ratio minimum required by the national regulator.

Home Swiss home

Both UBS CEO Sergio Ermotti and Credit Suisse CEO Thomas Gottstein said in their first-quarter statements that the Swiss home market gives their organizations an edge over international competitors.

Switzerland's average-provisions-to-average-loan ratio from 2006 to 2019 stood at 0.1%, compared to 0.7% in the U.K. and the EU, Gottstein said April 24. In the same period, the Swiss average nonperforming loans-to-total outstanding loans ratio was 0.6%, compared to 4.4% in the U.K. and 4.7% in the EU, he said.

Credit Suisse and UBS control the bulk of Swiss retail and commercial banking, which gives them pricing power unavailable to banks in other European countries, where this space tends to be highly fragmented and is much more competitive, Morningstar's Scholtz said.

The Swiss banking system is among the best-regulated globally which supports stability, he said. A stable banking system sitting outside the EU and U.S. regimes is a strong draw for wealthy individuals looking to protect and diversify their assets, which in turn is a "great advantage" for the UBS' and Credit Suisse's private banking and wealth management businesses, Scholtz said.

The Swiss economy is expected to remain more stable and resilient than the rest of Europe amid COVID-19 which means there will be lower asset-quality risks for UBS and Credit Suisse, CFRA Research's Ibrahim said. CFRA expects the Swiss economy to contract by 5% in 2020, compared to drops of 6.5% in Germany, 8.2% in France, 9.4% in Spain, 9.5% in Italy and a 7.7% dip in the eurozone.