The interest rate turnaround has been banks earning bumper profits on their rates businesses. That's likely to continue in the second half with Swiss retail banks headed for a record year.

Investors are still awaiting first-half results for major Swiss banks UBS, Raiffeisen, and Zuercher Kantonalbank (ZKB). But one trend has emerged from the results of smaller banks: their interest rate businesses are firing on all cylinders.

The headlines for the results of Swiss banks for the first six months are almost a copy-paste exercise. «[Fill in Bank Name] benefits from central banks exiting accommodative policies». Institutions consistently increased their earnings in the interest differential business by double digits compared with the previous year, with 30 percent or more a good aspirational benchmark.

Interest Rate Gains Compensate Other Units

Swissquote outshone all its competitors yesterday when it reported earnings in the interest business increased by nearly 600 percent. Compared to the second half of last year, this was still an increase of around 76 percent.

While not quite so spectacular, the interest income increases at other banks were impressive. Berner Kantonalbank reported an increase of 31 percent, Fribourg Kantonalbank 16 percent, and Geneva Kantonalbank just under 50 percent in gross interest income.

At Julius Baer, net interest income rose 36 percent to 464 million Swiss francs. Zurich-based Vontobel, where the interest business plays a subordinate role, compensated for declines in the commission and trading business with higher interest income, with the interest business increasing around 190 percent to 95 million francs.

Wider Margins Likely in September

It's no wonder the outlook for the second half has become rosier under these conditions. To be sure, the cycle of interest rate hikes is likely coming to an end soon, although there's a good chance that the Swiss National Bank (SNB) will raise the key interest rate again in September.

This would give the banks the opportunity to widen their interest margins again somewhat.

Pumping the Brakes on Savings Interest

That's because financial institutions are putting the brakes on interest costs by delaying increases in savings and deposit rates. Fees, which rose significantly in recent years to defend margins, are also not budging yet.

This prompted renewed criticism from consumer protection groups.

It's true that banks like to emphasize they pass on the interest rate advantage to their customers, but they hardly ever fully do so. The gap to the prime rate is part of the business model and is given simply by the fact that the banks have to use the average interest rate on all their loans as a benchmark. Due to the multi-year maturities of mortgages and loan agreements, increases come with a time lag.

Special tax? Unthinkable!

Appeals for moderation are unlikely to change this. Nor is there any threat of intervention from the regulators or politicians. Calls for special taxes on excess profits, as has transpired in some EU countries and recently introduced in Italy, seem to have no chance in Switzerland for a number of reasons, including an unusually long legislative process.

Customers are Key to Change

The only proven means of getting the banks to budge on interest rates and fees is functioning competition. But the banks that are pushing ahead with better conditions are mostly small and have little impact on the market. So far, the broad range of online and new banks has done nothing to change this.

The top dogs can rely on the sluggishness of their customers.

And so the business model holds: better to do nothing and continue to profit from the difference between lending and deposit rates.