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A tale of two dozen cantons

Switzerland's cantonal banks can no longer afford to be just sleepy local lenders. Here's how two of the boldest -- Zürcher Kantonalbank and Basler Kantonalbank -- are remaking themselves.

Cantonal banks can seem as peculiarly Swiss as middle-aged army reservists in combat fatigues wandering the Alps amid cows wearing outsize bells. Majority-owned by cantons, or Swiss states, the banks prosper largely thanks to mortgages and other loans to local farmers, artisans and small businesses, for whose sake they were created in the late-19th century.

To critics, the banks are squarely within the traditional, inefficient half of Switzerland's dual economy -- a term widely used to describe the coexistence of insular, old-fashioned, smaller enterprises alongside globally competitive businesses. "It would be preferable if cantonal banks were privatized and consolidated," observes Thomas Held, head of Avenir Suisse, a Zurich-based think tank financed by multinational companies, the modern half of the dual economy.

But in fact, cantonal banks have no problems defending their turf. They have rebounded as well as any other Swiss financial institution from the Sf44 billion ($35 billion) in bad loans that rocked the country's banking system in the 1990s and from this decade's bear market. In 2003 the 24 cantonal banks earned Sf1.2 billion on total assets of Sf310.7 billion, up from Sf895.7 million on assets of Sf312.9 billion in 2002. Such low profit margins are acceptable to many of the banks because their primary aim is to provide competitive loans to local residents and businesses without suffering losses for their cantonal government owners. "Even though the economy hasn't been favorable, the cantonal banks have thrived on their traditional business model," says Henner Schierenbeck, a professor of bank management at the University of Basel.

Cantonal banks account for about one third of the domestic banking market in terms of assets, well ahead of Credit Suisse's 20 percent share and not far behind UBS's 40 percent. "Of course, people can turn to UBS and Credit Suisse, but they often complain that global banks are too distant," says Tanja Kocher, a spokeswoman for the Swiss Federal Banking Commission in Bern. "The great advantage of a cantonal bank is that it can claim to know its clients very well." This is a sales pitch made with just as much insistence by such big cantonal institutions as Zürcher Kantonalbank, with its market of 1.2 million inhabitants, as by such pint-size operations as Appenzeller Kantonalbank, serving the 15,000 inhabitants of the tiny canton of Appenzell Inner Rhodes.

Nevertheless, even their defenders concede that cantonal banks will have to move beyond their captive, largely protected savings and loan markets into new revenue sources, including asset management, trading and corporate banking. For one thing, interest rates have been at historically low levels for years and appear likely to remain so in the near future, squeezing profits from mortgages and discouraging the opening of savings accounts. What's more, stagnant population growth means fewer new residences and mortgages. "There are still many banks that make 80 percent of earnings from mortgages and savings," notes Hanspeter Hess, a spokesman for the Association of Swiss Cantonal Banks, based in Basel. "If there's a problem, they will be in trouble."

Cantonal banks have been trying to diversify away from traditional income sources for a dozen years, but most are still moving too slowly. To build their mutual fund business, the cantonal banks in 1993 established Swissca, which they jointly own and operate. With Sf47.3 billion in assets under management, it is the third-biggest asset manager in the country after UBS and Credit Suisse. Some cantonal banks are venturing further. A nimble midsize institution like Basler Kantonalbank now earns as much money from private banking and corporate lending as from mortgages. And a big player, such as Zürcher Kantonalbank, tries to present itself to even the largest Swiss companies as a credible alternative to UBS or Credit Suisse.

All cantonal banks are majority or wholly owned by their cantons, though nine of them -- Banque Cantonale de Genève, Banque Cantonale de Jura, Banque Cantonale du Valais, Banque Cantonale Vaudoise, Basler Kantonalbank, Berner Kantonalbank, Luzerner Kantonalbank, St. Gallen Kantonalbank and Zuger Kantonalbank -- are publicly listed and have a minority of private shareholders. Although their day-to-day management is in the hands of professionals, even the biggest cantonal banks have trouble attracting topflight talent. They tend to be midcareer options for executives who lose jobs when UBS and Credit Suisse cut back personnel in times of austerity or consolidation. "You have banks with lots of money, overseen by people who sometimes go into markets they know little about," says Thomas von Ungern-Sternberg, an economics professor at the University of Lausanne.

None of these problems are acute enough to worry some independent analysts. "I see no reason to be negative about cantonal banks," says Guido Versondert, a London-based analyst who follows the sector for Moody's Investors Service. "I don't think there is a major structural issue with these banks, and they are demonstrating the capacity to gradually evolve." Although the total number of Swiss banks has shrunk from 495 in 1990 to 356 last year, only two small cantonal banks -- one in Solothurn and the other in Appenzell Outer Rhodes -- have ceased to exist as independent entities; both were acquired in the mid-1990s by UBS (it sold the Solothurn bank to Bâloise Insurance in 2000). According to a survey of senior bank managers carried out this year by the Swiss Institute of Banking and Finance at the University of St. Gallen and by the consulting firm Accenture, the number of banks is likely to decline by an additional 15 percent by 2010. But all 24 cantonal banks are expected to survive. Consolidation seems improbable because cantonal pride runs high among local voters, who would have to approve mergers. Instead, more back-office sharing is likely.

Zürcher Kantonalbank is the behemoth of the cantonal banking system, with almost a quarter of the Sf310.7 billion in total assets. A local savings and loan association in the canton of Zurich since 1870, ZKB is now the third-largest bank in Switzerland, providing the same services and products domestically as UBS and Credit Suisse. Even in derivatives trading on Swiss markets, ZKB is their equal.

"Of course, the difference is that we are not a global player as they are," says Hans Vögeli, ZKB's chief executive officer. "But this is no longer your traditional canton bank" (see sidebar, below).

But ZKB, whose assets in 2003 totaled Sf76.7 billion, shares the statutory constraints of the smallest cantonal bank, Appenzeller Kantonalbank, whose assets last year were Sf1.7 billion. Under its cantonal legal obligations to provide full-fledged financial coverage for Zurich, ZKB is not allowed to close any of its 113 branches.

ZKB is entirely owned by its canton, and its 13-member board of directors must reflect the local legislative strength of the various political parties. More than half the current board members have left-of-center affiliations. "They are not banking experts," says Vögeli. No one questions their nose for politics, however. When the bank achieved its best-ever results in 2003 -- a profit of Sf600 million -- ZKB's board decided to disburse a record Sf165 million to the canton for public works projects. "It was a sheer political decision," notes Vögeli. The canton's citizens seem to have no qualms about this mix of banking and politics. In a 1997 referendum, 80 percent of the electorate voted against privatizing even part of the bank.

Vögeli asserts that "the canton guarantees all of the bank's commitments and liabilities," even though no such guarantee is spelled out in law. In its February 2003 research report -- the most recent one on ZKB -- Standard & Poor's analysts underlined those informal cantonal guarantees in upholding the bank's AAA rating. "Standard & Poor's takes comfort from previous rescue operations within the Swiss cantonal banking sector, in which distressed banks were maintained as ongoing entities," states the report.

Not that ZKB shows any signs of allowing distress to set in. After markets and interest rates plummeted in 2000 and 2001 even as expenses continued to rise, ZKB launched a cost-cutting plan that achieved Sf100 million in savings last year. Most of that came from consolidating three marketing and three product departments in the retail sector into one of each. Despite the restructuring, the bank employed 4,124 people at the end of 2003, only 125 less than it had the year before (layoffs numbered 36). "But [the effort] never stops," says Vögeli. "For the next few years, all banks will have to bring down their cost basis." Cutting costs is probably even more critical to the bottom line than revenue increases from mortgages, corporate banking, trading and private banking. "Increasing our income base will be harder because the banking market is saturated," says Vögeli.

Information technology is the obvious next direction for cost-cutting. IT costs are an increasing burden for cantonal banks, large and small. Eight IT plans exist among the 24 cantonal banks, with 20 banks sharing four different plans and four going it alone. "We would like to see two or three IT-sharing arrangements for the whole system," says Hess, the Association of Swiss Cantonal Banks spokesman. "But we're not moving fast enough."

ZKB, which has its own IT department, complains that costs are ballooning. Every year the bank invests about Sf300 million francs for something that is a mere commodity as far as customers are concerned. "No client comes to our bank because of our IT department," says Vögeli. "But the third time he gets a wrong statement, he's out of here." So even giant ZKB is looking for an IT-sharing arrangement. Trouble is, most cantonal banks are smaller and require cheaper, less sophisticated systems.

The bulk of rising IT costs are linked to Switzerland's commitment to crack down on money laundering, terrorist financing and tax evasion by account holders from the European Union. But cantonal banks claim that they are being made to pay for the sins of Swiss global and private banks. Few foreigners -- whether terrorists, drug barons or mere tax evaders -- opt for accounts in cantonal banks, which lack the global branch networks that facilitate money laundering and asset hiding.

For a big cantonal bank like ZKB, rising regulatory costs are an expensive nuisance. But at a small institution, such as Appenzeller Kantonalbank, "meeting all these regulations is our biggest expense aside from salaries," says its chief executive officer, Bruno Dörig. A just-completed University of Zurich research project confirms the much heavier relative cost of regulation for smaller banks. "The smaller ones have a regulatory burden of about 9 percent of their total costs," says Hans Geiger, a professor of banking and one of the study's authors. "For the bigger banks, it's only 4 percent."

Cantonal banks have been better at controlling costs than they have been at creating new sources of income. Even ZKB, with all its resources, has found it difficult to reduce its dependence on net interest income, which traditionally accounts for 70 percent of profits. Last year 43 percent of the bank's income came from commissions and trading fees. But that spike was caused largely by bullish global markets. "To be honest, our own efforts were minimal," says Vögeli.

Basler Kantonalbank, or BKB, is the prime example of a cantonal bank that has boldly and seamlessly diversified its revenue sources. Headquartered in Basel, one of the wealthiest cities and cantons, it depended until a dozen years ago on interest income from mortgages and business loans for 80 percent of its profits. "But with only 190,000 inhabitants in the canton, there wasn't much new residential construction, so we had to look for other revenue," said Werner Sigg in an interview with Institutional Investor shortly before retiring in July as chief executive officer of the bank.

Beginning in 1993, under Sigg's guidance, BKB spread its earnings base into fees and commissions from trading operations and private banking. "To develop fee income, we had to expand beyond Basel," said Sigg. Private banking units were opened in Zurich, Geneva and Olten. Today BKB profits are evenly divided between these new sources and traditional mortgages and commercial loans. This has reduced the bank's vulnerability in times of low interest rate margins and has also made BKB extremely profitable, with a cost-income ratio of 33.6 percent last year, a Swiss record. By comparison, ZKB congratulated itself for achieving a cost-income ratio of 65.3 percent in 2003.

BKB has ruffled the sedate world of cantonal finance by violating an unspoken gentlemen's agreement not to engage in retail banking in other cantons. In 2000 it paid an undisclosed price for a 50 percent stake in Bank Coop, one of only four banks with a nationwide retail network (UBS, Credit Suisse and Migros Bank are the others). BKB has kept Bank Coop as a separate subsidiary, sharing back-office operations and allowing the remaining 50 percent of Coop stock to be quoted on the Swiss stock exchange. By acquiring Bank Coop, BKB has also better positioned itself for any future privatization. "In such a case, we could merge with Bank Coop and create a nationwide bank," says Sigg, who hastens to add that the canton isn't likely to sell its majority stake in BKB anytime soon.

The canton of Basel owns 80 percent of BKB; the remaining 20 percent is held by private investors on the Zurich Stock Exchange as nonvoting shares. Over the past five years, BKB has regularly outperformed the Swiss market index. It currently has a market cap of about Sf2.5 billion, along with an AA+ rating from S&P. In 2003 it recorded Sf68.6 million in net profits on Sf22.75 billion in assets -- compared with net profits of Sf62.2 million and Sf22.9 billion in assets in 2002. And although the private shareholders can't vote, some 6,000 attended the bank's general assembly in April.

But BKB's success has been hard to emulate. Moving into new businesses has been a nasty roll of the dice for some of its brethren. Banque Cantonale Vaudoise, or BCV, the fourth-largest cantonal bank, needed a Sf2 billion bailout from its cantonal government in 2001­'02 after some disastrous deals -- including some Sf200 million in bad loans to Greek shipping companies in the 1990s.

For University of Lausanne economics professor Von Ungern-Sternberg, BCV's troubles illustrate the risks of overseeing a bank with a board consisting of local politicians. "In the cantonal banks the majority shareholder is the government, and governments tend to avoid doing what they are supposed to do -- that is, supervise the banks," he says, noting that cantonal banks in Geneva and Bern also suffered severe losses from bad loans over the past decade.

Other observers insist that the troubles at cantonal banks have had little to do with venturing into unknown financial territory. To lose Sf2 billion, BCV must have made bad loans everywhere, not just in Greece, says the University of Basel's Schierenbeck. "This is a case of a bank that didn't do its homework even in its traditional mortgage business," he says.

Indeed, according to a BCV spokesman, most of the nonperforming loans were linked to local corporate clients. And, he insists, the bank is now healthy. "For the past 18 months, under a completely new management and board, the [bank] has successfully managed an in-depth restructuring and turnaround phase," comments the spokesman, Wilhelm Blaeuer, head of BCV's investor relations, by e-mail. Net profits reached Sf197 million for the first half of 2004, compared with Sf56 million for the same period the year before, while total assets declined from Sf34.25 billion in the first half of 2003 to Sf32.8 billion a year later.

At no point in BCV's crisis did the bank face the threat of a popular referendum calling for its privatization or sale. "Every canton wants to maintain an independent bank," says the Association of Swiss Cantonal Banks' Hess. Whatever pressure exists to radically change or abandon the cantonal bank system is likelier to come from the European Union than from domestic sources. Under mounting demands from the EU, Switzerland has retreated from its previously unalterable stance on such issues as maintaining bank secrecy and allowing EU citizens to hide their money from tax authorities back home.

The EU has banned the use of state guarantees for banks, moving recently even against Germany's powerful landesbanken. The EU is not now pressing for a similar change in the cantonal banks because, unlike the German landesbanken, they don't compete with European private sector banks. "But Switzerland has adopted a strategy to shadow EU banking regulations," says the University of Zurich's Geiger. "And if someday you remove the state guarantee, these banks will look very different -- that's for sure."

Vögeli on bank politics at ZKB

July 5 was the worst day in Hans Vögeli's two-year reign as CEO of Zürcher Kantonalbank, the biggest Swiss cantonal bank. That morning a disgruntled employee walked into a branch office behind ZKB headquarters and shot and killed two senior managers before fatally shooting himself. The tragedy underlined that neither Zurich, that safest of cities, nor cantonal banking, a bastion of

financial serenity, is immune to the senseless violence the Swiss read about happening elsewhere in the world.

Only days after the incident, a still-shaken Vögeli insisted on going ahead with a scheduled interview at his office on the Banhofstrasse, Zurich's famed financial artery, with Institutional Investor Contributing Editor Jonathan Kandell. A tax lawyer by training, Vögeli, 56, joined ZKB in 1998 after a varied career that included a decade as an international tax adviser to Credit Suisse and a dozen years on the board of Bank J. Vontobel & Co., a leading Swiss private bank.

Institutional Investor: What were the main reasons for the creation of ZKB, and are they still valid today?

Vögeli: Around 1870 the Swiss banking community consisted of very small savings associations, plus a few big banks that were interested mainly in financing exports, insurance and the railways. So the cantonal governments decided to create their own banks, catering to the needs of local artisans, farmers and small-business men. But ZKB has transformed itself into a universal bank, providing all the services and products -- domestically -- as UBS or Credit Suisse. Of course, the big difference between us and those banks is that we aren't a global player.

Do you regard the restrictions imposed on cantonal banks a straitjacket for ZKB's further growth?

By law we are obliged to provide full-fledged financial coverage for the Zurich area. So we can't close down branches. That's a straitjacket. The law also states that if we conduct business beyond the cantonal borders, we are not allowed to take "unreasonable risks" -- whatever that means. But these legal obligations are balanced by the fact that the canton guarantees all of the bank's commitments and liabilities. This has helped us get an AAA credit rating [from Standard & Poor's].

How are your board directors chosen, and how political are they?

By law the 13 members of the board must reflect the parliamentary strength of the various political parties in the canton of Zurich. They aren't banking experts.

How do you decide how much of your profits should be distributed to the canton?

That's a sheer political decision. For instance, last year we had our best-ever results, and since the canton felt it was in need of money, the board decided to pay out a very substantial amount of dividends to the canton.

How have your clients changed over the past decade?

Even today roughly half the canton's inhabitants have a relationship with the bank -- through a savings account or a business account. Some 40 percent of all mortgages in the canton are on our books. But loyalty is shifting. Clients are more selective. They use the Internet to compare rates and fees and rapidly switch banks.

Will mortgages continue to account for the majority of your revenues?

Our goal is to become more independent of interest income -- mortgages, as well as savings. Traditionally, we have had a 70-to-30 ratio in terms of interest income to commissions and trading fees. Last year we reached 57 percent from interest income and 43 percent from commissions and trading fees. Our strategic goal is to have two equally strong legs of income.

What is your corporate banking strategy?

Bear in mind that after the merger in 1999 that created UBS, the country was left with two big players [the other being Credit Suisse], and we became the only alternative for corporate clients in our canton. We are quite confident that we can offer the same services and products all over Switzerland. But it's too expensive to create a nationwide branch network. So outside of Zurich, we are interested only in medium and big corporates.

What is your private and investment banking strategy?

It is our clear intention to grow our private banking business. If we find a bank with a decent price, we will consider buying it.

How are you coping with rising information technology costs?

Every year we invest some Sf300 million

[$236 million] in IT for something that our clients consider a mere commodity. So we would like to participate in an IT cost-sharing arrangement. A number of such arrangements already exist in this country, but unfortunately, their common

denominator is focused on the needs of small cantonal banks. They feel satisfied with a Volkswagen, but ZKB needs a Rolls-Royce.

ZKB had its best year in 2003. How much of it do you attribute to the turnaround in the markets?

Last year's results were mainly thanks to the big rise in the stock market. So to be honest, our own efforts were minimal. The economy lagged behind until the end of the year, and even now it continues to recover very slowly. We are expecting 1.5 to 2 percent growth for the country in 2004 and a better year in 2005. But we export 72 percent of our GNP, and our biggest market is Germany, which still hasn't solved its economic problems.

What has been the impact of the post-9/11 regulations and of European Union demands on disclosure and tax compliance?

We have introduced specific computer programs that detect unusual money transfers. But at our bank this isn't a great concern because 90 percent of our clients are Swiss. ZKB isn't suitable for money launderers, who need an international bank network. So the impact of the new regulations on our costs hasn't been very substantial. And since we don't have nearly as many foreign clients as the private or global banks, the EU disclosure and tax compliance demands haven't had much impact either.

Small-town banker

Bruno Dörig, CEO of the Appenzeller Kantonalbank, Switzerland's smallest cantonal bank, lunches regularly at his favorite restaurant, in the Romantik Hotel Säntis. Outside the window lies the town square, where all able-bodied adults in Appenzell (population 5,535) turn out for elections and referenda, voting by chanting yeas and nays. Beyond the medieval belfries and gabled town houses, a snug landscape of neat farms and green hills rises up to the majestic, snowy Alps. It can tempt even a foreigner to yodel.

But looking up from his veal cutlet, Dörig suddenly becomes somber. A few tables away sits a businessman on whose property the banker was forced to foreclose. "A really nice fellow, too," says Dörig. "That's the worst part of the job -- handling difficult credit situations with people I see everyday."

Fortunately, deadbeats are a tiny minority. Judging from the warm reception the 60-year-old Dörig gets from fellow Appenzellers on the narrow, winding streets, his bank seems to be satisfactorily meeting the needs of the farmers, artisans and owners of small-to-midsize businesses for which it was created in 1900. At the time, there was no bank in either the town or its canton, Appenzell Inner Rhodes (present population, 15,281). Appenzellers made the hourlong train ride to St. Gallen or rode an hour further west to Zurich to plead for loans with bankers who viewed them as bumpkins and credit risks. So a local bank made sense. "And only the canton had the capital to start a bank in Appenzell back then," says Dörig.

Today giant UBS and nationwide mortgage specialist Raiffeisenbank have branches in the town. But their local business lags well behind Appenzeller Kantonalbank's, with its total assets of Sf1.7 billion ($1.35 billion) and net income of Sf10.7 million in 2003. Dörig's not-so-secret weapon against competitors is what he calls "cantonal patriotism" -- the attachment that Appenzellers feel for the bank owned by their canton, and thus by its inhabitants. "Between 80 and 90 percent of the adults in Appenzell have accounts with us," says Dörig, who usually fields their phone calls without a secretary. "And they are the same sort of customers we have always had."

They include Roger Dörig (no relation to the banker), a leather and metal worker who crafts the ponderous bells that local dairy farmers hang around cows' necks. "The cantonal bank is like my shop -- an old tradition," says the fourth-generation artisan. "I use it for my mortgage and for my everyday business cash flow. I've never even considered another bank."

Nor has Stefan Heeb, proprietor of the Romantik Hotel Säntis, one of the largest local businesses. His family has owned the hotel since 1919 and has been using the cantonal bank at least as long. Eight years ago Heeb built a new wing, financed almost entirely with loans from Appenzeller Kantonalbank. "UBS once approached us, but they offered 1 percent over the rate we were getting at Appenzeller, so there was no reason to talk," says Heeb.

Over the past dozen years, the cantonal bank, with only 70 full-time employees in its headquarters and three branches, has tried to diversify services. Mortgages and commercial loans (79 percent of profits) remain its bread and butter, just as they were a century ago. This is a cause for concern because Swiss interest rates have been at historical lows for the past two years, which means that for a typical 3 percent home mortgage, the market spread is only 1.5 percent above the bank's cost of capital. Dörig hopes eventually to compensate for the tight profit margins from net interest income with more fees from asset management, now accounting for 16 percent of profits, and currency trading (5 percent of profits). "You can't stay frozen in time," he says.

Like its bank, Appenzell has demonstrated the capacity to change, albeit glacially. In 1990 it became the last canton to grant women the right to vote in local elections. The very first thing women did with their vote was to push through a referendum to fund the Appenzell Museum, largely devoted to the talents and travails of the canton's women. The museum's displays include superb samples of the area's famed lace dresses and tablecloths. One afternoon every week, Vreni Schiegg, a master embroiderer, offers lessons in her craft. But Maria Hamm, one of the museum guides, makes sure that visitors also view the third-floor exhibit of a cramped early-20th-century wooden jail cell used for unwed mothers until they gave birth. "The new-born infants were forcibly taken away from them and sent to secret orphanages," says Hamm.

Banker Dörig doesn't gloss over Appenzell's shortcomings. He once even tried to break away. The son of a furniture maker, he quit his teenage apprenticeship at the cantonal bank and went off to the U.S. as a ski instructor. When he returned to Switzerland, he worked with large banks in Geneva and Zurich. But a quarter century ago, he and his wife, also from a local family, returned to Appenzell when the local bank recruited him with the promise of a shot at top management.

Asked about his most memorable moments at the bank, Dörig cites the ailing businesses helped back to profitability and the centennial celebrations in Appenzell's town square for his bank in 2000. Could a sequel to It's a Wonderful Life, Frank Capra's 1946 paean to a small-town banker, be in the works? "Never heard of the movie," says Dörig. -- J.K.

It's a nice place to visit your money. . .

Zurich used to be as deliberately dull and proper as a banker's gray suit. But the city of financial gnomes exhibits a new vitality these days, thanks in part to an influx of immigrants. They now account for a third of Zurich's 363,000 inhabitants. Nightlife runs the gamut from classical concert halls to reggae clubs. Zurich has gained repute as a hip destination for gays.

But Zürchers understand the subtle distinction between risqué and risky. So entertainment is designed as a safe outlet for the ebullience that many visitors experience when they count their unreported currency and valuables in those underground bank vaults along the Banhofstrasse. Nothing in Zurich should spark a sense of unease that might get those foreign account holders thinking about Luxembourg or the Cayman Islands.

This is the ethos that imbues the best nightclub, Kaufleuten, a place naughty enough to draw Madonna and her entourage, yet secure enough for UBS and Credit Suisse to rent for corporate functions. Housed in a former theater and decorated in retro red and gold, Kaufleuten takes up a different theme every night, from salsa to cabaret. Kaufleuten, Pelikanstrasse 18; telephone: (41) 1 225 3322; Tuesday to Sunday 11:00 p.m. to 4:00 a.m.; expect to spend about $80 per person, including admission and drinks.

The Widder Hotel Restaurant, in the heart of the medieval district, straddles the culinary border between nouvelle cuisine and heartier dishes. Start with a tuna and perch carpaccio, then go on to the richly braised calf's cheeks with mushroom-filled gnocchi, and for dessert, the lemon pancakes. Stick to the sommelier's suggestions for fine, reasonably priced Swiss dry whites and smooth reds. Widder Hotel Restaurant, Rennweg 7; telephone: (41) 1 224 2526; about $100 per person, including wine -- and in Switzerland the service charge really is included, so a few extra francs' tip to round out the bill will suffice. Orsini, hidden in a small medieval square a block off the Banhofstrasse, has remained arguably the best Italian restaurant in Zurich by not straying far from traditional recipes. For a starter, try the ravioli with seafood in sweet pepperoni sauce, and for the main course, the breaded veal cutlet. Orsini, Am Münsterhof; telephone: (41) 1 215 2727; about $100 per person, including wine.

For gifts, there are memorable chocolates at Sprüngli, with an especially wide selection at its main shop on Paradeplatz. For something less perishable, there are exceptional handmade laces and embroideries -- ranging from initialed hankies to antique tablecloths -- at Spitzenhaus, Börsenstrasse 14; telephone: (41) 1 211 5576.

Heading most lists of business-oriented luxury hotels is the Baur Au Lac, rated tops in the city in Institutional Investor's December 2003 rankings of lodgings around the world. Built where the financial district emerges from Lake Zurich, it offers spectacular views of the water and the Alps. Hotel Baur Au Lac, Talstrasse 1; telephone: (41) 1 220 5020; 124 rooms and suites, starting at $400, including taxes and service charges. -- J.K.