The SNB’s profit potential remains intact

This was expected as the Swiss National Bank (SNB) has been operating in an uncertain environment since the start of the year. It recorded losses of 95.2 billion francs in the first half of 2022. By way of comparison, it had made a profit of 43.5 billion during the same period last year. Suffice to say that the war in Ukraine and the volatility of the prices of mining and agricultural raw materials have destabilized the markets. The loss in the second quarter exceeded those recorded between January and March, which were 32.8 billion. “They are indeed larger than expected, says Allesandro Bee, senior economist at UBS Research. But they remain within the estimated range; what is extraordinary is that the equity and bond markets both moved negatively in the first half of 2022”.

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The SNB’s result depends primarily on developments in the gold, foreign exchange and capital markets. Foreign currency positions fell by CHF 97.4 billion. Interest and dividend income amounted to CHF 3.3 billion and CHF 2.3 billion respectively. Interest-bearing securities and interest rate instruments recorded a price loss of 48.7 billion; securities and participation instruments show a loss of 44 billion. On the foreign exchange side, the deficit amounts to 10.3 billion.

“Well-sized” provisions

As for gold, the SNB has not made any recent acquisitions. The stock has not changed in volume since last year and generated a surplus of 2.4 billion francs. At the end of June, the price of one kilogram of the yellow metal stood at 55,836 francs, against 53,548 francs at the end of 2021.

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What are the implications of these losses? In a study published in mid-July, the bank UBS had indicated that if they were to continue during the second part of the year, the contributions made by the SNB to the Confederation and the cantons would be called into question. For Arthur Jurus, senior strategist at the ODDO BHF bank in Geneva, the SNB anticipates this kind of correction, which lends credibility to its policy of creating provisions. “These are rather well sized and will allow him to honor his commitments,” he says. Moreover, according to him, the losses are not final because we are only halfway through the year. They will already be less significant in July due to the rise in US equity markets of 7% and the fall in interest rates – the Germans have been halved.

“In normal times, profits are distributed according to rules established with the Confederation, adds Allesandro Bee. As for 2023, it’s too early to make any decisions. Anything can happen in the second half.” And to add: “It is not a comfortable position for the cantons. If I were the finance minister of one of them, I would not put the SNB contribution in the 2023 budget.”

Increased risk of loss

Two weeks ago the SNB pointed out to the Time that since the beginning of the financial crisis in 2008, its balance sheet has increased considerably. “This increase has indeed improved the absolute return potential, but the risk of losses has also increased,” she said. It may therefore record a profit one year and then a loss the following year. In any case, it never pays the entire distributable part at once, but on the contrary aims for a consistency of payments.

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According to Allesandro Bee, there is no reason to panic. “The losses in the first half of 2022 do not change the long-term outlook,” he said. The profitability potential of the various SNB portfolios remains intact.”

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