SNB Interim Results: -38 Billion, An Analysis

The increasing volatility of SNB Earnings

Annual results are not really definite. Given that the SNB accumulates foreign currencies with interventions, they have huge swings.

But the SNB may lose 50 billion in one year and win 60 billion in the next year or vice verse.

Franc will rise again with crisis or inflation

With a new financial crisis or a with a big rise of inflation, the run into the Swiss franc will start again.

Deflationary period (e.g. Corona Crisis)

During deflationary periods and recessions, the SNB will strongly intervene, similarly as she did in 2008/2009.

During the Corona Crisis, the SNB intervened at 1.05 – 1.06 for a euro, in 2009 even for 1.50 These high intervention levels pave the way for later losses, which are the inflationary periods.

Inflationary periods 

During an inflationary period the

• EUR/CHF will fall by 20% (currently this would imply 0.90).
• and USD/CHF by 15% (currently this would mean 0.75).
• Stocks will lose up to 70% in the following crash.
• Due to inflation the government bonds on the SNB balance sheet will also lose value, this might be 30%.

And this will lead to a massive SNB of at least 150 billion CHF.

This is not a black swan, but a normal inflation scenario. We have seen a 60% rise of CHF in the 1970s; this was a black swan.

In this case all assets except gold will fall. However, SNB’s gold share of 6% is too small to cushion this scenario.

Some additional technical details:
The SNB will earn some money on interest payments when she is rolling into new government bond issuances, similarly as she did in the 1970s.
This will reduce the losses to 150 bn again.

The crux, however, is

1. that she bought the biggest part of government bonds at elevated prices.
2. In the 1970s there were positive real interest rates. This will not be the case in the future inflation periods, quite the opposite.

Interim results of the Swiss National Bank as at 31 March 2020

Total Loss: 38.2 billion, this is more than the high 30 billion gain in Q1/2019, when the SNB profited on higher stocks caused by the more dovish Fed.

Gold: Gain 2.8 billion.

 

Income Statement for Q1 2020

Source: snb.ch - Click to enlarge

SNB Asset Allocation and Expected Return

Main insights:

• The SNB is rather conservative investor, she has 20% of equities (as opposed to the Norway state fund with 60-70%)
• The currency distribution corresponds to the Swiss trading partners.
• 58% are AAA  rated bonds, typical for a conservative portfolio.
• The duration is high with 4.7 years, she has a rather high inflation risk.

A roughly calculated expected return should be around 2% as of Q1/2020.

• 0.5% for government bonds (69% share of the SNB portfolio)
• 1% on other bonds  (11% share)
• 8% on equities (20% share), assuming that historic equity yield repeats.
• About 95% of the assets are invested in securities (non-cash).
• In this calculation we left out gold.

This should be re-compensate for the on average 2% yearly increase of the Swiss franc.

source

Loss on foreign currency positions

We see the typical consequence of a recession

• Somewhat rising prices of AAA bonds. This time less than usual, given that we were already in an low interest environment.
• Strong losses on equities.

The following numbers are in billion Swiss Francs.

SNB Loss on Foreign Currencies

Source: snb.ch - Click to enlarge

Valuation gain on gold holdings

A valuation gain of CHF 2.8 billion was recorded on gold holdings, which remained unchanged in volume terms. Gold was trading at CHF 49,923 per kilogram at the end of March 2020 (end 2019: CHF 47,222).

Percentage of gold to balance sheet

The percentage of gold has risen to 6.09% thanks to these rising prices.
The SNB has maintained the same quantity of gold.

Balance Sheet compared to GDP

SNB Balance Sheet for Gold Holdings for Q1 2020

Source: snb.ch - Click to enlarge

Profit on Swiss franc positions

The SNB maintains its profitability, last but not least, thanks to the reduction of the profitability of banks. When too many funds arrive on their accounts, they must deposit them on their sight deposit account at the SNB.

The profit on Swiss franc positions totalled CHF 0.3 billion. It largely resulted from negative interest charged on sight deposit account balances.

Negative Interest rates

Furthermore, the SNB harms the Swiss economy, when it reduces the profits of Swiss banks by negative interest rates. But with this measure she maintains her own profitability.

Still, as compared to the FX profits or gains on equities, this number is relatively low.

SNB Result for Swiss Franc Positions for Q1 2020

Source: snb.ch - Click to enlarge

SNB Liabilities

Electronic Money Printing: Sight Deposits

Sight deposits are the biggest part of SNB interventions.

In Q1 2020 the SNB intervened again, increasing sight deposits and its debt towards the Swiss state.

Paper Printing

Banknotes in circulation: -2.54 bn francs to 79.7 bn. CHF

This old form of a printing press, today a less important form of central bank interventions. It showed that safe-haven Swiss francs, e.g. 1000 franc bank notes are currently less in demand than previously.

SNB Liabilities and Sight Deposits for Q1 2020

Source: snb.ch - Click to enlarge

Provisions for currency reserves

The provisions for currency reserves cannot cover the potential loss 150 bn mentioned in the beginning for the inflation scenario.

The SNB has only added the minimum of 8% of the result to these provisions.

SNB’s Profit Game:

Then the SNB carries forward the profits of the previous years in form of a “distribution reserve”. The idea is to be able to pay a distribution/dividends even in bad years.

Dividend yield

For investors: The dividend yield is extremely low. Buying the SNB stocks is a bet on the stock price.

While the Swiss confederation and cantons, the SNB stock is a nice investment.

On the other side, they have a higher risk.
They must pay in the case of an SNB default, unless they choose the other option:
The central bank may simply be liquidated:

Art. 32 Liquidation
1
The joint-stock company Swiss National Bank may be liquidated by means of a
federal statute. This statute shall also lay down the liquidation procedure.
2
In case of a liquidation of the National Bank, the shareholders shall receive in cash
the nominal value of their shares as well as reasonable interest for the period of time
since the decision to liquidate the National Bank became effective. The shareholders
shall not have any additional rights to the assets of the National Bank. Any
remaining assets shall become the property of the new central bank.

(source)