$55 Billion Profit for Giant Asset Manager—the Swiss Central Bank
SNB expects record profit on higher global equity and bond prices and a weaker Swiss franc
ZURICH—Switzerland got a lot wealthier in 2017, thanks to its central bank’s emergence as a major money manager with a near $800 billion portfolio of foreign stocks and bonds.
The Swiss National Bank said Tuesday it expects to report a record annual profit of 54 billion Swiss francs ($55 billion) for last year—a staggering sum equal to 8% of the country’s entire gross domestic product. By comparison, if the Federal Reserve were to run a profit of similar scale relative to the U.S. economy, it would be about $1.5 trillion. The Federal Reserve has earned an annual profit of around $100 billion in recent years.
But the Swiss National Bank can’t lock in its paper profits by selling chunks of its assets, for fear of lifting the franc’s value and hurting exports while weakening consumer prices. That will likely keep its balance sheet at the mercy of financial markets this year.
The SNB’s profit was lifted by a trio of positive forces: low bond yields preserved the value of its foreign bonds that account for 80% of its foreign reserves; higher stock prices raised the value of its equity holdings and the weaker Swiss currency made those foreign assets worth more in franc terms.
The euro strengthened nearly 10% against the franc last year. Euro-denominated assets are the largest currency holding of the SNB, followed by the dollar.
The SNB said 49 billion francs of its profits came from its foreign assets. Its gold holdings increased in value by about three billion francs last year, and its Swiss franc positions by two billion francs.
Switzerland’s central bank has accumulated about 760 billion francs in foreign bonds and stocks through years of foreign-exchange interventions, particularly during Europe’s debt crisis, in which it created francs and used them to purchase foreign assets in a bid to weaken the currency.
Other central banks like the Federal Reserve, European Central Bank and Bank of Japan have also amassed large portfolios consisting primarily of bonds. But those assets are denominated in their own currencies. What sets the SNB apart is that its balance sheet is comprised almost entirely of foreign assets, exposing it to huge foreign-exchange risk.
Things haven’t always gone the SNB’s way. In 2015, the central bank’s decision to abandon a ceiling on the franc’s value caused the franc to soar in value, leading to a 23 billion franc loss that year.
The Swiss can’t spend this latest windfall. Booking its profits would require the SNB to sell some of its foreign bonds and stocks that included nearly $3 billion in Apple Inc. stock and $1.5 billion in Facebook Inc. at the end of the third quarter. The SNB’s equity investments—which comprise 20% of its foreign assets—replicate broad indexes.
And while central banks like the Federal Reserve transfer most of their profits to their governments, the SNB is in the early stages of a five-year profit-sharing arrangement whereby the maximum amount it can transfer to the Swiss federal and regional governments is just two billion francs a year.
That agreement runs until 2020. It also pays a small amount—1.5 million francs annually—to its private shareholders. The SNB is one of the few central banks with listed shares. Its share price more than doubled last year, and was up 2% early Tuesday.
The SNB said it would allocate about five billion francs to its provisions that guard against future fluctuations in exchange rates. The rest of its paper profits will go to a distribution reserve to ensure that the SNB can still make future payouts even in the event of a loss.