SNB emerges as a cash cow, surpassing profits of global corporate giantstop $55 billion, It expects 2017 profit to top $55 billion, more than JPMorgan and Berkshire combined
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 10, 2018).
ZURICH -- Switzerland got a lot wealthier in 2017, thanks to its central bank's emergence as a major money manager with a nearly $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 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.
The profit is more than Apple Inc. earns in a year, and more than JPMorgan Chase & Co. and Berkshire Hathaway Inc. combined. Those are all giant, world-spanning corporations, while the SNB employs about 800 people. Its chairman -- among the best-paid central bankers -- earns about $1 million a year.
The SNB is one of the few central banks with listed shares. Its share price more than doubled last year, and was up 3.4% Tuesday.
But the Swiss National Bank can't lock in its paper profit by selling chunks of its assets, for fear of lifting the franc's value and hurting exports while weakening consumer prices. That likely will 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.
Here's how the SNB profits from buoyant asset markets and a weaker franc. At the end of September, regulatory filings showed it owned more than 19 million shares of Apple, its largest U.S. stockholding. Apple's shares rose nearly 10% in the fourth quarter, which would have added almost $300 million to the SNB's profit, assuming it didn't buy or sell shares. The dollar strengthened 0.7% against the franc during that time, too, which would have added another several million francs when the value of that investment was translated into the Swiss currency.
The SNB said 49 billion francs of its profit 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 also have 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 profit would require the SNB to sell some of its foreign bonds and stocks that included nearly $3 billion in Apple 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. Private shareholders have little or no say over who manages the bank or how it is run. The SNB is mostly owned by Swiss states, known as cantons, and cantonal banks.
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 profit will go to a distribution reserve to ensure that the SNB can still make future payouts even in the event of a loss.
Write to Brian Blackstone at email@example.com
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January 10, 2018 02:47 ET (07:47 GMT)