The Swiss National Bank (SNB) is expected to announce a significant profit for the third quarter of 2024, thanks to a strong performance in the stock market and effective management of currency losses.
The SNB's financial results are heavily influenced by fluctuations in the financial markets, including share prices, interest rates, and the value of gold. As of the end of August, the SNB had foreign currency investments totaling around CHF 710 billion and gold holdings worth approximately CHF 70 billion.
UBS projects that the favorable conditions in global stock markets during the third quarter will result in a valuation gain of CHF 7 billion on the SNB's equity portfolio, which is currently valued at just under CHF 180 billion. The SNB's bond portfolio has also benefited from declining interest rates, contributing an estimated CHF 15 billion to its financial standing. Additionally, the increase in gold prices has added another CHF 5 billion to the bank's profits.
However, the appreciation of the Swiss franc has presented challenges, with estimated exchange rate losses between CHF 20 billion and CHF 25 billion. Despite these setbacks, the current income from dividends and interest remains modest, generating around CHF 3 billion.
With a reported profit of over CHF 55 billion in the first half of 2024, the SNB's cumulative results for the first three quarters are expected to approach CHF 60 billion. UBS suggests that profits above this level would likely trigger distributions to the federal government and cantons. The positive momentum in financial markets has continued since September, further improving the SNB's outlook.
However, UBS economists warn that geopolitical uncertainties, particularly surrounding the upcoming US elections, could negatively impact the SNB's financial results by the end of the year. The potential for a stronger Swiss franc remains a significant concern, as historical trends show that currency fluctuations can be unpredictable, especially during the period following Christmas.
UBS characterizes the stock market performance of 2024 as an "outlier," suggesting that such high profits may not be sustainable in the future. The current provisioning rules, which require a minimum allocation of 10 percent of provisions for currency reserves, could complicate the SNB's ability to distribute profits. As provisions have reached levels where the minimum allocation may soon exceed the estimated profit potential of CHF 10 to CHF 15 billion, UBS believes that a revision of these rules is necessary for future distributions.
The SNB's equity ratio has historically been below average, indicating the inherent valuation risks within its balance sheet. As the bank faces these challenges, it must balance the need to maintain a strong financial foundation with its mandate to ensure price stability. The SNB's approach to managing its equity and provisions will be crucial in determining its ability to distribute profits while safeguarding its financial health.
In summary, the upcoming interim results of the SNB are expected to show a strong performance driven by favorable market conditions, despite the challenges posed by currency fluctuations and geopolitical uncertainties. As the bank prepares to adjust its provisioning rules, the focus will remain on maintaining a robust balance sheet to effectively fulfill its mandate.