Bursting the central banking bubble

Yvan Berthoux - 04 October 2017

Have you ever wondered what it would be like to be a shareholder in a central bank? Wonder no more. The Swiss National Bank (SNB) is one of a handful of central banks whose stock is publicly traded – other examples are Japan, South Africa and Belgium. SNB shares are quoted on the Swiss Stock Exchange SIX (under the ticker SNBN:SW). Like Bitcoin and the monster stocks (FAAMG: Facebook, Apple, Amazon, Microsoft, Google), SNB’s stellar share price performance has become a source of envy and intrigue. Figure 1 shows the ascent of SNB stock from CHF 1,000 to almost CHF 4,000, recording a 400 per cent gain over the past five years, and a 123 per cent year-to-date return.

With 100,000 registered shares outstanding and a market capitalisation shy of CHF 400 million, its daily trading volume precludes the involvement of institutional investors. A further deterrent is the symbolic (gross) dividend of CHF 15, regardless of the bank’s net profits. What explains the recent share price surge, especially since the beginning of this year?

The latest 13F holdings report, released in Q2, showed that the Swiss central bank has been constantly increasing its holdings in US stocks. As of end-June 2017, the SNB owned US$84.3bn of US stocks, up from US$22.7bn four years ago, mostly invested in FAAMG stocks. It appears that the bank has been purposefully loading its portfolio with tech stocks, whose investment returns have been driven, in part, by the excessive monetary stimulus provided by the major central banks. However, US equities led by the FAAMG stocks have been going up for years now, and this should have been reflected in the SNB stock price much sooner than 2017. A second potential explanation of the recent exponential appreciation of SNB shares is found in the currency composition of the SNB balance sheet (figure 2).

Breaking down the SNB balance sheet

Over the past few years, The SNB drastically increased the size of its balance sheet due to its ongoing interventions to depress the Swiss Franc after the September 2011 floor announcement (it protected the CHF/EUR from falling below 1.20, until mid-January 2015). The central bank’s total assets have reached CHF 796bn, representing 124 per cent of GDP at current prices, with more than CHF 745bn allocated to foreign currency investments (figure 2). Unlike the Federal Reserve or the Bank of Japan, which both mostly own local assets (eg government bonds, MBS, ETFs, REITs…), the SNB mostly owns assets denominated in foreign currencies (figure 3). An explanation of the recent surge of the SNB’s share price could come from the strength of the Euro in the first half of this year (the Euro index is up 8 percent year-to date). If we look at the bilateral exchange rate against the Swiss Franc, CHF/EUR is up 8 figures since mid-April (up from 1.07 to 1.15), which means that 40 per cent of the Euro-denominated assets (Figure 3) are now worth more in franc terms. The SNB had €282bn in Euro-denominated assets before the summer, which equalled to CHF 302bn when the exchange rate was 1.07. Today, with CHF/EUR trading at 1.15, those assets are worth CHF 324bn, corresponding to a profit of CHF 22bn. The revaluation of these foreign currencies offers an explanation of recent SNB strength.

However, this is a dicey game: the SNB issues Swiss Francs, invests in non-CHF denominated assets (mainly EUR and USD) and makes money as long as the Swiss Franc weakens against the major currencies. How long can this process continue before the SNB loses market credibility? The perfect storm for the SNB would be a weakening Euro and US Dollar against the Swiss Franc, combined with an US equity market correction. Beware central banking bubbles.

Figure 1: SNB Stock price since 2012

Source: Google Finance

Figure 2: SNB Balance Sheet as at end-June 2017

Assets Amount (CHF bn) Liabilities Amount (CHF bn)
Gold Holdings 41.1 Deposits of domestic banks 479
Foreign Currency Investment 745.3 Banknotes in circulation 76.5
Int. Payment instruments 4.4 Deposits of foreign banks 49.1
CHF securities 3.9 Foreign currency liabilites 28.1
IMF reserves 1.2 Amount due to the confederation 15.6
Other assets 1.1 Other liabilities 148.7
Total 797 Total 797

Source: Swiss National Bank

Figure 3: SNB Currency Allocation

Source: Swiss National Bank

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