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Thursday, 15 January 2015 00:00

Monetizing The Spear That The Swiss National Bank Hurled At Swiss Banks and Insurers Featured

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Hey, guess what? Global banks rely on leveraged monies used to speculate on things big and small around the world. These speculations are usually denominated in the banks domiciled currency and express risks through the currencies in which the speculation was made. As an example, business done in the eurozone from a Swiss bank has EUR to CHF exchange risk. This risk is materially and significantly magnified by the leverage necessarily inherent in the banking model. 

You want to know what's worse. The entire FIRE (finance, insurance and real estate) sector is susceptible to the same thing, often to more servere degrees. Insurance companies, particularly longer tail companies such as catastrophic PC and life insurance, place the vast majority of their assets in longer duration bonds, oft denominated in thier home domicile country's currency. So, guess what the Swiss National Bank did? They shot spear right through the heart of Switzerlands biggest financial institutions. Let's take a look, shall we?

Allianz, one of the worlds largest insurers, who was significantly weakend this year by firing likely the most important employee they ever had (Bill Gross) thereby suffering hundreds of billions of dollars of asset outflows from PIMCO now has to contend with a vast amount of what may be left of its investment assets denominated in CHF being worth ~17% less, and that's sans the leverage that they're likely guaranteed to employ to some degree. 

Keep in mind that the SNB is employing NIRP (negative interest rate policy) at the same time as letting exchange rates jump as much as 30%, full knowing that many of its largest instituions are highly leveraged into these markets. These are drastic moves.

From the Reuters' persective:

LONDON (Reuters) - Shares in Switzerland's two big banks UBS and Credit Suisse slumped as much as 15 percent on Thursday after a massive strengthening in the Swiss franc raised the threat that reported earnings will be hit hard.

The Swiss National Bank (SNB) shocked financial markets by scrapping a three-year-old cap on the franc, sending it soaring nearly 30 percent against the euro. The SNB also cut interest rates, which were already negative, to minus 0.75 percent.

..."We estimate that the sharp Swiss franc appreciation will potentially negatively impact forward earnings by about 7-10 percent. With interest rates going into deeper negative territory, there could be further margin pressure," Citi analyst Kinner Lakhani said.

Credit Suisse shares were down 10.6 percent at 20.75 Swiss francs and UBS was down 10.8 percent at 14.88 francs by 1414 GMT. Both had slumped by more than 15 percent at one stage, which dragged Credit Suisse shares to a two-year low. Julius Baer shares were down 12.4 percent.

A 10 percent appreciation in the Swiss franc against the U.S. dollar would have knocked 277 million francs ($271 million) off Credit Suisse's pre-tax income in the first nine months of last year and a 10 percent appreciation against the euro would have hit it by 180 million Swiss francs, the bank said in its third-quarter results.

...About 19 percent of Credit Suisse's revenue and 27 percent of its costs were in Swiss francs last year. About 69 percent of revenue was in U.S. dollars and euros, compared with 52 percent of expenses.

...Adding in the impact of higher costs -- especially in wealth management -- UBS could take a 14 percent earnings hit, Credit Suisse 15 percent and Julius Baer 30 percent, Barclays said.

Can you imagine the margin and collateral calls that are likely occuring right about now. Let's discuss contagtion effect in our next blog post, shall we? This is a price snapshot as of now.

swiss financials after SNB currency debacle

This is how to set up the trade in the UltraCoin client to go long the Swiss Franc in euros and short Allianz equity traded directly on the SWX (Swiss stock exchange)...

Allianz short and long Franc

 

Read 4313 times Last modified on Thursday, 15 January 2015 12:04

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