UPDATE 2-SNB posts nine-month profit, cuts euro holdings

Wed Oct 31, 2012 7:47am EDT

Related Topics

* SNB sees 9-month book profit of 16.9 bln Sfr

* SNB's Q3 euro holdings slip to 49 pct, dlrs up to 28 pct

* SNB profit bolsters franc cap policy (Adds SNB reserve allocation data, analyst quotes)

By Catherine Bosley

ZURICH, Oct 31 (Reuters) - The Swiss National Bank has made a hefty nine-month profit and trimmed euro holdings in favour of dollars and sterling in its huge foreign exchange reserves built up to weaken the franc.

The diversification and profit bolster the SNB's drive to keep the safe-haven franc capped at 1.20 per euro, a limit set more than a year ago to ward off deflation and recession.

"Today's policy can be continued, for sure," Credit Suisse economist Maxime Botteron said after Wednesday's data.

SNB reserves this year have risen 70 percent to 429.9 billion Swiss francs ($461.8 billion), equivalent to almost three-quarters of national output, as it bought billions of euros to stop the franc strengthening past 1.20 per euro.

Yet an easing of market tension in the euro zone in September has seen the franc weaken towards 1.21 per euro, stemming the need for the SNB to intervene and allowing it to diversify out of euros.

Thanks to the weaker franc, the central bank said on Wednesday it recorded a gain of 10.3 billion francs on its foreign currency positions for the first nine months, helping it to record a book profit of 16.9 billion for the period.

The SNB also said it cut its holdings of euros to 49 percent in the third quarter from 60.1 percent in the second, while its holdings of dollars rose to 27.6 percent from 21.7 percent and of British pounds to 6.7 percent from 3.3 percent.

PORTFOLIO RISKS

"This rapid pace of diversification ... could suggest SNB policymakers are specifically concerned about risks emanating from the euro zone rather then portfolio balance," said Swissquote analyst Peter Rosenstreich.

The larger the SNB's euro holdings, the bigger the risk of it suffering huge losses if the euro zone were to break apart.

In September, the SNB rejected a report by ratings agency Standard & Poor's that its buying of euro assets had helped to push down yields on "core" euro zone bonds.

The bulk of the SNB's foreign currency reserves are held in highly-rated government debt. It increased its equity holdings to 12 percent from 10 percent during the third quarter.

The SNB is a joint-stock company that has to report results to its shareholders, most of whom are Switzerland's 26 states, or cantons. They have come to rely on an annual dividend from the central bank to help support their budgets.

In 2010, the bank came under heavy fire after it ran up a record loss of 27 billion francs on its currency holdings as it intervened to try to weaken the franc, resulting in calls for then Chairman Philipp Hildebrand to resign.

Yet the SNB's policy of putting a lid on the franc since September 2011 has drawn broad support in Switzerland. It has helped to stabilise the economy and the bank has managed to post profits despite the ballooning of its balance sheet. It made a profit last year of 13.5 billion francs.

"If the exchange rate holds, then the likelihood rises that they will make a profit at the end of the year. And then the political pressure won't grow," said Botteron at Credit Suisse.

The SNB is trying to diversify its portfolio further and its holdings of other currencies - including Swedish and Danish krona, Australian and Singapore dollars, and South Korean won - rose to 4.2 percent in the third quarter from 3.4 percent.

($1 = 0.9310 Swiss francs) (Editing by Emma Thomasson and Stephen Nisbet)

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