July 31, 2017 / 6:47 AM / 2 years ago

UPDATE 2-Swiss central bank's H1 profit hit by forex loss

* Swiss central bank reported H1 net profit of 1.2 bln Sfr

* Foreign exchange losses weighed on earnings

* Bank earned 970 mln Sfr from negative interest rates (Rewrites, adds analysts, sight deposit data)

By John Revill

ZURICH, July 31 (Reuters) - The Swiss National Bank reported a 94 percent plunge in first-half net profit on Monday, hurt by losses on huge foreign currency investments made to restrain the Swiss franc.

Net profits at the Swiss central bank plunged to 1.2 billion Swiss francs ($1.2 billion) from 21.3 billion francs a year earlier as foreign exchange-related losses of 11.8 billion francs almost wiped out earnings from bonds and shares it holds.

The bank - whose aim is to maintain price stability, not make a profit - has been buying foreign currencies in large amounts to check upward pressure on the franc, which is sought by investors during economic uncertainty.

SNB foreign currency investments have ballooned to 724 billion francs - 11 percent larger than the entire Swiss economy at the end of June.

Currency interventions have been a cornerstone of the SNB’s campaign to prevent the rise of the franc since the central bank suddenly scrapped a peg limiting the currency to 1.20 versus the euro in January 2015.

The bank has consistently described the Swiss currency as “significantly overvalued”.

The Swiss currency was on track for its biggest monthly drop in six years against the euro as some hedge funds sold the currency after it broke through major technical levels last week.

But this development has been countered by the weakness of the dollar, which reduces the Swiss franc value of its U.S. investments - with 35 percent of the SNB’s holdings in dollars.

“Exchange rate gains on the euro did not offset losses recorded on other investment currencies, particularly the U.S. dollar,” the SNB said on Monday.

The bank made a valuation gain of 300 million francs from its gold holdings and 970 million francs from the negative interest rates it charges on banks.

The SNB has scaled back its currency interventions in recent weeks as fears over the future of the single currency faded following the French elections, while total sight deposits - an indication of SNB foreign currency purchases - were flat on Monday.

Alessandro Bee, an analyst at UBS, has estimated that every one percent rise in the franc versus the dollar costs the SNB around 2.5 billion francs. In contrast, the bank gains around 3 billion francs for every 1 percent depreciation versus the euro.

“The huge size of the SNB’s balance sheet means it is very sensitive to currency fluctuations,” said Bee, who expects the franc to weaken to 1.14 to the euro by the end of 2017.

The bank’s second-half profit could improve as the franc continues to weaken in the rest of the year, said Bee.

Credit Suisse expects the euro-franc to trade between 1.09 and 1.15 for the remainder for the year, while the dollar will be broadly neutral against the Swiss currency.

“The SNB has more of its foreign currency reserves in euros than dollars, so it could help compensate for the weakening of the dollar, but we have to see how the currencies develop,” said Credit Suisse economist Maxime Botteron. ($1 = 0.9681 Swiss francs) (Reporting by John Revill; Editing by Adrian Croft)

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