Swiss National Bank makes new victims

The Swiss National Bank’s shocking decision last week to scrap the cap that was preventing the Swiss franc from appreciating to more than 1.20 to the euro continues to play out in the markets.

The cap had been in place since 2011. Last Thursday, the Swiss National Banks also cut interest rates further into negative territory but the Swiss franc still appreciated by around 20% vs. both the euro and the U.S. dollar, causing large losses to some investors and even the collapse of foreign exchange broker Alpari in the U.K.

The effects of the Swiss move are far from over. “As with any market event of such magnitude, it is often a few days before the full impact becomes apparent,” said James McAlevey, head of interest rates at investment firm Henderson Global Investors.

“We would not be surprised to see some large losses reported by investors or banks in the wake of some of the largest moves we have ever witnessed in developed market exchange rates,” he added.

For Swiss stocks, the impact of the move is generally negative, because the stock market is dominated by companies that derive a lot of their revenues from outside Switzerland, and therefore their stock prices are very sensitive to changes in the exchange rate.

Swiss equities are expensive

Swiss equities are expensive compared to peers. Source: HSBC

“We would expect the share price of a Swiss company with all its costs and revenues outside Switzerland to fall by about the same amount as the currency appreciates. An exporter’s share price would fall more and a domestic company’s share price would fall by less,” Peter Sullivan, head of equity strategy with HSBC bank, said.

The effects can be felt as far as Central and Eastern Europe. During the boom years before the global financial crisis, some banks there extended loans denominated in Swiss francs, because local currencies were appreciating rapidly against it and therefore the cost of the loans was lower.

The financial crisis reversed that trend. Now, with the Swiss central bank giving up the peg to the euro, borrowers in Central and Eastern Europe are in for another nasty surprise: because their national currencies move largely in step with the euro, the repayments on their loans have become more expensive overnight.

The luckiest borrowers are in Hungary, which passed legislation late last year fixing the exchange rate of the Swiss franc to the Hungarian forint, raising the wrath of banks but saving mortgages worth around 10 billion euros ($11.6 billion) in the process.

Analysts say Poland, where no such measures have been taken, is more at risk. Polish deputy prime minister Janusz Piechocinski said the government may help borrowers if the exchange rate remains above the 4 zloty level for the longer term, after the zloty plunged to 4.2 to the Swiss franc from 3.6 before the Swiss National Bank’s announcement.

Poland’s Financial Stability Committee, which includes the finance minister, the central bank governor and the watchdog of the financial markets, is meeting on Tuesday to discuss the Swiss franc loans.

Another Eastern European country, Romania, has also been hit by the Swiss central bank’s move. Over there, relatively small bank Volksbank announced it would freeze the exchange rate on repayments of Swiss franc loans for three months at the level of 3.8 Romanian lei for one Swiss franc — the exchange rate valid on Dec. 31, 2014. A Swiss franc is currently worth 4.4 Romanian lei.

A parliamentary committee in Romania has scheduled a hearing of representatives of the country’s central bank, financial markets regulators and commercial banks regarding the loans in Swiss francs.

Investors should watch Austrian banks Raiffeisen Bank International and Erste Bank (EBKOF), because they have the biggest exposure to the region, according to analysts at RBS.

Any further strengthening for the Swiss franc is bad news for these stocks but, if policymakers in Central and Eastern Europe reach an agreement on helping borrowers, they could rally – depending of course on what the agreement entails.

In Poland, rating agency Moody’s named General Electric’s (GE) unit Bank BPH, Millennium, which belongs to Portugal’s Bcp (BPCGF), mBank, which is owned by Germany’s Commerzbank (CRZBY), and locally owned Getin Noble as the most vulnerable banks to the Swiss franc’s sharp appreciation.


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