Swiss francs have given back about half the value they gained immediately after the Swiss National Bank (SNB) removed the currency’s price cap against the Euro. The exchange rate, previously fixed at 1.2 EUR/CHF, fell to 0.89 and then bounced back sharply, sitting between 1.02 and 1.05 for the last few hours. Once the shock has worn off, Morgan Stanley analysts Huw Van Steenis and Bruce Hamilton expect the franc to have appreciated by about 10%, knocking 10% – 20% off earnings for some major Swiss companies.
Credit Suisse stand to lose more than 10% EPS
“Moves today (15% against major currencies) mean we estimate [Credit Suisse] prima facie may see a 21-24% reported EPS fall. This is before additional cost cutting but also the headwinds from negative front end rates on NIM or possibly higher bad debts (eg from SMEs or any leverage cross currency positions),” they write.
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That would also mean a 9% – 10% drop in book value, though both would be less severe if the Swiss franc settles with a 10% gain as Morgan Stanley expects. They also argue that, even though this change gives a small boost to Equal-weight-rated Credit Suisse’s capital ratio, it makes a dividend cut even more likely.
Overweight-rated UBS faces the similar headwinds including pressure on its net interest margins and potentially more bad debts, but Morgan Stanley forecasts a 12% – 16% EPS hit for a 15% Swiss franc appreciation and 9% – 11% hit for a 10% appreciation.
Baer and Partners Group, both rated Equal-weight, would lose 15% and 13% of profits respectively if the Swiss franc settles with a 10% gain, although both companies may be able to mitigate their losses with cost-cutting or other measures.
Analysts still focused on ECL decision
“The CHF is long-term overvalued from a fundamental stance at any level below the floor,” write Thomas Köbel and Richard Falkenhäll for SEB (Skandinaviska Enskilda Banken). “The SNB decision today should probably be viewed against the risks the ECB will launch new measures at the upcoming meeting on January 22, which will weaken the euro even further.”
Today’s copy of Societe Generale’s Morning Call reaches the same conclusion, telling investors to continue focusing on yesterday’s ECJ opinion in support of Outright Monetary Transactions (OMT) in the secondary sovereign bond market. If the ECB announces QE later this month as many expect it will have a major impact on EUR/CHF and that expectation is at least part of the reason the exchange cap was removed.