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Strong franc leaves Swiss central bank with record first-half loss

[ZURICH] The Swiss franc's surge against the euro after a currency cap was dropped pushed the Swiss National Bank to a record first half loss, casting doubt on its ability to pay dividends on which some local government shareholders depend.

The 50.1 billion franc (S$71.5 billion) loss reported on Friday means the SNB will need to make a massive profit in the second half of 2015 to pay out a dividend to owners, including the federal government and Swiss cantons, or states. "The dividend really makes a difference," said Credit Suisse economist Lukas Gehrig. "It can tip a budget from deficit to surplus or vice versa." Gehrig estimated the SNB will need a second-half profit of 25 billion francs for a shareholder payout assuming it also utilises distribution reserves from 2014.

The central bank's profits have been a delicate subject politically since it paid no dividend in 2013 following a big loss on the value of its gold holdings.

The SNB's policy practices and ownership structure have also come under intense scrutiny after it decided on Jan 15 to abandon the franc's cap against the euro, in place since September 2011. The shock move sent the currency skywards, threatening the export-dependent Swiss economy.

Last year, the SNB paid dividends to shareholders of 2 billion francs after posting 38.3 billion francs in profit but warned such hefty payouts might not continue.

The first-half loss was almost entirely due to losses on foreign exchange positions.

Since ending the 1.20 francs per euro cap, the SNB has intervened in the currency market by buying euros to weaken the franc, which currently hovers at around 1.06 francs per euro .

The SNB warned that its results rely heavily on developments in the gold, foreign exchange and broader financial markets. "Strong fluctuations are therefore to be expected, and only provisional conclusions are possible as regards the annual result," the central bank said in a statement.

The SNB said euro-denominated assets made up 42 per cent of its portfolio at the end of June, unchanged from end-March, while 32 per cent was held in US dollars, also unchanged.