SNB profit, strong Swiss Franc, Finma's views on AI

Good morning, and welcome to your Swiss Business Brief for Thursday, April 24th, 2025. Global markets remain cautious amid ongoing uncertainty surrounding US trade policies and potential tariffs, influencing currency movements and investor sentiment. Here in Switzerland, the focus is on the Swiss National Bank's latest results, the persistent strength of the franc, significant technological shifts in the financial sector, and ongoing pressures in the Zurich housing market.

Let's start with the Swiss National Bank. The SNB reported a first-quarter profit of 6.7 billion Swiss francs before allocations to currency reserves. While positive, this figure landed at the lower end of analysts' expectations. The profit was overwhelmingly driven by a massive 12.8 billion franc gain on the central bank's gold holdings, thanks to surging prices for the precious metal. However, this significant gold gain masks underlying pressures. The continued strength of the Swiss franc resulted in a substantial loss of 5.3 billion francs on the SNB's foreign currency reserves , a stark contrast to the large profit seen from these reserves a year earlier. This highlights the balance sheet's sensitivity to global market swings and the impact of its own currency's value. On a technical note, a recent SNB study confirms that its policy rate changes since 2022 have effectively passed through to short-term market interest rates.

The strong franc remains a major economic theme. Its appreciation against the US dollar and euro this month reflects its safe-haven status amid global trade tensions. But this strength is a double-edged sword. It makes Swiss exports more expensive, adding pressure on industries already facing weak international demand and potential fallout from a slowing German economy. Industry group Swissmem has voiced concerns. This currency strength also risks pushing inflation below the SNB's target, creating a policy dilemma. Experts suggest intervention to manage the franc is more likely than further rate cuts, given the already low interest rate environment. Amidst these concerns, there was a slight sign of recovery in the Swiss job market during the first quarter.

Turning to the financial sector, technology adoption is accelerating. A survey by the financial regulator FINMA reveals that half of Swiss financial institutions are now using artificial intelligence, with another quarter planning adoption within three years. Generative AI tools like chatbots are particularly popular, used by 91% of AI adopters. However, this rapid uptake comes with risks. FINMA notes concerns around data quality, data protection, the explainability of AI decisions, and a heavy reliance on external technology providers, which elevates outsourcing risks – a point FINMA previously highlighted. Notably, only half the institutions surveyed have a formal AI strategy in place. Elsewhere, the Swiss fund market saw overall growth of 1.6% in the first quarter, reaching 1.63 trillion francs, though market volatility increased late in the period due to trade worries, prompting a shift towards bonds and commodities. And the debate over digital assets continues, with campaigners renewing calls for the SNB to add Bitcoin to its reserves, citing diversification needs – a move the traditionally cautious central bank remains sceptical about.

Finally, in real estate, housing pressures in Zurich persist. A recent study highlights that Zurich experiences significantly more tenant evictions than other major Swiss cities. These evictions disproportionately affect vulnerable groups, including the elderly on low incomes, asylum seekers, and single individuals. Often, these displacements are linked to the demolition of older, more affordable buildings to make way for denser, higher-priced new developments, contributing to gentrification and exacerbating the housing shortage for many residents.

In summary, Switzerland today navigates a complex landscape, balancing domestic challenges like housing affordability and the integration of new technologies against significant global economic headwinds driven by trade uncertainty and the enduring strength of its currency.