Bloomberg News

Swedish Banks Pummel EU Peers Wallowing in Laxer Rules

May 10, 2012

Far from languishing under stricter capital rules, Swedish banks are thriving.

Lenders in the largest Nordic economy are proof that creating bigger buffers to balance risky assets doesn’t have to erode profits or lending. Sweden’s four biggest banks, which must meet a 10 percent minimum capital requirement by January, all beat analysts’ profit estimates for the first quarter and raised their lending volumes.

“They showed strong levels of capital generation; core Tier 1 ratios keep inching up, while a lot of euro-zone banks wallow around trying to make 9 percent,” Nick Davey, a London- based analyst at UBS AG (UBSN), said in a phone interview. “The Nordic banks are still showing low single-digit loan growth and the Swedish retail banks have wider overall group margins despite lower interest rates.”

Svenska Handelsbanken AB (SHBA), Sweden’s second-biggest bank by market value after Nordea Bank AB (NDA), is Europe’s strongest lender, according to a Bloomberg Markets ranking published May 3. Swedish bank shares have outperformed a Bloomberg benchmark index of European rivals this year and credit derivatives show they’re among the world’s safest. The outperformance suggests capital rules alone don’t stifle competitiveness, contrary to what bank executives including Oswald Gruebel, the former head of UBS AG, and Deutsche Bank AG (DBK)’s departing chief executive Josef Ackermann have argued.

Virtuous Cycle

“It’s a virtuous cycle with responsible, sustainable lending, leading to higher quality sustainable profits for shareholders and stronger economies that can withstand economic downturns better,” Satish Pulle, a portfolio manager at London- based European Credit Management Ltd., said in an interview. “The Swedish banks are prime examples of this.”

Handelsbanken, Nordea, SEB AB and Swedbank AB (SWEDA) need to reach core Tier 1 capital ratios -- a measure of financial strength -- of 10 percent of their risk-weighted assets by January, the government said in November. The ratio will rise to 12 percent by 2015. That compares with the Basel Committee on Banking Supervision’s core capital target of at least 7 percent, due to take effect by 2019. The European Banking Authority has set a temporary 9 percent target for some lenders.

Swedbank shares gained as much as 1.7 percent today before trading at 107.80 kronor as of 11:53 a.m. in Stockholm. SEB rose as much as 1.1 percent, Nordea as much as 1 percent and Handelsbanken as much as 0.8 percent.

Steer Clear

Banks in AAA rated Sweden, which suffered losses through their Baltic units when the former Soviet region’s housing bubble burst in 2008, have managed to steer clear of the worst of Europe’s debt crisis and didn’t need to draw on the more-than $1 trillion in three-year loans offered by the European Central Bank since December. Nordea Chief Executive Officer Christian Clausen said investors have signaled they want his bank to maintain access to market funding instead of relying on subsidized loans, in a March interview.

As of yesterday, Handelsbanken shares had risen 21 percent this year, Nordea 7.1 percent, Swedbank 21 percent and SEB 8.2 percent, compared with a 1.4 percent loss in the 43-member Bloomberg Europe Banks and Financial Services Index.

While Swedish banks have increased loans to clients, ECB liquidity has failed to boost euro-area bank lending. Loans to non-financial companies in the single-currency bloc fell 0.17 percent in April, according to ECB data. The region’s economy will contract 0.3 percent this year, the European Commission said in February. Sweden’s gross domestic product will grow 0.4 percent, the government and central bank estimate.

Deleveraging Plans

“A lot of European peers will be focusing on capital plans,” Davey said. “The Nordics are firmly ahead. Many European banks will now be out outlining deleveraging plans as part of that capital build, while Swedish banks are showing positive loan growth.”

Banks in the rest of Europe are retrenching as they face higher funding costs, in part as Moody’s Investors Services looks into cutting the ratings of as many as 114 European lenders. Of the five Swedish banks on that list, the lowest long-term rating is A3 and the highest Aa2, two levels below Moody’s top grade. All the ratings carry stable outlooks.

Moody’s is reviewing the credit profiles of 24 banks in Italy and 21 in Spain, where ratings now range from as low as junk to Aa3. Most of those ratings carry negative outlooks.

‘Life Support’

“The continental European banks continue to be on life support by the ECB and the national governments,” Lex Van Dam, who manages $500 million at Hampstead Capital LLC in London, said in an interview. “The investor base is getting smaller and smaller as it is very hard to justify investing in a sector where capital dilutions could happen at any point and which are based in countries with serious growth concerns.”

European banks struggled to boost earnings last quarter. Deutsche Bank, Germany’s biggest lender, saw its shares tumble the most in almost four months after profit fell 33 percent, missing analysts’ estimates. Spain said this week it would take over Bankia SA and prepared to inject public funds into the banking group with the most Spanish real estate as part of government efforts to bolster confidence in the country’s lenders.

BNP Paribas SA (BNP), Societe Generale SA (GLE) and Credit Agricole SA (ACA), France’s biggest banks, face higher taxes and may have to split off some of their riskiest operations after Francois Hollande was elected president. Hollande, who called the financial industry his “greatest adversary” during the campaign, had pledged to force banks to split retail and speculative operations, impose a tax on all transactions and increase the levy on bank profit by 15 percent.

Borg’s Way

While Finance Minister Anders Borg has rejected calls for a financial transactions tax and doesn’t want banks to split their deposit-taking divisions from investment operations, he has signaled he won’t compromise on Sweden’s goal to impose tougher capital rules than elsewhere in Europe. His stance puts him at loggerheads with nations such as France, which has argued against granting national freedoms to impose stricter rules than those set in the rest of the union.

“I will not be ready to give up any of the major interests of our country,” Borg said in an interview last month. “I am not willing to compromise on the core principles that we have.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net.

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net.


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