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Some of the best bank returns in Europe are found around a tree-lined square in Stockholm that used to serve as the Swedish Royal family’s cabbage patch.
Svenska Handelsbanken AB (SHBA), Nordea (NDA) Bank AB and SEB AB, all based at Kungstraedgaarden park, along with Swedbank AB (SWEDA) are among the top 10 European banks by risk-adjusted return in the past decade, according to the BLOOMBERG RISKLESS RETURN RANKING. Handelsbanken has the second-best returns and Nordea, the Nordic region’s largest bank, is ranked fourth among the 38 companies in the Bloomberg Banks and Financial Services Index.
“The only risk we like is the ultimate credit risk that’s managed through our branch network,” Ulf Riese, chief financial officer at Handelsbanken, said in an interview. “Banking should be free of thrills -- we’re in the trust business.”
The banks have focused on retail banking in the Nordic countries, a wealthy region with an extensive welfare system, and avoided the worst of Europe’s debt crisis. Regulators, drawing on lessons from the Nordic banking crisis in the early 1990s, are pushing through tighter capital standards than required elsewhere and raising risk-weights on mortgages, in a preemptive move to make the banks less vulnerable to declines in property prices.
The Swedish banks, which also have businesses in Finland, Denmark and Norway, are only surpassed by Finland’s Pohjola Bank Oyj (POH1S), which had a risk-adjusted return of 6.7 percent in the past 10 years. Handelsbanken was the best performer by risk-adjusted return over the past five years, and Swedbank was top-ranked over the past three years as well as since the start of this year.
The top 10 banks over the past decade also include Norway’s DNB ASA (DNB), with a return of 4.1 percent, meaning six of the top 10 European lenders are Nordic. The Nordic region has emerged as a haven from Europe’s crisis because of its fiscal prudence. Sweden is posting balanced budgets and Denmark and Finland have stayed within European Union deficit rules. Norway, backed by its oil, has a $620 billion sovereign wealth fund and no net debt.
Handelsbanken outperformed in part because it had the second-lowest volatility among banks with positive returns, trailing only HSBC Plc. Handelsbanken produced a total return of 162 percent over the past 10 years and a volatility of 32, for a risk-adjusted return of 5.1 percent. Nordea returned 4.4 percent after adjusting for price swings, Swedbank 1.8 percent and SEB 0.8 percent.
The risk-adjusted return isn’t annualized. It’s calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The performance of Sweden’s banks is “mainly a result of experiences and useful insights during the Nordic banking crisis,” said Anders Nyren, chief executive officer of Swedish investment company Industrivaerden AB, which owns 11 percent of Handelsbanken. There’s also “a strong macro environment in the Nordic region and the fact that the more stable retail business stands for a larger part of the Nordic banks’ operations,” he said.
The Swedish banking market crashed in the early 1990s after deregulation caused a rapid credit expansion and later a real estate crash. The government stepped in with bailouts and took over failing banks. Two bankrupt lenders, Nordbanken and Gota, were merged by the state and had their bad loans dumped in so- called bad banks. The merged company later combined with banks in Finland, Denmark and Norway to form Stockholm-based Nordea.
Swedish regulators are now imposing tougher capital standards for its four biggest lenders than the minimums proposed by the European Union and the Basel Committee on Banking Supervision. The banks will need to meet common equity Tier 1 capital ratios of at least 10 percent from 2013, and 12 percent two years later, compared with Basel’s minimum of 7 percent, due to take effect by 2019. The European Banking Authority has set a temporary 9 percent target for some lenders.
Finance Minister Anders Borg also last week backed a Financial Supervisory Authority proposal to “eventually” tighten risk weights on Swedish mortgage loans, which would lower ratios by as much as 2.5 percentage points. Sweden has had lower risk weights on home loans because the extensive welfare safety net makes default less probable.
“Should it help keep the housing market in check, while increasing banks buffers, it is undoubtedly a boon for the Swedish economy and Swedish banks,” Roger Josefsson, Stockholm- based chief economist at Danske Bank A/S in Stockholm, said. “The reason for Sweden’s stricter capital rules is that the banking system is relatively big in comparison with the economy and that banks rely more on foreign funding than many other banks, so from that perspective, this makes sense.”
Even after shaving 2.5 percentage points off capital ratios, Nordic banks would still surpass their European peers. Nordic banks with a market capitalization of more than $1 billion have a median capital ratio of 15.2 percent, compared with a median of 11.6 percent for the remaining western European lenders, according to data compiled by Bloomberg.
Swedish regulators say stricter standards are necessary because the bank’s make up about four times the size of the $540 billion economy. Sweden, which has opted out of the euro, has seen its economy withstand a contraction in the euro area. Growth was 1.4 percent in the second quarter from the three months through March, seven times the pace economists estimated.
“The risks at the Swedish banks are much smaller than at our European peers,” Goran Bronner, Swedbank’s chief financial officer, said in a phone interview. “Sweden is a very homogenous market. The experiences from the early 1990s are incredibly important.”
Nordea has used its strength to become the third-largest bank in Europe last month among 20 Nordic, German, French, Spanish, Italian, Austrian and U.K. lenders in terms of market capitalization. Spain’s Santander SA and France’s BNP Paribas SA (BNP) are larger. Handelsbanken was No. 8, up from 18th in 2007, according a Nordea presentation last month.
Nordea’s shares have returned 23 percent in Stockholm this year, before adjusting for volatility, and Handelsbanken’s have climbed 35 percent, compared with a 9.2 percent gain in the Bloomberg Banks and Financial Services Index. Swedbank is up 38 percent and SEB has jumped 30 percent. The four banks, along with HSBC and Switzerland’s Julius Baer Group Ltd., have the lowest volatility of all stocks in the index this year.
At the end of last year, Swedbank and Handelsbanken were the two best-capitalized lenders in Europe under Basel II on a Riksbank ranking of 24 of the region’s largest banks, including Deutsche Bank (DBK) AG, BNP, Barclays, UBS AG and Santander. SEB was No. 4 and Nordea claimed the seventh spot.
Their capital ratios have been partly inflated as Sweden’s risk-weights on mortgage loans are below 10 percent, according to the central bank. A potential increase to 20 percent would have cut Swedbank’s Basel III based common equity Tier 1 ratio by 2.5 percentage points to 12.3 percent, according to the central bank. Handelsbanken would see its ratio narrow to 12.4 percent from 14.6 percent.
Handelsbanken is Europe’s strongest lender and the No. 10 globally, according to a May Bloomberg ranking that looked at measures such as cost efficiency, loan loss reserves, non- performing assets and capital and deposits to funding.
In the second quarter, Handelsbanken reported a 9 percent increase in profit to 3.41 billion kronor ($510 million) amid higher lending income. The loan-loss ratio was 0.07 percent in the quarter, compared with 0.09 percent at Swedbank, 0.26 percent at Nordea and 0.08 percent at SEB.
“Risk awareness is clearly a long-term benefit to the banks’ shareholders,” Industrivaerden’s Nyren said. “This is quite clear if you look at the return on equity development and the risk-adjusted return in Handelsbanken.”
Handelsbanken’s return on equity rose to 14.4 percent in the second quarter from 13.8 percent in the first, according to the Swedish lender’s second-quarter earnings report. That surpassed Deutsche Bank’s 5.5 percent and Santander’s 4.8 percent, according to data compiled by Bloomberg.
“We don’t think we can create any value by knowing where the value of the dollar is going, for example,” Riese said. “Of course you have to have some market risk in a bank, but we always minimize this risk.”
Other Swedish lenders were caught with losses in the Baltics, which suffered the steepest recessions in the European Union in 2008 and 2009 after a property bubble burst. Swedbank and SEB both suffered soaring loan losses in the region, with Swedbank reporting a net loss of 10.5 billion kronor in 2009 after credit impairments jumped.
The region has since rebounded, and after returning to profit in the first quarter of 2010, Swedbank reported net income of 3.16 billion kronor in the second quarter this year.
“Swedbank and other Nordic banks grew in the Baltic countries and were a little bit to pre-occupied with expansion and partly forgot the macro-aspects, which was an expensive lesson,” Swedbank’s Bronner said. “Still, the Baltics are a small part of our business and the main part is in Sweden.”
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