Swedbank raises rate sensitivity estimate as Q2 net interest income jumps

Swedbank AB (publ) raised its estimate for income sensitivity to future rate hikes after it posted stronger-than-expected net interest income in the second quarter.

The Swedish lender's net interest income, or NII, came in at 7.11 billion kronor in the quarter, up 5.5% from the same period last year and up 5.2% from the previous quarter, and beat the S&P Capital IQ consensus estimate of 7.00 billion kronor. This comes amid rising central bank and market interest rates.

It was the second-highest NII result in the bank's history, said CEO Jens Henriksson during a July 19 earnings call.

Higher market interest rates contributed to improved deposit margins, while deposit volumes remained consistently high, according to Swedbank, which is Sweden's third-largest bank by assets.

Responding to surging inflation, the Swedish central bank raised its key interest rate by 25 basis points to 0.25% in late April and by a further 50 bps to 0.75% in late June.

"For quite some time, we've lost money on the large inflow of deposits. Now it turns into earnings," said Henriksson.

A boom in deposit volumes since the outbreak of the coronavirus pandemic has had a negative drag on Swedbank's earnings due to low interest rates, but the bank is now well positioned to benefit as rates rise. Private deposit volumes for Swedbank grew by 11.2% year over year.

"After many quarters of a flattish net interest income, we think this is a very positive outcome," said UBS analysts of Swedbank's second-quarter results in a July 19 note. The investment bank has previously suggested Swedbank would be the main beneficiary of higher rates among the large Swedish banks.

Peers Skandinaviska Enskilda Banken AB (publ) and Svenska Handelsbanken AB (publ) also recorded higher net interest income in the second quarter.

Higher rate sensitivity

Swedbank, which operates in Sweden and the Baltic region, is poised for further NII growth from future rate rises. The bank increased its NII sensitivity estimate for the next 50 bps rate hike to 3.33 billion kronor from 3.07 billion kronor in the previous quarter.

The bank's sensitivity calculation illustrates the annual effect on NII when market rates change and all existing interest fixings have rolled over. A 100 bps rate increase would boost its NII by 6.82 billion kronor, similar to its previous estimate.

The Swedish central bank has signaled further rate increases this year, expecting the policy rate to be "close to 2% at the start of next year." The European Central Bank, meanwhile, has said it would raise interest rates this month by 25 bps and again in September, to reach 0%.

Swedbank's rate sensitivity is "clearly very attractive, especially with the growth in the deposit base over the past couple of years," said Omar Keenan, equity analyst at Credit Suisse, on the earnings call.

As of July 18, US$1 was equivalent to 10.35 Swedish kronor.