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Swedish banks show the European challenge

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Swedish banks show the European challenge

WhereNordic banks lead, other European banks tend to follow. Earningsresults from Sweden's four leading banks are not encouraging.

Datafrom S&P Global Market Intelligence shows that for Sweden's big four, netinterest income, fee income, trading revenues and hence net profit came underpressure in the first quarter. Although triple-A rated Sweden is growing steadily and more stronglythan Europe as a whole, Swedish banks, and Nordic lenders more generally, aresuffering from significant pressure on revenues and returns from low interestrates.

Accordingto Swedbank AB(publ), Swedish GDP is likely to rise 3% in 2016 after a 4.5%year-over-year increase in the fourth quarter of 2015. Yet as forbanks across Europe, interest rates are a key source of pressure. Sweden'sRiksbank in February cut its main rate to negative 0.50%, and although itheld off on a further cut in April, it added a further 45 billion Swedish kronor to its assetpurchase program.

Caspervon Koskull, CEO of Nordea BankAB (publ), said market volatility also hurt the bank in January andFebruary. Net interest and operating income fell for all fourSwedish banks, and Citi analysts wrote May 2 that "every single Nordicbank missed [consensus] on net interest income and fee income."

KristinDahlberg, a bank analyst at Jefferies, said in an interview that the mostrecent repo rate reduction added to pressure on net interest income. Sheforecast that the rate would stabilize in 2016 and begin to increase during thefirst half of 2017.

Shealso said "low market activity and general risk avoidance by household andcorporate clients" weighed on first-quarter results, adding that feeincome was boosted in the first half of 2015 by considerable market activitythat is far from the case at present.

Nevertheless,she said the longer-term trend for fee income showed "a basis forgrowth" given a widening range of bank products and generally strongeconomic growth.

Cost control

Theeconomic climate and low interest rates are, however, reflected in very low ordeclining risk costs. Nordea's was the highest among the four at13 basis points of total loans, while only Skandinaviska Enskilda Banken AB saw its cost of riskrise — but to just 8 basis points from 6 basis points. Svenska Handelsbanken AB (publ) reported a loan lossratio of 4 basis points, and the figure for Swedbank stood at just 1 basispoint.

Cost-to-incomeratios were weaker for all except Swedbank but remain generally impressive, andthe Swedish banks continually emphasize their commitment to lowering costs.Handelsbanken's expenses rose notably because of a for bank branch cutsreflecting the move to digital banking.

Ignoringone-off items that led to a net loss, SEB claimed to have achieved of 10.1%that was comparable to that of its peers. This resilience in an evidentlydifficult quarter could well serve as a model for the rest of Europe.

"The question for the Nordic banks is about holdingonto their returns and paying decent dividends," said Edward Firth, a bankanalyst at Macquarie. "The Nordic region is still the strongest growingarea in Europe in terms of volume growth, but given the margin pressure, theissue is how much the banks can hang onto. It is not a recovery story."

Capital

Sweden's banks continue to boast some of Europe's highestcapital ratios — but also continue to face some of its most stringent capitaldemands. The Riksbank's latest move is to impose new methods of risk-weightingcorporate exposures, which are now expected to for all banks.

Firthsaid the proposed change would cut Handelsbanken's CET1 ratio to 18.8%, comparedto 22.7% at the end of March. It faces a current Swedish FSA of 18.6%, withrising countercyclical buffers in Sweden and Norway set to add a further 0.3percentage point.

Swedbankreported a 23.7% CET1 ratio against an estimated regulatory minimum of 20.4%,including countercyclical buffer changes, while SEB had a CET1 ratio of 19.1%against an estimated 16.2% minimum requirement. Nordea's CET1 ratio stood at16.7%, ahead of Citi's estimated minimum of 16.0%.

Firthsaid Handelsbanken is more affected by the corporate risk weight change becauseits peers "do not have such a big corporate book and such a lowrisk-weighting applied to it." However, the increasedrisk-weighting will hit the banks' sustainable returns because they need morecapital to achieve the same revenues from their corporate lending.

Dahlbergsaid that although some of the detail still remains unclear, "most of themwill be able to mitigate or incorporate the changes to the RWA calculationwithout suffering a significant capital deficit."

Andthe good news, Firth said, is that the process of rising regulatorycapital looks to be reaching an end. Both the mortgage and corporate books willhave been risk-weighted afresh and, Firth said, the minimum requirement for ownfunds (MREL) requirement looks eminently manageable.

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