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Swedbank cautious on outlook for oil as impairments rise

Swedbank AB (publ) remains cautious about the outlook for the oil and gas sector after it prompted another rise in credit impairments, CEO Birgitte Bonnesen said Feb. 2.

The bank the same day reported impairments of 593 million kronor in the fourth quarter of 2016, up from 399 million kronor in the same period in 2015, with the rise mainly linked to the energy sector and large corporates. Credit impairments in the bank's large corporates and institutions business outstripped the total for the bank as a whole, rising to 652 million kronor from 164 million kronor.

For the full year, Swedbank reported total credit impairments of 1.37 billion kronor, up from 594 million kronor in 2015, and large corporates and institutions impairments of 1.48 billion kronor, up from 284 million kronor.

"There have been some positive signals because of the recovery in the oil price, but we don't think this will have a major impact on our clients," Bonnesen said. Investments in the oil and gas sector have been falling consistently for the past few years, she added.

Swedbank expects to lend less to the large corporate sector in 2017, focusing instead on lending to small and medium-sized enterprises, Bonnesen said.

"We will also strive to grow in lending to manufacturing and professional services," she noted.

Total corporate lending stood at 521 billion kronor at the end of 2016, down from 530 billion kronor three months earlier, with large corporate lending down to 178 billion kronor from 187 billion kronor. Weak demand for commercial real estate lending was partly responsible for the quarterly decline.

Sweden's negative 0.5% interest rate has introduced "a new kind of risk" for the bank, Bonnesen said, adding: "We have encouraged all our corporate customers to implement buffers."

Growth in the mortgage segment has been slightly subdued thanks to the introduction of amortization requirements, but the market should pick up in 2017, Bonnesen also said. The Swedish government introduced amortization requirements in May 2016 as part of a push to put a dampener on Sweden's hot housing market and bring down rapid household debt growth.

Private mortgage loans stood at 783 billion kronor at 2016-end, up from 761 billion kronor at the end of September and 723 billion kronor at year-end 2015. About 12.7 billion of the quarterly increase was attributable to mortgages added through the acquisition of Sparbanken Öresund, which Swedbank took over in October 2016.

CFO Anders Karlsson, meanwhile, defended the bank's high common equity Tier 1 ratio, which reached 25.0% at year-end, rising from 23.8% three months earlier.

"We are not overcapitalized," he said.

The bank noted that its regulatory CET1 ratio requirement rose during the fourth quarter to 21.9%, reflecting the impact of an increase in the bank-specific Pillar 2 capital it must hold under Swedish rules that impose an effective risk weight floor on mortgage exposure. The bank said it remains too early to assess the potential impact of proposed changes to capital mandates being considered by European authorities and by the pan-global Basel Committee on Banking Supervision.

CET1 ratios reflect capital held as a percentage of risk-weighted assets. Basel officials are considering changing the way banks carry out the risk-weighting process, and many European banking officials have warned that this could have a disproportionate impact on banks in the region, particularly those with a high share of mortgage loans.

Swedbank's leverage ratio, which measures capital as a proportion of total assets, stood at 5.4% at the end of 2016, up from 4.5% at the end of September and 5.0% a year earlier. The quarterly increase was attributable both to a fall in total assets and to an issuance in December of $500 million of Additional Tier 1 capital.

The bank's board proposed a dividend of 13.20 kronor per share for 2016, compared to 10.70 kronor per share for 2015. Swedbank said the proposal would make 2016 the fifth successive year in which it distributed 75% of profit to shareholders.

The bank made a fourth-quarter net profit attributable to shareholders of 4.14 billion Swedish kronor, compared with 3.81 billion kronor in 2015, as net interest and net commission income rose. Full-year attributable profit rose 24% to 19.54 billion kronor.

As of Feb. 1, US$1 was equivalent to 8.76 Swedish kronor.