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Swedbank execs foresee stable oil exposure after sharp rise in provisions

A sharp year-over-year rise in second-quarterprofit may have been partly down due to a one-off gain, but it also beatanalysts' forecasts, and the lender's executives said July 21 that they areconfident in their management of impairments related to oil-related risks.

Second-quarter profit attributable to shareholders rose to 6.27 billionSwedish kronor from 3.67 billion kronor in the year-ago period on the back of atax-exempt windfall of 2.12 billion kronor from the of Visa Europe to The profit figure beat bothReuters' and Bloomberg News' analyst consensus by more than 700 million kronor.

Net interest income and net commission income were largelystable year over year, while second-quarter ROE rose to 21.0% from 13.4%.

Oil exposure

Yet Swedbank's net credit impairments also jumped in thesecond quarter, reaching 538 million kronor compared to 6 million kronor in theyear-ago period. This was attributable to larger provisions for severaloil-related commitments within the large corporates and institutions division,with the lender saying "the long period of low prices and reducedinvestment in the oil sector have affected oil-related customers' financialpositions."

CEO Birgitte Bonnesen told analysts on a conference callthat there had been little sign of improvement in the situation despite therecent oil price stabilization. "Our clients are as concerned as we areabout the level of investments, which are not picking up," she said.

As a result of the increased risks in oil-related sectors,Swedbank and fellow syndicate lenders began restructuring loans to clientswhose businesses are hit by low oil prices. This has involved delayingamortizations and extending maturities, as well as owners contributing capital,the lender said, adding that this approach had seen several successfulrestructuring plans during the second quarter.

"In the first half of the year, we've seen a veryconstructive approach from our clients," Bonnesen told analysts, saying"very good progress" had been made. The sharper-than-expected rise inrisk provisions was a sign of success, the CEO added, because "that meanswe have been able to close some of the negotiations earlier than we expected."

CFO Anders Karlsson said Swedbank believes that riskexposure in its oil-related portfolio will be "fairly stable goingforward," with Chief Risk Officer Helo Meigas adding that this would onlychange in the "theoretically possible" but unlikely event that"the negotiations change dramatically and some of the early commitments willnot be signed."

Yet Bonnesen cautioned that it would be "veryoptimistic" to expect investment by oil sector-related clients to increaseany time soon.

"In our restructurings, we are talking aboutstabilizing the cash flows for a minimum two of years, in some cases up to fouryears," she said.

Swedbank has oil-related exposures only in the Nordicregion, Meigas said, adding that all of them are syndicated, rather thanself-originated, loans and that the lender is "a mid-range participant inthe syndications."

This, she admitted, means that "we are not controllingthe discussions," as the syndicates comprise many banks from around theworld and "we sometimes have quite diverging views on what needs to bedone." But Nordic bank participantstend to have similar views, she said, and the fact that Swedbank was "thefirst one to raise the issue" means that it has "quite a big say inthe ongoing negotiations."

Corporate lending

Bonnesen also said Swedbank will reprice its corporatelending offering to increase margins once the country's FSA applies stricterrules on risk weightsin relation to corporate lending.

"It will happen," Bonnesen said. "I can'ttell you exactly how much and when, but we've started to work on it."

For the first half, Swedbank's attributable profit rose to10.58 billion kronor from 7.99 billion kronor in the year-ago period. ROE was17.4%, compared to 14.1% a year earlier.

The group's common equity Tier 1 ratio stood at 23.0% at theend of June, compared to 23.7% at the end of March and 22.4% at June 30, 2015.

As of July 20, US$1was equivalent to 8.59 Swedish kronor