While most of Europe struggles to achieve respectable economic growth, and some countries battle with near-calamitous budgetary deficits and public debt, one country in particular is doing very well: Sweden.
Gross domestic product (GDP) rose 5.5% last year, rebounding from the negative figure of 5.3% registered in 2009, according to the country's Ministry of Finance. Further growth of 4.8% is predicted for this year, with the Swedish economy “recovering faster than most other [Organisation for Economic Co-operation and Development] countries”, say the ministry’s economists. Unemployment is forecast to fall from the current 7.4% to 4.8% by 2015.
Sweden, a member of the EU but not the euro, sets its own interest rate, the repo rate. As the economy improves, the Riksbank, the country's central bank, has increased the rate from a record low of 0.25% in 2009 to 1.5% this spring.
Remarkable achievement
“Sweden is an island of prosperity in the middle of very uncertain waters, which makes your achievements even more remarkable,” Angel Gurría, the OECD’s secretary-general, told a Stockholm audience earlier this year. “The public sector deficit is expected to have been below 3% of GDP in 2010 and to return to a surplus by 2012. Public debt remains relatively low. And contrary to many other countries, you reformed your pension system years ago, so you are not facing huge future liabilities, as a result of the ageing of your population.”
All of these factors bode well for the banking market, 75% of which is controlled by Sweden's big four – Handelsbanken, Nordea, SEB and Swedbank. Although Swedish banking models proved resilient in the global financial crisis thanks to the lessons learned in the Swedish financial crisis of the early 1990s, three of the four big banks (Nordea, SEB and Swedbank) have suffered large loan losses in the Baltic states of Estonia, Lithuania and Latvia in the past two to three years.
Nordea's good crisis
Christian Clausen, chief executive of Nordea, which is headquartered in Stockholm but has large operations in all Nordic markets, says there are many reasons why the economy is doing well, “but perhaps the most important is that the external and internal balance was maintained before and through the crisis – Sweden didn’t build up big deficits”.
Mr Clausen, who is also chairman of the Swedish Bankers’ Association, became president of the European Banking Federation (EBF) this year. He has three main priorities at the EBF. “The first is to restore trust and confidence, and rebuild the reputation of Europe’s banks,” he says. “We need to deter bank bashing, and we will do that by being transparent and proactive. The second priority is to ensure that the new wave of regulation on capital, liquidity, funding and so on strikes a balance between avoiding another banking crisis and not over-regulating to the extent that it hurts customers and the economy. The third is to ensure there is a level playing field in regulation. For example, within Europe we have to be sure we don’t have a 15% core Tier 1 capital requirement in one country and 7% in another, which would be destabilising.”
The Banker voted Nordea Bank of the Year 2010 in Sweden, Norway and Denmark. The group has 11 million customers, assets of €601bn and achieved a net profit in 2010 of €2.66bn, up 15% on 2009.
“We did well all through the crisis,” says Mr Clausen. “We never had a loss or went into big write downs, and in our worst quarter we still achieved a 10% return on capital. Early on in the crisis we took some extra capital from the market, not from the government, and used it to support our customers. That created a huge momentum and brand awareness in our market, and we have actually increased the number of personal and corporate customers.”
Mr Clausen says 2010 was “a milestone on the journey towards Great Nordea” – a concept launched in 2006 “not necessarily to make us the biggest bank, but a better bank for customers”, with all 35,000 staff being “proactive in improving the way we work”. Its objectives, which Mr Clausen says have already been delivered or are on course to be delivered, include strong risk management, a doubling of the bank's risk-adjusted profit in seven years, the best return on equity (ROE) and total shareholder return among its peer group, and an ambitious growth strategy.
“In 2009, we put growth on pause and set a middle-of-the-road strategy so as not to run into the ditches, with a focus on risk, capital and existing customers,” says Mr Clausen. The growth strategy has been reactivated, but at a slower pace. “Now we are moving into what we call the ‘new normal’, where the crisis is over but where financial regulation will have a huge impact on our balance sheet, and profit and loss. But we have come out of the crisis stronger than we went in,” he adds.
Swedbank's comeback
Swedbank had a complete revival of fortunes in 2010, reporting a net profit of SKr7.4bn (€822m), compared with a loss of SKr10.5bn in 2009. ROE was 8.1%, compared with -12.5% the previous year. Its Baltic banking division did not quite make it into the black, reporting a loss of SKr7m, but that was a dramatic improvement, largely due to lower credit impairments, on the loss of SKr9.8bn in 2009.
“Some Swedish banks have a large part of the Baltic market, and that has been a problem, but their Swedish operations have been stable,” says Catrin Fransson, Swedbank’s head of retail. Her division has more than 4 million customers in Sweden, out of a population of 9 million. She is relieved interest rates are going up, as “it’s not easy to have a retail banking business with the extremely low interest rates we have had in recent years”.
Swedbank and the other major banks set up a company last year to provide a common infrastructure for ATMs. “We no longer view ATMs as being a competitive advantage for any one bank because customers can use them all, so the new company will help us reduce costs and give customers the same service,” says Ms Fransson.
Handelsbanken's steady approach
Handelsbanken, in business since 1871 and the oldest listed company on the Stockholm Stock Exchange, has maintained its long-held reputation for stability and organic growth. Net profit rose 8% last year to SKr11bn, with ROE edging up to 12.9%, from 12.6% in 2009.
“Throughout the financial crisis, in no quarter did ROE fall below 12% ROE,” says CFO Ulf Riese. “It’s because we are a very conservative bank. We focus on stable customers with good cash flows. Also, we don’t like market risk, and we don’t have proprietary trading. We focus on universal banking throughout our branch offices, which gives us long-term stability.”
Its core Tier 1 capital ratio is 13.8%, well above the Basel III minimum standard, so Mr Riese says there will be no need to raise more capital from shareholders in the near future. “Besides, our capital is created through our operations. We are the only bank in the Nordic region that has not recently asked shareholders for new capital.”
As for raising debt, Handelsbanken has the lowest credit default swap spread of any European bank, which makes funding easy and costs low. “Just the other week we did a small renminbi bond issue in Hong Kong, which was oversubscribed 6.5 times,” says Mr Riese.
The regulator’s views
High on the list of priorities for Finansinspektionen (FI), the Swedish financial supervisory authority, is implementing the new Basel III capital regime as soon as the European Commission incorporates it into its Capital Requirements Directive.
“We intend to implement it earlier than the Basel timelines,” says Martin Andersson, FI’s director-general. “At this stage in the business cycle, where we are experiencing strong growth, banks should be building up their countercyclical buffers. Our banking sector is big compared with the overall economy. We therefore think we should be at the stricter end of the capital regime.”
This no-nonsense approach is likely to see the FI setting higher capital ratios than the Basel III minimum. However, Mr Andersson is aware of the need for “a level playing field and not much room for regulatory arbitrage between countries”.
The FI takes a tough approach in other areas too. Restrictions on bankers’ bonuses came into effect in March; in January the FI fined Swedbank and Handelsbanken for deficiencies in their roles as depositaries for investment funds; last October it capped the loan-to-value ratio on mortgages at 85%; and in August it cancelled HQ Bank’s banking licence for breaking trading and risk management rules.
“There must be a culture of good compliance, good risk management and treating customers fairly, and that means banking supervision needs to be more intrusive than it was in the past,” he says.
For those who complain that recent moves towards stricter financial regulation will damage economic growth, Mr Andersson has a simple retort – just look at the current GDP growth rates.
