Stephen Timewell looks at the enviable position of the large Swedish banks in a turbulent financial world.

While many European banks grapple with downgrades, market instability and economic slowdown, it is easy to be negative and paint a gloomy picture. But although Swedish banks are not immune to the global downturn and have clearly experienced difficulties in their life insurance operations, their outlook is surprisingly different.

The ‘big four’ banks – Nordea Group, Svenska Handelsbanken, Skandinaviska Enskilda Banken (SEB) and FöreningsSparbanken (Swedbank) – remain profitable and are seen as a beacon of stability in a difficult period.

According to a recent Standard & Poor’s (S&P’s) report on major Nordic banks, which are dominated by the four Swedish banks: “The ratings are expected to remain largely unchanged in 2003 because of their sound financial profiles, which are grounded in sturdy predominantly national or regional, retail franchises; diversified revenue bases; and good core capitalisation.”

S&P expects the banks to maintain their sound creditworthiness in 2003 “because of healthy retail banking operations, which support core revenues, the achievement of cost savings, and a manageable rise in non-performing loans (from very low levels).”

Secrets of success

How have these banks been able to enjoy a solid A rating? One reason is the relatively low level of net loan losses.

Seldom do bankers remember the lessons of the past but in Sweden the memories of the collapse of the banking system in the early 1990s remain vivid. Magnus Carlsson, vice-chairman of SEB Merchant Banking, says: “Despite three years of downturn, loan losses are not going up. We learnt a lot in 1992-93. We learnt about the risk-taking culture.”

Much of Swedish bank lending is now fully collateralised, there is a strong focus on risk management and there has been a general decline in lending to corporates. This lack of risk exposure is proving useful.

Lessons sink in

“We still carry the scars of 10 years ago. We are cautious in our actions and do not have a tendency to get exposed,” says Handelsbanken CEO Lars Gronstedt.

In its first quarter results this year, loan losses at Handelsbanken (SHB) remained low at SEK31m ($3.9m), producing a ratio of bad debts to lending of just 0.25%.

Commenting on SHB’s better than expected first quarter profits, Citigroup Smith Barney noted: “Lower than expected loan loss provisions, including a general provision without which the bank would have reported a net recovery, provided the primary explanation for the earnings surprise.”

SHB is not alone in having good earnings. Swedbank’s loan loss level was reduced to 0.22% while at Nordea loan losses were 0.27% of loans and guarantees for the first quarter.

Nordea spokesperson Erik Evren says: “We learnt from the early 1990s, the structure of mortgages is now very different.” As household lending continues to grow steadily, bankers seem confident that strict credit management will help to void the problems of the past – and the results back that up. Nevertheless, some concerns exist over the concentration of risks at some large regional corporates that have had problems recently, such as Ericsson and ABB.

Healthy capital ratios

Besides robust asset quality and healthy loan growth the big four are also viewed as well capitalised. Most have Tier 1 core capital ratios in excess of 7%, with Handelsbanken slightly behind at 6.5% at the end of March. On performance, the four provided few surprises in 2002: SEB reported a 9% improvement in net income and along with SHB and Swedbank all maintained return on asset (ROA) ratios in the 0.5%-0.6% range. Nordea’s ROA slipped to 0.37% following a 43% drop in net income, which stemmed in part from equity and life insurance operations.

The banking sector, like the Swedish economy itself, seems relatively well balanced and unlikely to get blown off course. The referendum on euro entry in September is cause for some nervousness but at this stage the result is viewed as too close to call and banks remain neutral on the delicate subject.

With the economy expected to grow at 1.5% this year – better than most of Sweden’s European peers – the banks appear relatively well placed, an unexciting but stable outlook.

As Handelsbanken noted in its latest forecast: “The next few years will probably see an undramatic, slow successive recovery. A somewhat dull scenario for households, companies and financial markets but something of a central bank’s dream.”

Competition between the major four banks is anything but dull. Nordea, formed through the merger of Sweden’s Nordbanken, Finland’s Merita, Denmark’s Unidanmark and Norway’s Christiania, dominates the Nordic banking arena with 1240 branches, 34,600 employees and 11 million customers, 45% of the population. Deriving 75% of total income from retail banking, it is the market leader in retail and corporate banking in Finland while coming in second or third in both retail and corporate in Sweden.

Nordea’s strategy for the present is to focus on the core business, keep costs under control and to be seen as the leading financial services group in the Nordic and Baltic financial markets.

Cost savings

While Nordea CEO Lars Nordström was cheered by 2% lower costs in the first quarter, Citigroup believes the group’s hard-earned 2003 cost savings “are likely to be eaten up by revenue headwinds”, and the group’s cost/income ratio of 64% looks high compared with the other majors, like SHB, with a creditable 47% ratio.

Nordea’s balance sheet (total assets of e282bn [$328bn] at end of March) dwarfs its nearest rivals, SHB and SEB. But size is not everything in the current market, especially since the recent planned merger between SEB and Swedbank was blocked by the European Union, stopping any further consolidation.

Handelsbanken’s unique set of values, radical decentralisation and tight costing make it efficient and attractive to customers and investors alike. Citigroup Smith Barney notes that SHB is one of only 10 banks in a pan-European universe of 48 banks where estimates have been increased for 2003.

Mr Gronstedt has not only cut costs but has also boosted lending volume in the region this year and strengthened margins. In 2002 SHB increased margins (defined as net interest income to average earning assets) by 12 basis points to 1.64%. Mr Gronstedt maintains that the bank’s decentralised approach has achieved higher profitability than its peer group for the past 31 years, recording a 15.1% return on equity in the first quarter.

International networks

SHB also has a broad international network, including 88 branches in Denmark, Finland and Norway and eight branches in the UK. A ninth branch is due to open in Cardiff, Wales, on June 4. “Our model travels well. We have not had to withdraw from any branch at all outside Sweden, and we only expand through opening branches.”

SEB also has an important international network along with the strongest investment banking franchise in the region. Before the failed merger it saw itself as an expanding pan-European banking force. Now its focus is as a north European financial group with new home markets in Germany and the Baltics and with more than half of its customers and 20,000 staff outside Sweden.

Mr Carlsson aims to maintain SEB’s Swedish franchise as the dominant bank in the corporate sector and sees great opportunities in Germany’s Mittelstand market through its German subsidiary (formerly BfG).

Although SEB’s comprehensive investment banking range is a low net contributor, at present it is a key part of its franchise, and the other Nordic countries, its three Baltic subsidiary banks and Polish subsidiary offer further sources of growth.

Mobile banking

Reinforcing its strong technology focus, SEB plans to launch a 3G mobile banking service in mid-June. Designed with telecoms provider 3, the new mobile service complements the bank’s e-banking capability – it already has 1.3 million internet customers in the region.

The smallest of the four, Swedbank, is likewise well provisioned (133% cover), well capitalised (capital adequacy 10.8%) and provided a 13.1% return on equity for the first quarter. Its subsidiary in the Baltics, Hansabank, is the leading bank in the three states, and deputy president Nils-Fredrik Nyblaeus told The Banker: “The Baltics is the biggest growth potential we have, it is like Sweden in the 1960s.”

In a turbulent world, the large Swedish banks remain relatively protected, are producing stable results and have good growth potential. An enviable position compared with some other European banks.


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