Rate cuts stymie Swedish third quarter profits, but positives seen

Third quarter results of the big four Swedish banks came in below consensus expectations this week, with the impact of persistently low interest rates on net interest income (NII) and weak capital markets cited as contributing to the weaker than expected performance.

According to Pascal Decque, bank analyst at Crédit Agricole CIB, net profits for Nordea, Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken and Swedbank were on average 7% below market expectations.

“They all underline the tough interest rate environment – the Swedish central bank has now lowered its policy rate further to minus 0.35% – that weighs on NII and the very difficult capital markets, with poor liquidity and wider credit spreads,” he said.

Net profits were down 10%-20% year-on-year, he noted, although Handelsbanken’s were only down 4%, while a substantial one-off gain in Q3 2014 was behind a fall of 38% at SEB.

Swedbank kicked off the reporting on Tuesday, announcing a net profit of Skr3.93bn (Eu417m), 6% below consensus expectations.

“The financial results for the quarter were stable,” said Swedbank president and CEO Michael Wolf (pictured). “Increased lending volumes helped to offset the pressure on earnings from lower interest rates.”

Swedbank beat NII expectations by 2%, although Mats Anderson, equity research analyst at Kepler Cheuvreux, noted that its overall results reflected the trend.

“The NII of Skr5.8bn is up 4% year-on-year and 2% quarter-on-quarter, but obviously Swedbank take the hit of the Riksbank rate cut in early June via Net result of financial transactions,” he said. “This should be the bottom, though, as price increases were instigated towards the end of the third quarter.”

The analysts noted that SEB in particular had been hit by weak capital markets, given that commission generation is, in Anderson’s words, SEB’s forte.

“Nevertheless,” added Decque, “we keep thinking that fee driven business models (illustrated in Sweden by SEB) have a clear competitive advantage in this low rate framework.”

He meanwhile noted that, already boasting the highest capital ratios in Europe, Swedish banks continued to increase their ratios in the third quarter.