Bankers smiling as the money rolls in

RIGA - Swedbank, SEB and Nordea Bank, the largest lenders in the Baltic countries, returned to profitability in the region as credit losses narrowed amid the economic recovery, reports Bloomberg. SEB on Oct. 28 reported the first profit in two years at its unit for Estonia, Latvia and Lithuania in the third quarter after loan impairments tumbled. Swedbank said that its operations in the region had a quarterly profit for the first time since 2008, while Nordea became profitable in the second quarter of this year.

At the height of the crisis in the Baltic countries, which suffered the deepest recessions in the European Union last year, Swedish banks were saddled with more than 10 billion kronor (1 billion euros) of loan losses in the second quarter of 2009 alone. Swedbank, SEB and Nordea all sold shares to replenish capital and cover an increase in bad debt.

“The Swedish banks took a beating during the economic crisis because of their exposure to the Baltics, but investors would be wise to notice that these banks, which are already well capitalized, seem to have ridden out the storm,” said Lex van Dam, fund manager at London-based Hampstead Capital, which oversees investments of about 500 million dollars. “They’re looking very attractive now and I’m looking to maybe invest myself,” van Dam said.

All four major banks (including Handelsbanken) posted better-than-expected earnings. But Peter Norman, Sweden’s newly appointed minister for financial markets, says they make “too easy money,” reports the Swedish Wire. They do this, “for example, by providing insufficient information on costs for customers,” he said.

Swedish banks should also carry the costs of new regulation and not pass it on to customers, he pointed out. “It does not make sense that a bank should pass on the costs of new regulation on to its mortgage customers. I will look at bank margins and assess if the banks pass on the costs,” he promised.

Nordea, the biggest bank in the Nordic region, reported a 14-percent jump in quarterly net profits on Oct. 27, far better than analysts had expected. Chief executive Christian Clausen said: “Nordea had a strong quarter, with record level income and one of our highest operating profits ever.”

The bank posted an operating profit of 22 million euros in the Baltic countries in the third quarter, up from 5 million euros in the three months through June. That followed operating losses in the region in the previous four quarters.
Handelsbanken, Sweden’s second-biggest bank by market value, reported higher-than-expected net interest income in the third quarter due to higher lending margins and volume increases.
SEB swung to a third-quarter operating profit of 514 million kronor in the Baltic countries, compared with a loss of 2.2 billion kronor a year earlier.

The fourth biggest bank Swedbank - the biggest lender in the Baltics - posted a better-than-expected profit as loan losses fell drastically. “Swedbank’s positive trend from the first two quarters was further strengthened during the third quarter. Net interest income improved, Baltic banking reported a profit again and the business activity with our customers was good,” Swedbank’s CEO Michael Wolf said.

Swedbank’s loan losses in the Baltic region, which were mainly driven by lending in Latvia, narrowed to 327 million kronor in the third quarter from 3.3 billion kronor a year earlier. Profit at the bank’s Estonian, Latvian and Lithuanian units reached 531 million kronor, compared with a loss of 2.3 billion kronor a year ago. Latvia remained unprofitable in the period.

Sweden’s central bank raised its benchmark interest rate by 0.25 points to 1.0 percent on Oct. 26, the third increase since July as the country’s economy makes a strong recovery from recession. The banks lending margins got a lift from interest rate hikes by the central bank.

“The Swedish banks are strong in terms of capital and have been further strengthened during the third quarter. In this way, the Swedish banking sector is very stable,” said Frida Lewne, an analyst at Danske Bank.
Swedish banks offer investors the best avenue to capitalize on a Baltic economic rebound as the pace of recovery in Latvia, Lithuania and Estonia allows lenders to reverse provisions and boost profits, say analysts. “We always see banks as the best proxy for economic recovery,” said Aivaras Abromavicius, a partner at East Capital, in an interview in Oslo. “Now we see that when the economies are recovering, a lot of bad loans are returning to the banks so instead of write-downs we now see write-backs; the positive news for some of these banks will continue for now.”

East Capital, which manages about 4.6 billion euros in mostly emerging European assets, estimates export growth will help the Baltic economies expand an annual four percent to five percent on average “over the next business cycle,” starting at the end of next year, said Marcus Svedberg, the company’s chief economist. That would be double the average growth rate for the euro area over the same period, he said.

Banks operating in the former Soviet region have underestimated the strength of the recovery, according to Stockholm-based East Capital. “Some of the Swedish banks, in particular, have been quite conservative and have over-provisioned for loans in the Baltics, but also in their portfolios in Russia in Ukraine,” Abromavicius said.
Nordic banks, including Swedbank and SEB, the largest lenders in the Baltics, reported a surge in loan losses last year as Estonia, Latvia and Lithuania suffered the deepest recessions in the European Union.
“The worst is behind the banks already” in the Baltics, Abromavicius said.