Sweden's Banks Ride Stock-Market Rebound as Baltic Region Dodges Defaults
Swedbank CEO Michael Wolf
Casper Hedberg/Bloomberg
Swedbank CEO Michael Wolf said loan losses will probably fall further, after declining for five quarters from a peak of 2.16 percent of total lending in the first quarter of 2009.
Swedbank CEO Michael Wolf said loan losses will probably fall further, after declining for five quarters from a peak of 2.16 percent of total lending in the first quarter of 2009. Photographer: Casper Hedberg/Bloomberg
Sweden banks in record rally as Baltics avoid default
Casper Hedberg/Bloomberg
Pedestrians walk past the Swedbank AB headquarters in Stockholm.
Pedestrians walk past the Swedbank AB headquarters in Stockholm. Photographer: Casper Hedberg/Bloomberg
A pedestrian walks across Smilsu Street in Riga's financial district, in Riga on June 15, 2009. Photographer: Ilmars Znotins/Bloomberg News
Swedish banks, among Europe’s worst performers 18 months ago as the risk of Baltic loan defaults threatened to swell losses, are enjoying their biggest gains in at least 15 years as the former Soviet region rebounds.
Shares in Stockholm-based Swedbank AB, the biggest bank in Estonia, Latvia and Lithuania, have soared almost six-fold since March 2009, beating a 132 percent increase in the 52-member Bloomberg Europe Banks and Financial Services Index. Sweden’s SEB AB, the No. 2 bank in the Baltics, has more than tripled in market value since March 2009.
SEB and Swedbank are reaping the rewards of sticking with their Baltic expansion last year even as the region lurched into the deepest recession in the European Union. Latvia’s economy, the worst hit, may grow 3 percent next year after the toughest austerity program in Europe shrank the economy by 18 percent in 2009, according to JPMorgan Chase & Co. estimates. Some equity analysts see scope for further gains as the Baltic area rebounds from a fiscal crisis still crippling its European neighbors.
“Both banks are seen as a recovery story,” said Kimmo Rama, a financial analyst at Evli Bank in Helsinki. “In the Baltic countries, credit quality has improved more rapidly than previously expected, and as a result loan losses have decreased strongly.”
‘Slowly But Steadily’
Swedbank Chief Executive Officer Michael Wolf said July 22 loan losses will probably fall further, after declining for five quarters from a peak of 2.16 percent of total lending in the first quarter of 2009. The bank was profitable in Estonia last quarter for the first time since late 2008. SEB Chief Executive Officer Annika Falkengren said last month profit in the region where her bank is the second-biggest lender is “slowly but steadily” recovering.
Estonia’s adoption of the euro in January “will strengthen confidence in the country’s economy and increase interest in direct investment,” Swedbank’s Wolf said. Latvia and Lithuania plan to join the euro in 2014.
Estonia’s GDP expanded an annual 3.5 percent last quarter, growing for the first time in 2 1/2 years, the Tallinn-based statistics office said today. Latvia’s registered unemployment rate declined for a fourth consecutive month in July to an eight-month low of 15.3 percent, the National Employment Office said today.
Nordic Interest
Other Nordic banks also see growth potential in the Baltics. Norway’s DnB NOR ASA said Aug. 2 it will take over all of its DnB NORD joint venture, which operates in Lithuania, Latvia and Poland. The bank said it sees “good future earnings potential” in the Baltics and finds now “a good time to strengthen its position” there. Finland’s Pohjola Bank Oyj has also said it wants to open offices there.
A rebound in Sweden’s economy may also cushion the banks against any deterioration in their overseas businesses. Gross domestic product will grow 3.8 percent this year, the central bank estimates, after last year’s 5.1 percent contraction.
“Credit quality remains strong in Sweden,” Rama said. “This, combined with a good economic outlook, will provide a good growth platform for the Swedish banks.”
Swedbank and SEB shares plunged last year amid speculation Baltic losses may deplete assets and cost Sweden as much as 5 percent of GDP, Fitch Ratings estimated in June 2009. Swedbank shares sank 83 percent to a record low from Sept. 15, 2008, through a March 6 trough. SEB lost 72 percent between Sept. 15, 2008, and March 3, 2009, when the stock reached its lowest level since 1995. The krona lost 18 percent against the euro and 27 percent against the dollar in the same period.
Speculation
Latvia was forced to turn to the International Monetary Fund and the EU at the end of 2008 for a $10 billion bailout to avoid bankruptcy and boost reserves needed to stave off devaluation speculation.
Swedbank and SEB have since “done all the things that had to be done in the bank sector, they have restructured, made provisions, and have gone through optimization processes,” said Dainis Gaspuitis, an economist at SEB AB in Riga, the Latvian capital.
Swedbank’s estimated 2010 price-to-earnings ratio is the highest among Swedish banks, at 20.97, followed by SEB’s 19.36. Svenska Handelsbanken AB and Nordea Bank AB, the largest Nordic lender, trade at 12.36 and 13.4, respectively. The average ratio for the Bloomberg Banks and Financial Services Index is 12.3.
The shares are rebounding from “fears of a collapse in the Baltics that would bring down Swedbank and SEB,” said Morten Hansen, head of department at the Stockholm School of Economics in Riga. “That never happened. Calamity was averted so it’s not strange that there was a bounce back.”
Pipeline
The banks’ share price may be too high for some investors. According to Hansen, there remains a risk of an economic slowdown in Europe and the U.S., which may hurt the banks.
“There could be bad news in the pipeline,” Hansen said in an interview. The Baltics “rely very much on external demand.”
Toronto-based credit rating company DBRS Ltd. said there is an “improving credit situation in the Baltics,” though “risks remain,” in a July 26 note by analyst Steven Picarillo. DBRS said personal bankruptcy laws passed in Latvia last month, capping borrowers’ liabilities, may hurt banks operating there.
Still, “Swedbank’s solid capital resources, considerable underlying earnings and sizeable reserves, which cover 64 percent of lending,” will shield it from these risks, DBRS said.
To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net Aaron Eglitis in Riga at aeglitis@bloomberg.net
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