Nordic banks will need to show investors they can do more to cut costs when they report third-quarter earnings this month or risk an investor backlash for failing to adjust to Europe’s worsening economic outlook.
“We’ve heard chatter about Nordic banks laying people off, but we investors need to see more concrete detail on what they plan on doing to judge if they are doing enough,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $74 billion. “It’s obvious banks need to start cutting costs to deliver earnings growth, given economies are slowing.”
While Nordic banks such as Nordea Bank AB are among Europe’s best-capitalized, the cost of insuring against lender defaults in the region has more than doubled as the threat of contagion from Europe’s debt crisis spreads to Norway and Sweden. The average price for insuring debt sold by the five biggest Nordic banks jumped to 150 basis points from 65 in June, according to CMA. The insurance peaked at 175.5 basis points last month, the highest level since March 2009.
Policy makers in Sweden, Denmark and Norway have told banks in the region to do more to gird against Europe’s debt crisis and the risk of a credit crunch. Swedish Finance Minister Anders Borg said today while lenders face no immediate need to raise capital levels, banks should stand ready to increase their buffers in the long term.
“We don’t have a primary risk to the Swedish banking system,” he told reporters in Stockholm today.
As regulatory demands grow and recovery prospects fade, banks must cut costs to have any chance of generating profits, said Nick Anderson, a London-based analyst at Berenberg Bank.
“Cost cutting and restructuring will be a big theme across all the banks,” Anderson said in an interview. “Banks that are slow to do this will come under increasing pressure from the rest of the market to follow the banks that are. Plans have more credibility than promises.”
Western European banks have announced almost 80,000 in job cuts this year as they struggle to adapt to tougher markets. Investor concern that Europe’s debt crisis may engulf Italy and Spain has roiled financial markets and depleted earnings from fixed-income trading, stock and bond underwriting as well as mergers and acquisitions.
Nordic lenders are more highly valued than European rivals. Nordea, for example, had a price to tangible book value, which strips out goodwill and other intangibles and is a measure used by investors to examine the value of a stock, of 1.15 in the first half compared with a median of 0.68 among other lenders, according to Bloomberg Industry data.
In Sweden, policy makers have warned that lenders are too reliant on short-term dollar funding. Banks may face fees for their foreign-currency borrowing or higher capital ratios to compensate for the added risk.
In Denmark, a regional banking crisis this year led to the European Union’s first senior creditor losses within a resolution framework, cutting most of the country’s roughly 120 lenders off from international funding markets.
In Norway, the central bank and financial regulator have warned banks they need to tighten lending standards to avoid a credit-driven housing bubble as consumer debt levels surge to the highest in over two decades.
The 14-member MSCI Nordic/Financials Index has fallen 22 percent this year, while the 46-member Bloomberg Europe Banks and Financial Services Index has slumped 31 percent.
Nordea Bank, the region’s biggest, said on Aug. 29 it plans to cut 2,000 jobs to reduce costs. Stockholm-based SEB AB hasn’t announced any job cuts, and says it won’t raise costs until 2014. Denmark’s Danske Bank A/S said it plans to trim its workforce by as many as 1,500 people through attrition, though the adjustment will be phased in over seven years. The Danish lender is also raising interest rates. Norway’s DnB NOR ASA has announced cost savings of 3 billion kroner by the end of 2015.
The announcements lack detail and don’t convince investors that the banks have clear plans on how to stay profitable through the crisis and its aftermath, Furnes said. That makes profit targets doubtful, he said.
Nordea shares fell as much as 2.6 percent and were down 0.3 percent as of 2:54 p.m. in Stockholm. Danske fell 0.7 percent, Swedbank declined 0.4 percent, while DnB NOR rose 1.3 percent.
Return on Equity
Nordea, SEB and Swedbank are targeting a return on equity, a measure of how much a company earns for each krona invested, of 15 percent. Svenska Handelsbanken AB aims for a higher ROE. Lenders are unlikely to reach those targets, said Andreas Hakansson, a Stockholm-based analyst at Exane BNP Paribas.
A detailed cost-reduction program “is the only way to improve profitability in this environment, which is key as none of them will reach their return on equity targets,” he said. Nordea, which publishes third-quarter earnings tomorrow, will report a 22 percent slump in net income from a year earlier to 556 million euros ($760 million) for the period, according to a Bloomberg survey.
Nordea said it wants to achieve most of its announced job cuts through “natural turnover” and voluntary agreements.
“We have a need to become more efficient in terms of capital, more efficient in terms of costs,” said Fredrik Rystedt, chief financial officer at Nordea.
Sweden’s government has cut its economic growth outlook for next year to 1.3 percent from 3.8 percent previously. In Denmark, Scandinavia’s worst-performing economy, output will grow just 1.6 percent next year, the central bank estimates.
“We’ve really seen a sudden slowdown in Nordic economic growth and this means the banks will be forced to refocus and adjust their cost structures,” said Christian Hede, an analyst at Denmark’s Jyske Bank A/S. “Investors are expecting something soon so we’ll likely see more announced job cuts before the year is over.”