April 5 (Bloomberg) -- Banks operating in Finland are facing an erosion of profitability of their core businesses amid low interest rates, the country’s financial regulator said.
“Favorable overall results conceal a weakening of profitability in traditional business operations,” Anneli Tuominen, director general at the Financial Supervisory Authority in Helsinki, said in a statement today. “The low level of interest rates and sluggish economic growth pose a challenge to smaller banks in particular.”
The euro area’s recession is hurting Finland’s export-led economy, which gets about 40 percent of its output from foreign sales. Gross domestic product has shrunk for nine consecutive months, contracting 2.3 percent in January, according to trend indicator data published by Statistics Finland today.
Banks operating in Finland, including Nordea Bank AB and Danske Bank A/S, are struggling to boost income as rates hover close to record lows amid central bank efforts to stimulate demand. The European Central Bank kept its benchmark rate at 0.75 percent yesterday and Sweden’s Riksbank reduced its repo rate four times in a year to 1 percent before halting cuts in February.
Profitability varies among banks, and the smaller banks suffer more as net interest income is a “key” source of income, Finland’s FSA said. Banks have seen operating profit growth come from increased returns from securities trading and investments, the regulator said.
Swedish and Finnish banks have largely steered clear of the European debt crisis and their balance sheets aren’t weighed down by assets linked to the region’s most indebted nations, giving them better access to funding than many European peers and allowing them to increase lending to Nordic clients.
Finland’s financial sector has a strong liquidity position and banks have “maintained their safe-haven status in international markets,” the watchdog said. Lenders raised the ratio of the highest-quality common equity, the core Tier 1 capital, to 15.5 percent on Dec. 31 from 13.1 percent a year earlier. Finland is the only Nordic country to use the single currency.
To contact the reporter on this story: Kati Pohjanpalo in Helsinki at firstname.lastname@example.org
To contact the editor responsible for this story: Tasneem Brogger at email@example.com