Swedbank Sees Earnings Pressure Ahead as Rates Stay Negative

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Swedbank AB said profit is under renewed pressure because of negative rates and unpredictable markets.

Sweden’s biggest mortgage lender reported a decline in net income on Thursday to 3.67 billion kronor ($430 million) from 4.14 billion kronor a year earlier, in line with the average estimate of analysts surveyed by Bloomberg. One-time tax effects resulted in an extra expense of 447 million kronor.

Swedbank is earning a reputation as a conservative lender that has built up one of Europe’s biggest capital buffers as markets remain inhospitable. The lender said on Thursday its capital ratio, equivalent to more than one-fifth of risk-weighted assets, rose further in the second quarter.

“The key highlight of second-quarter results came from the exceptionally strong capital generation,” UBS AG said in a note to clients. “This was mainly driven by a revaluation of anticipated pension liabilities. Strong capital generation in the quarter is likely to reignite excess capital return debate, which should be supportive for the shares.”

Swedbank’s shares rose as much as 2.2 percent to 206.2 kronor in Stockholm trading, their highest level since April 27 The stock gained 1.9 percent as of 9:04 a.m. Swedish time.

But the environment for banks remains uncertain. Sweden’s lenders are struggling to adjust to negative rates as policy makers drive down the cost of money to fight the threat of deflation. SEB AB said July 14 its net interest income fell 6.3 percent last quarter, reflecting the impact of negative repo rates. While Swedbank saw its interest income rise, it described the outlook as challenging.

Renewed Pressure

“With uncertainty in the financial markets and the negative interest rate environment, bank profits are under renewed pressure,” Chief Executive Officer Michael Wolf said in the statement. “It is also important, therefore, that we stay consistent in working with cost efficiencies.”

Swedbank’s common equity Tier 1 ratio rose to 22.4 percent of risk-weighted assets from 20.5 percent in the first quarter. The Swedish regulator said on May 22 it required the bank to hold 19.1 percent in the first quarter, by that measure.

“We are very well capitalized in an uncertain world” and “feel safe with that buffer and we also say we don’t have any excess capital,” Wolf told reporters on a conference call.

Net commission income gained 1 percent to 2.84 billion kronor in the quarter, in line with the 2.86 billion-krona average estimate. Net interest income rose 3.3 percent to 5.7 billion kronor, meeting the average analyst estimate.

In the first six months of the year, net interest income rose 3.8 percent to 11.4 billion kronor. Swedbank said group treasury’s net interest income improved because of falling market interest rates while at its Swedish banking unit, it decreased.

“Lower market interest rates adversely affected deposit margins, while increased lending volumes and higher mortgage margins contributed positively,” Swedbank said.

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