Swedbank Capital Buffers Swell as Quarterly Net Tops Estimates

Swedbank AB, the second-best capitalized major bank in Europe, reported a 19 percent jump in third-quarter profit on higher lending income and lower loan losses and said its capital buffers increased.

Net income rose to 4.17 billion kronor ($652 million) from 3.5 billion kronor a year earlier, the Stockholm-based company said in a statement today. That beat the average estimate of 3.87 billion kronor in a Bloomberg survey of 12 analysts. Swedbank rose the most in almost nine months in Stockholm trading and reached a six-year high.

Sweden has subjected its banks to some of the strictest capital rules in the world and warned it may raise requirements further next year after housing prices and household debt levels soared to records. Swedish banks, the best capitalized lenders in Europe, already exceed the government’s 2015 capital requirement, sparking speculation lenders will increase dividends or make extraordinary payouts to shareholders.

“We welcome the increased regulation of the financial sector, which in recent years has produced a more sustainable international banking system,” Chief Executive Officer Michael Wolf said in the statement. “At the same time we must state, from a Swedish perspective, that increased capital requirements on banks will never solve the imbalances in the housing market.”

Swedbank gained as much as 6.2 percent to 173 kronor, its steepest intraday advance since Jan. 30 and highest price since Oct. 24, 2007. The stock was 4.2 percent higher at 169.80 kronor by 9:42 a.m. local time, with trading volume at 106 percent of the daily average in the past three months.

House Prices

Sweden has taken several measures to try to stem growth in household borrowing and house prices amid concern a bubble is developing. The steps include capping mortgages at 85 percent of property values and tripling risk-weights on mortgages. While the steps have helped slow loan growth, house prices are still climbing and debt loads have risen to record highs of more than 170 percent of disposable incomes, according to the Riksbank.

Apartment prices, which more than doubled since 2000, increased 14 percent in the 12 months through August, according to data from Svensk Maeklarstatistik, which publishes monthly data on Swedish real estate. The price of single-family houses advanced 4 percent since August last year, it said. State-owned mortgage lender SBAB warned on Oct. 18 that there is a risk of overheating and that prices are likely to continue to rise.

Not Optimal

“We want to help our customers to buy a home and will gladly provide financing for new construction,” Swedbank’s CEO Wolf said. “But we are not willing to take part when the same properties are mortgaged at ever increasing levels. In our view, the increased capital requirements on banks are not an optimal way to provide a solution to Sweden’s problem of too little housing, which dampens potential growth.”

Swedbank reported a common equity Tier 1 ratio under Basel II regulations of 18.8 percent at the end of September, compared with 18 percent at the end of June, and a ratio of 18 percent under Basel III, compared with 17.2 percent at the end of June. The bank said in its second-quarter report that it needs a ratio of about 15 percent under Basel III rules. The bank said today it expects its ratios to get even higher.

“We are awaiting approval from the Swedish Financial Supervisory Authority to use an advanced model to calculate risk weights on Swedish corporate lending, which will further improve our capital ratios,” Swedbank said. “In order to set a new internal capital target, we need a clear ruling from the authorities on future capital requirements for Swedish banks.”

Dividend Policy

The lender, which earlier this year raised its dividend payout ratio to 75 percent of net income, is the second-best capitalized major bank in Europe in terms of core Tier 1 capital, after Svenska Handelsbanken AB. Its dividend ratio is likely to remain the same, even as the government warns it may raise capital requirements and risk-weights further, it said.

There would have to be “a lot of regulation and significantly higher capital rules” for Swedbank to have to revise its dividend policy, Wolf and Chief Financial Officer Goeran Bronner said on a conference call with reporters today.

Sweden’s biggest banks are already subject to some of the strictest capital rules in the world, requiring them to hold a core Tier 1 ratio of at least 12 percent by 2015, a requirement Swedbank and its peers all already fulfill. The government has told banks it may raise capital requirements further to try to protect the economy from any new crisis in an industry that has swelled to four times the size of the nation’s economy.

Swedbank’s net interest income advanced 11 percent to 5.64 billion kronor in the third quarter while net commission income rose 6 percent to 2.52 billion kronor. The bank recovered 56 million kronor of money set aside for loan losses after reporting impairments of 36 million kronor a year earlier.

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