Bank Fees at Risk in Sweden as Negative Rates Aren't Only Threat

  • Moody's says MiFID II rules will add to Swedish bank headwinds
  • Continued negative rates may have ratings effect, Moody's says

The fees and commissions that Swedish banks have relied on to offset losses from negative rates may now also be at risk, according to Moody’s Investors Service.

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The development couldn’t come at a worse time. Banks in Scandinavia’s biggest economy were last month told to use tougher risk-weight calculations for their assets. A strengthening krona means the central bank is unlikely to remove stimulus any time soon, making it hard to earn money through lending. Meanwhile, revelations in the so-called Panama Papers have fueled public anger over the alleged misdeeds of the financial industry.

Now, tougher competition and new rules for investment services and lending will eat into fee and commission income, Oscar Heemskerk, a banking analyst at Moody’s, said by phone. That won’t mean ratings adjustments in the short run, but such measures can’t be ruled out, he said.

“We think new loan origination fees may be affected by the introduction of debt-to-income measures in Sweden,” Heemskerk said. At the same time, the European Markets in Financial Instruments Directive, or MiFID2, “may over time well have a negative effect on fee and commission income from asset management operations.”

With the Riksbank predicting negative rates may last until 2018, Sweden’s banks have tried to adapt their businesses to rely more on asset management to generate revenue and on cost cuts to preserve profits.

Svenska Handelsbanken AB, the first of Sweden’s four big banks to report this month, said net fees and commission dropped 6 percent in the first quarter from a year earlier. It bought a Dutch asset manager with 2 billion euros ($2.3 billion) under management in an effort to boost revenue.

Fee income at Swedish banks faces “headwinds,” Kristin Dahlberg, an analyst at Jefferies Equity Research, said in a note on Tuesday. Much of that effect is from the selloff in equity markets that hit in the first quarter.

Heemskerk says two other important factors will add to the headache facing banks:

  • Regulation: Banks will start to adjust to new market rules which will limit their ability to charge clients a fee for distributing the investment funds they manage. Though MiFID probably won’t come into force until 2018, banks will have to start changing their operations to accommodate the rule, Heemskerk said.
  • Competition for residential mortgage clients: Banks have been able to keep fees up despite falling central bank rates, but “margin pressure will continue,” he said. “Sweden is a competitive market, with four dominant banks and many smaller players.”

All in all, the headwinds facing Swedish banks have prompted equity analysts at Citigroup to cut their underlying earnings-per-share estimates for 2016, given the “challenging quarter,” in an April 18 note.

Until recently, Swedish banks had managed the negative rate environment well, Heemskerk said.

“We’ve seen large banks make substantial dividend payments, and understand they want to keep their equity investors happy, which we think is healthy,” he said. “At the same time, capital has continued to be built up, and that’s not a bad thing either for the creditors.”

But given the outlook for rates, banks will come under greater pressure, he said. “If things were to deteriorate substantially beyond current expectations, then of course we could look at ratings.”

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