Top-Ranked Banks Slip to Bottom as Scandinavian Haven Splinters

  • Credit Suisse says investors now more selective as risk grows
  • High valuations proving a deterrent despite capital strength

The haven play just isn’t what it used to be for Nordic banks.

Cushioned with capital and relatively unburdened by non-performing loans, Scandinavia’s big six -- Nordea Bank AB, Danske Bank A/S, DNB ASA, Svenska Handelsbanken AB, SEB AB and Swedbank AB -- outperformed European peers in the years following the financial crisis. Now, with valuations hovering at highs, the banks risk falling out of favor.

Swedbank and Handelsbanken have already lost so much since December that they’re among Europe’s worst performing bank stocks. That’s despite being the best capitalized banks. The point is that industry prospects are improving and that’s eating into the relative advantage Nordic banks have had, according to Mads Thinggaard, a financial analyst at Handelsbanken in Copenhagen.

“We can see that expectations for return on equity in European banks are increasing much faster than for the large Nordic banks, so they could be run over,” Thinggaard said. “There is a risk of a selloff of Nordic banks, that investors will jump over to banks south of Denmark.”

Nordic bank shares lagged behind their European peers on Monday as the results of the French election sent stocks higher across the board. The Bloomberg Europe Banks and Financial Services Index climbed as much as 4.5 percent. Though all stocks in the index rose, Handelsbanken, Swedbank and SEB were among the worst performers, with Nordea at the very bottom of the gauge at one point during the day.

This year, Swedbank has lost about 5 percent, making it the weakest bank stock not just in the Nordics but in Europe, after Banco Popular Espanol SA. Banco Popular may need to raise as much as 4 billion euros ($4.3 billion) in capital. In contrast, Swedbank has Europe’s second-highest ratio of common Tier 1 equity to risk-weighted assets. Handelsbanken boasts Europe’s highest CET1 ratio, but has lost about 2 percent this year, compared with an 8 percent increase in the Bloomberg index of European financial stocks.

Banks in Scandinavia successfully weathered some of Europe’s toughest regulatory demands and the most negative rate environment by venturing into new business areas and passing on to customers the cost of higher capital requirements. Even after recent price drops, shares still trade above their historical averages, Handelsbanken notes.

But investors no longer look at Scandinavia as one homogeneous story and have started selling out of bank stocks they’ve decided are “more vulnerable to the worst outcomes,” according to Jan Wolter, head of European bank research at Credit Suisse. “The screen is done not on a regional basis, but on a valuation basis.”

Nordic banks start reporting first-quarter results this week. Potential weaknesses to look out for include:

  • Denmark’s regulator may demand Danske hold more capital to guard against potential losses in Norway and Sweden, where the bank has been growing rapidly and where house price gains have alarmed regulators, according to Thinggaard. Denmark’s FSA already has warned Danske on Sweden.
  • Sweden’s banks face possible higher fees for a resolution fund, with Nordea threatening to relocate its headquarters if the government doesn’t roll back its demands. Investors will “try to avoid the names where you see one bank which could be faced with higher resolution fees, or banks which aren’t able in any way to mitigate the cost,” Wolter said.
  • Negotiations continue in Basel on a capital floor for banks using internal models to determine requirements. If set high, the floor would be particularly painful for Nordic banks, which actively employ their own models. Preemptive measures of local regulators should limit the impact, according to Danske credit analysts.
  • Growth in lending to households, which has helped mitigate the impact of low demand elsewhere, looks set to slow as regulators impose tougher rules to curb runaway debt. Though corporate borrowing showed signs last quarter of picking up, there’s also heightened competition for clients. That could make it harder for banks to pass on higher capital costs. “It would be helpful to see corporate lending demand pick up overall, especially since mortgage lending has been the key driver of balance sheet growth in the Swedish and Norwegian markets,” Wolter said.

Nordic banks “have been a safe haven in volatile markets,” Wolter said. But with valuations close to record highs, banks’ strong capitalization levels and asset quality “are already reflected in the price,” he said.

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