Hot Swedish Property Market Raises Questions on Swedbank Margins

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  • Swedbank profits rise, but margins may be hard to maintain
  • Danske Bank says housing risks a threat to bank’s business

Investors in Sweden’s biggest mortgage lender should take a closer look at the potential risks lurking in the country’s housing market.

Because Swedbank AB’s business model leaves it more exposed to the property market than others, Danske Bank A/S says there’s reason to treat the bank with caution.

“It all comes down to the Swedish housing market and the dynamics there,” Matti Ahokas, an analyst at Danske in Helsinki, said by phone. “Given how strong it has been -- and Swedbank has the biggest exposure -- it’s difficult to see anything could improve and, if anything, there’s a risk of a correction.” Though that “wouldn’t be the end of the world,” Ahokas said it clearly “wouldn’t be a positive driver.”

Sweden was identified as one of four countries this month in an analysis by Moody’s Investors Service, in which a “potential housing market correction” was listed as a risk. The rating company’s analysis is something “you can’t disregard,” Ahokas said.

Swedbank’s chief risk officer, Helo Meigas, said the lender is confident “about the credit quality in the mortgage market,” in comments made during a conference call after the bank published first-quarter results. Swedbank reported a 19 percent increase in net income last quarter from a year earlier, beating analyst estimates, as the industry passed higher interest rates on to customers.

Net income rose to 5.12 billion kronor ($578 million), the Stockholm-based lender said in a statement on Tuesday. That compares with a 4.98 billion-krona estimate in an analyst survey compiled by Bloomberg. Net interest income rose 9 percent, as the bank offered more home loans and older mortgages were refinanced at higher margins.

Meigas said Swedbank saw signs customers are better able to withstand house-price swings “because of the general increase of the households’ wealth,” but also because mortgage costs and housing costs “are at a very low level,” she said.

“If house prices continue to go up, then the fragility of the house price itself will increase, so the probability for correction is higher,” Meigas said. “At the same time, this, we believe, will primarily be affecting consumption, not whether our clients are able to pay their mortgages or not.”

Ahokas at Danske said Swedbank makes a “good point” in its assessment of how a housing market correction might affect the lender. “It won’t impact loan losses,” he said. “But it will have an impact on the rest of the business, including small corporates. Just look at Swedish house prices -- they’ve gone through the roof. If anything, it is a risk.”

The bank has managed to generate more revenue from lending by passing on higher market rates to customers.

“There is an effect from the back book, when that comes in and is rolled over,” Chief Executive Officer Birgitte Bonnesen said in a press conference. “It is becoming tighter, of course, but it is still there, and you’ll continue to see that this year.”

Bonnesen acknowledged that higher interest costs may eat into margins. “When you look at the margins in new lending, the margins are actually coming down this quarter due to the increase in the underlying interest rates in Sweden,” she said.

Kristin Dahlberg, an analyst at Jefferies International, said Swedbank’s ability to maintain its margins will be key. Keeping the “presently high mortgage margin will be difficult when interest rates rise,” she said in a note. That could ultimately affect earnings estimates, with Swedish mortgages representing about half of Swedbank’s loan exposure, she said.

Shares in Swedbank fell 1.3 percent to trade at 208.80 kronor as of 12:07 p.m. in Stockholm. The Bloomberg index of European financial stocks was little changed. Anders Karlsson, Swedbank’s chief financial officer, said the bank is reluctant to be a “first mover” on future rate increases for customers. Any rate movements will be “incremental, small changes, step by step,” he said on a conference call.

Rising Interest Costs

Chart shows Stockholm interbank offered rates, the benchmark for Swedish mortgage rates.

Swedish banks face a tougher operating environment as government measures to curb runaway household debt eat into loan growth, and competition for corporate clients picks up. Other costs facing the industry include higher fees to build up Sweden’s resolution reserve, which is supposed to protect taxpayers from financial crises. Nordea Bank AB has threatened to leave the country if the proposal is adopted.

Other Income

Swedbank said income from commissions grew 7 percent. It also booked one-time income of 680 million kronor from the sale of an online real-estate portal, Hemnet. The bank’s common equity Tier 1 ratio reached 24.2 percent of risk-weighted assets at the end of the quarter, up from 23.7 percent a year earlier.

The lender allocated extra capital in the first quarter after finding that its models underestimated the default frequency for oil-related exposures and leases. Bonnesen said that allocation is likely to remain in place after the bank gets supervisory approval for an updated model.

“I would say that the capital, the extra capital, that we’ve allocated now, will probably end up in that range, so that you can see that it is something that will stay,” she said.

But there are signs that investors are focusing less on capital strength. Despite boasting some of Europe’s highest capital levels, Swedish bank shares have started under-performing those of their peers.

Read more: Nordic banks lose their appeal amid high valuations

Swedbank’s stock is the weakest in the Bloomberg index of European financials so far this year, after Bank Popular Espanol SA, having lost about 4 percent. That compares with an 8 percent gain in the benchmark index over the same period.

Like other Nordic banks, Swedbank is trying to make profits in an environment in which interest rates have been negative for years. To cope, lenders have tried to reduce costs and diversify their income streams, relying more on areas such as wealth management. Greater use of digital technology is also spreading in the region.

Bonnesen said in the statement that Swedbank’s “Swedish operations saw a high level of activity, mainly in mortgage loans, which generated increased volumes and margins.” At the same time, “rising stock prices bolstered income” at the bank’s asset management unit, while “our savings initiatives are beginning to produce results,” she said.