Swedbank's Q1 Results Reveal Further Problems in the Baltics

Swedbank (SWDBY.PK), one of the biggest banks in the Baltic countries, suffered its first loss in the current recession amounting to a total of 3.4 billion SEK ($414 M) compared to a profit of 2.9 B SEK ($360M) a year ago and a profit of 1.9 B SEK ($234) in Q4 of 2008. (Note: the dollar amounts were calculated using the latest rates. The Swedish krona has fallen considerably during the recession).

From 2009 Q1 results, page 3:

The share of impaired loans has increased to 8.9 per cent in Ukraine, 8.5 per cent in Latvia, 3.6 per cent in Lithuania and 2.5 per cent in Estonia. Swedbank expects a deep-rooted and persistent recession in these countries.

Swedbank's loan portfolio has shrunk around 7-10% in the region in 2009 and a further fall is expected. Swedbank has launched a program to reduce the cost base around 15% in the Baltics.

Further pain down the road

The situation of the banking sector in the Baltics further illustrates the severity of the recession in the region. The economies of Estonia, Latvia and Lithuania fell 9.7, 10.4 and 1,5 per cent in Q4 of 2008, respectively. Adding to the pains of the Baltic countries are deteriorating exports, which have fallen off a cliff, quite literally. The only positive sign is that imports have fallen even more.

According to the estimates of Fitch, which only recently downgraded the credit ratings of each of the Baltic countries, the Latvian economy will contract another 12% this year, while the economies of Estonia and Lithuania will shrink 10%.

Unemployment has reached a new high in all the Baltic countries and a further deterioration is expected. According to the Bank of Estonia, the number of unemployed people will soar to 98,000 (~14%) by Q4 this year from the current 53,500 (7.6%). The central bank expects income to drop 4.7% in 2008 and a further 3.2% in 2010. Average price levels are expected to remain unchanged.

The situation does not look good for Swedbank or any of the other Swedish banks operating in Estonia. While it may turn out to be a great investment years later, your money will certainly be of better use right now.

Disclosure: No positions

Comments

[Kristjan Ve...:]

Actually, Latvia has already turned to the IMF for a loan, but they are unable to secure it because they have not been able to meet the budget deficit requirement (set by the IMF), which is at 5% of GDP. Even with a 40% cut in the budget, Latvia's budget shortfall will amount to 7.7% of GDP. If Latvia doesn't meet the IMF's request of 5%, they will not receive the loan.

Apr 27 07:14 AM

[Valley Boy:]

It sounds like the IMF needs to liberalize its terms at least for
the duration of this economic crises. Peaceful democratic
countries (such as the Baltics) should be given extra consideration
by the IMF as part of its terms.

Apr 27 04:10 PM

[Old Trader:]

This article just adds to the mutterings that the next financial crisis might well have its origins in Eastern Europe. Its my understanding that Austrian banks also have heavy exposure in this region.

Apr 27 08:42 PM

[Kristjan Ve...:]

Freya,
Latvia hasn't received a penny so far. According to their agreement with the IMF, they have to bring their budget deficit down to 4.9% of GDP. With a 40% cut in all wages and expenses, the Latvian budget deficit stands at around 7%. Right now they are hoping to reconsider the agreement.
By the way, IMF gave Latvia two options - either devaluation or cuts in expenditure.

And yes, you are correct on the Austrian banks having huge exposure in Eastern Europe. I'm not so sure about Latvia and Lithuania, but Estonian banks are all owned and run by Swedish banks.

Apr 29 05:08 PM

[Freya:]

Kristan: when did the IMF turn down Latvia, the last I saw was Dec of 08 when Latvia received a $10.5 Billion loan from the IMF. Do you have later news?

Apr 28 01:06 PM

[Freya:]

old trader: Austrian Banks have very heavy exposure.

They asked for help from the EU, Germany refused. Germany has spearheaded other denials of monetary aid to the Easter Bloc. That's why the IMF was funded to an extreme, the World can now provide aid as needed without a specific region footing the Bill.

Ge has large Commercial property exposure in the Eastern Bloc as well, last I heard. Write offs there would have been deeper than here.

Apr 28 01:18 AM

[Freya:]

The IMF's new role is to lend to these countries bypassing the usual requests for aid from the EU, World Bank, the USA, etc.

If SwedBank has a problem, it can go to the IMF.

Apr 27 03:13 AM