Earnings season is upon us and the Swedish banks have begun reporting earnings. Their results have seen huge writedowns that demonstrate large and continued exposure to souring loans in the Baltics.
Handelsbanken and Nordea reported today. Despite the writedowns, you do get the sense that things are going better than expected as the banks beat expectations. Nordea even raised its guidance. But SEB and Swedbank, major lenders to the Baltics, are still on the ropes as previous earnings from those banks attest.
The Danish daily Berlingske Tidene calls the first six months of 2009 “one of the best in Nordea’s history.” It notes that “despite the crisis atmosphere net income was almost a record, and management will need to revise full-year guidance upwards.” Net income was 616 million Euros against expectations of only 421 million. That’s pretty spectacular.
But what about loans to the Baltics? Berlingske Tidene reports.
Impaired loans in the Baltic region as a whole – including both non-performing and performing – have run up to 418 million Euros, equivalent to 550 basis points of total loans and receivables.
The total writedowns for the Baltic countries was 202 million Euros…
Long story short, Nordea faces the same problems with loans in the Baltics that JPMorgan (JPM) faces with credit cards and residential property in the U.S., i.e. rising losses. In both cases, these losses have been offset by large profits due to a favorable interest rate environment. Whether this continues is the question.
It was the same story at Handelsbanken, with the company beating expectations. The bank reported an operating profit of 3.445 billion krona, which was slightly more than last year and well above the 2.924 billion krona consensus. The Swedish krona is trading at 7.69 to the dollar, so we’re talking about $450 million in profit.
Loan losses were up to 939 million krona from 571 million last year. There was no initial report of exposure to the Baltics as Handelsbanken was not one of the biggest lenders amongst the Swedish banks. All in all, this was a good report.
SEB reported yesterday and they showed a large loss of 193 million krona, compared to the 2.8 billion profit of 2008. This huge swing is due to large credit losses, he majority of it in the Baltics. SEB had 3.6 billion krona in credit losses, 74% of which came from the Baltics. This forced them to write down 2.4 billion in loans in the Baltics and Russia.
The contrast is striking and its all due to the reckless lending in the Baltics. Expect more of the same going forward.
Swedbank is the other big lender in the Baltics with SEB. So they had dismal earnings as well in a report from last Thursday. The FT reports:
Swedbank, the largest lender in the Baltics, posted net losses of SKr2.01bn ($257m), compared with net profits of SKr3.6bn a year earlier.
It was the bank’s second consecutive quarterly loss and much worse than the SKr1.27bn deficit forecast by analysts.
Loan losses soared from SKr423m a year ago to SKr6.67bn, with about two-thirds of the amount in the Baltics and a third in Ukraine.
In response, the bank said it planned to reduce staff by 3,600, about 16 per cent of its workforce, by this time next year, with most of the cutbacks in the Baltic states.
Shares were up on the announcement, but I expect more of the same going forward. Whether Swedbank needs more capital remains to be seen.
Now, just two weeks ago I mentioned a plan by Swedbank and SEB to write down personal loans in Latvia, the hardest hit country in the Baltics, by 10% in exchange for a Latvian government guarantee against further losses (see Transferring Swedish bank risk onto Latvian taxpayers). It is unclear whether these writedowns were taken or even if this proposal has gotten a green light, especially given the problems Latvia is now having getting more money from the IMF. But, clearly, this would mitigate any losses at Swedbank and SEB.
The difference in profitability between the four banks does show that the banking system in Sweden is doing just fine outside of the problems with Baltic exposure. I take that as an encouraging economic sign in Sweden that may be indicative of other countries in Northern Europe as well.
Nordea overrasker positivt – Berlingske Tidene
Nordeas vinst klart över förväntan – Dagens Nyheter
Handelsbanken överträffar prognoser – Dagens Nyheter
Baltic exposure hits Swedish bank – BBC News