UPDATE 2-Swedbank sees tougher times ahead in mortgage market
* Q2 profit of 4.4 bln SEK vs forecast 4.6 bln
* Says core tier 1 ratio needs to be around 15 percent
* Planning for period of low rates, weak credit demand
* Sees rising importance of leverage ratio (Recasts, adds CFO, analyst comments)
By Mia Shanley and Oskar von Bahr
STOCKHOLM, July 16 (Reuters) - Swedbank, one of Europe's strongest banks, reported a fall in second quarter profit on Tuesday and warned of tougher times ahead in Sweden's mortgage market due to increased competition.
The bank's profit fall, due to unexpected writedowns on property management business and IT systems, follows a period of strong growth, backed by a resilient Swedish economy and a Baltic recovery, in contrast to other parts of Europe. Latvia, for example, is expected to be Europe's fastest-growing economy this year.
Swedbank warned that tougher competition in the mortgage market, where it wants to maintain a 25 percent market share, could squeeze margins in the months ahead.
"We have worked with a lot of tailwind from repricing and funding improvements," Goran Bronner, chief financial officer said on an analyst call. "But now we are now facing a situation where there headwinds are building up in the pricing environment. That's a clear change in the picture."
This more measured tone contrasted with rival SEB, more focused on corporate clients, which on Monday beat forecasts on all income lines as its corporate customers started to take the plunge on investment decisions.
Swebank's operating profit fell 3 percent to 4.4 billion crowns ($657.6 million), missing a mean forecast for 4.6 billion seen in a Reuters poll of analysts due to the writedowns.
"Lukewarm results are unlikely to be good for a bank trading around twice book (value)," Societe General wrote in a note. "Valuations are high, and Nordic banks need to keep delivering."
Swedbank shares were down over two percent at 0928 GMT, compared with a Stockholm bourse that was up 0.3 percent . Swedbank is up 22 percent year-to-date compared with a 3.4 percent increase for the European bank index.
PLENTY OF CAPITAL
Swedish banks have been attractive to investors because of their focus on cutting costs, scaling back risky lending and offloading assets which have weighed on profitability.
Swedbank, for example, recently pulled the plug on Russia and sold its Ukrainian subsidiary to focus on its home markets.
The bank has also built up a solid core Tier one capital ratio - a measure of financial strength. This continues to swell, reaching 17.2 percent at the end of the quarter, making Swedbank one of the most strongly-capitalised banks in Europe.
The hope now is that Swedbank will start sharing some of that excess capital with investors.
Analysts believe Swedbank will eventually pay special dividends or restart a buyback programme shelved two years ago.
"Pretty much any way you cut it, the bank seems to be the most overcapitalised," said Nick Davey, an analyst at UBS. He said it was not a question of if the bank would give back excess capital to shareholders, but when and how much.
Societe Generale said it believed Swedbank had nearly 10 billion Swedish crowns ($1.5 billion) of excess capital.
But Swedbank said there were many moving targets in the current debate by global regulators about how banks calculate capital and which ratios to focus on.
Sweden's financial watchdog recently imposed a 15 percent floor on the country's biggest banks' "risk weights" for mortgages in order to get them more in line with European peers.
Swedbank said the new rules meant it would probably have to hold around 15 percent in core Tier one capital compared to a previous plan for 13 to 15 percent.
The bank hopes to provide new capital targets at the end of the year as it waits for outstanding regulatory issues to be settled. One of these is a leverage ratio that regulators are currently focused on to keep banks from taking on too much risk.
"We believe that the leverage ratio will become a factor going forward. We are looking fine on that line but it is an issue that is increasing in importance in our view," CEO Michael Wolf said on a call with analysts.
Swedbank has a leverage ratio of 4.5 percent.
($1 = 6.6905 Swedish crowns)
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