* Swedish banks had 13 percent ROE on average for 2013
* Major European banks struggling out of crisis with average
7 pct ROE
* Swedish banks' cost-income ratios at low end of Europe
* Analysts see Swedish bank shares as stable, high-yielding
By Mia Shanley and Johan Ahlander
STOCKHOLM, Feb 21 Swedish banks are pulling
ahead of the pack in Europe, showing their peers it is possible
to stay on top of regulatory demands to hold more capital while
rewarding shareholders with a focus on profitability rather than
It was not long ago that Swedish banks said the double-digit
profitability of years past was out of reach, given the mountain
of regulations introduced to prevent a repeat of the 2008
Yet Sweden's main four banks - which had their share of
problems in areas such as loans to the shipping industry and the
Baltic countries during the downturn - earned a return on equity
(ROE) of 13 percent in 2013, almost double the less than 7
percent average at the 20 of Europe's 30 largest banks that have
reported so far.
The Swedes' buoyant returns were achieved due to major cost
cuts and sharply lower loan losses, despite sluggish economic
growth and slim margins in a period of low interest rates.
Investors and analysts say Swedish banks are providing a
roadmap for European banks still trying to find their way out of
"In the Nordics, most of the banks have decided that if
there is no natural growth, then don't try to force growth,"
said Nick Anderson, a London-based analyst at Berenberg bank.
"Most European banks are as much focused on growth as returns.
The French talk about growing in Asia, (Spain's) BBVA is
considering expanding its investment in Turkey."
Nordic banks, in contrast, cut their losses and ran from
Russia, Ukraine, Poland and Ireland.
"You see a pretty significant risk transformation taking
place in the Baltics and eastern Europe in this bank," said
Swedbank CEO Michael Wolf, whose bank had a near 15 percent ROE
on continuing operations.
That transformation has lifted them above the fray during
recent turbulence in emerging markets.
"They have a tough regulator and very logical, sensible
management teams who are not trying to punt the world in six
months but just steadily churning out good returns," said Edward
Firth, an analyst at Macquarie.
The Nordic bank share index, which includes the
"Big Four" - Nordea, Handelsbanken, SEB
and Swedbank - has quadrupled in five
years, dwarfing an 80 percent rise in the European banking index
Analysts are not gung-ho about further gains - Thomson
Reuters data shows 48 "hold" recommendations on the Swedish
banks, outstripping the 40 "buys" or "strong buys" - but they
say the capital return story is solid, so their premium to
European rivals is likely to hold up.
Anderson calls the banks "stable dividend cash cows".
In a note titled "Dividend Vikings", Citigroup said Sweden
could be the next Australia - the "poster child" for dividends,
where bank payouts averaged nearly 80 percent of earnings for
The Swedish banks will pay out 66 percent of earnings on
average, a stark contrast to many peers, which are skipping
dividends or keeping them low ahead of stress tests of Europe's
financial system later this year.
Swedish banks are among Europe's most well-capitalised banks
and are already ahead of requirements that they have Core Tier 1
capital of 12 percent from next year. The European Banking
Authority, the EU banking watchdog, expects banks to have a core
capital ratio of 8 percent.
"If investing over 3-5 years, they are going to churn out
good tangible book growth and good dividends," said Firth.
Citigroup forecast an average dividend yield for 2014 of 4.5
percent for the Nordic banks, putting them near the top in
Europe, compared with an average 3.3 percent for the region.
The rest of Europe faces a long grind to get its house in
While Swedish banks' cost-to-income ratio reached an average
49 percent in 2013, the 20 largest European banks that have
reported had a ratio of 61 percent, Reuters calculations show.
Deutsche Bank and UBS were close to 90
percent, while Credit Suisse and Barclays
approached 80 percent.
In some ways, Sweden is in a sweet spot. Its banks conduct
90 percent of their lending in the Nordics, whose economies have
outperformed the rest of Europe, and where tech-savvy clients
have embraced internet and mobile banking, helping them keep
Sweden's big four enjoy little competition in their main
retail businesses, dominate 70 percent of deposits and lending
in Sweden and have a loyal customer base - too loyal, according
to Daniel Liljeberg, chief economist at the Swedish Homeowners
Swedish banks also enjoy average labour costs that are well
below their peers. Profitability is further boosted by low loan
losses, which ate up just 3 percent of total income in 2013,
against an average 17 percent for the 20 largest European banks
that have reported.
With such favourable metrics, slow loan growth is an easier
fate to bear.
"We are adjusting to that and accepting that that is the way
it is, so we are taking out our activity-related costs,"
Christian Clausen, CEO of the region's biggest bank Nordea
, told Reuters.