October 26, 2016 / 6:15 AM / 3 years ago

UPDATE 2-Nordea joins the club as Swedish banks brush off negative rates

* Swedish banks boosted by strong economy, prudent lending

* Nordea Q3 operating profit better than expected

* Sees mortgage margins improving (Recasts, adds detail, context, analyst)

By Johan Ahlander

STOCKHOLM, Oct 26 (Reuters) - Nordea, the Nordic region’s biggest bank, reported forecast-beating profit on Wednesday, joining its Swedish peers in a set of results that would be the envy of most European lenders despite interest rates at record lows.

Swedish banks have had to contend with sub-zero interest rates since early 2015, with the central bank cutting them further this year to an unprecedented -0.5 percent to stave off stubbornly low inflation.

Yet Handelsbanken, SEB, Swedbank and Nordea made a combined operating profit of $3.2 billion in the third quarter, putting them on track to deliver hefty 2016 dividends to shareholders.

Low credit losses and the ability to raise mortgage margins have supported the bottom line for a Swedish banking sector that paid out close to 60 billion crowns ($6.73 billion) in dividends last year

“Of course that (low interest rate) has a negative impact, but it’s not at as important as having a solid credit book,” said Danske Bank analyst Matti Ahokas, adding that the main difference between Swedish and European banks has been much lower loan losses.

“The low loan losses are a reflection of the Swedish economy, that’s the most important thing.”

The export-driven Swedish economy has been growing fast in the past few years, boosted by low interest rates and a weak currency. Gross domestic product (GDP) grew by 4.1 percent in 2015 and is projected to expand by 3.5 percent this year.

That compares with euro zone GDP that grew 1.5 percent last year and is forecast to expand by 1.6 percent this year.

The low interest rates have also heated up an already buoyant housing market, with accompanying growth in mortgage lending. And though negative rates mean the banks now have to pay to deposit money with the central bank, they have been able to offset part of the cost by raising margins on mortgages.

LENDING MARGINS

“The biggest lesson to be learned is that if you are in a situation with negative rates, you have to compensate one way or the other and the most important way is the margins on the lending side,” Ahokas said.

Nordea Chief Executive Casper von Koskull said that the bank has shown in the past few quarters that it has the ability to make progress.

“The margin is now improving and I expect the improvement to continue into the fourth quarter,” he added.

The strong performance is in contrast to many banks in the euro zone. In the region’s largest economy, Germany, banks are struggling with wafer-thin margins and some lenders are even looking at the previously unthinkable possibility of charging customers for holding deposits.

Nordea posted a third-quarter operating profit of 1.15 billion euros ($1.26 billion) compared with a mean forecast of 1.06 billion euros in a Reuters poll of analysts and 1.03 billion euros a year ago.

Shares in the bank were up 1 percent at 1307 GMT, outperforming a 0.5 percent drop for Stockholm’s blue-chip index .

Nordea also said that its Tier 1 capital ratio stood at 17.9 percent at the end of the third quarter, up 1.1 percentage points from the previous quarter.

Sweden’s financial watchdog increased the capital requirements for Nordea to 17.3 percent this month, saying the bank had underestimated the risk in its corporate portfolio.

Nordea has said it would like to have an internal buffer of 0.5-1.5 percentage points above the FSA’s requirement. ($1 = 8.9131 Swedish crowns) ($1 = 0.9156 euros)

Editing by David Goodman

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