Negative rates put Nordic banks under pressure
Retail banks to be hit hardest; corporate clients set for higher charges.
The negative deposit and repo rate regimes in Denmark and Sweden are set to hit profits in the Nordic banking sector, with retail banks likely to take the hardest blow.
Denmark’s Nationalbanken and Sweden’s Riksbank cut deposit and repo rates for different reasons in January and February, but analysts warn both measures will affect Nordic banks in the same way – squeezing net interest margins, in turn hurting profits.
Barclays equity strategists Christoffer Rosquist and Kiri Vijayarajah argue that SEB and Swedbank could be affected most by the Riksbank cutting the repo rate to minus 0.1% from 0% on February 12.
This followed Nationalbanken’s move in late January to cut its deposit rate by 15 basis points to minus 0.5% after selling kroner in an effort to keep the Danish currency close to its peg of 7.46 per euro.
By comparison, the Riksbank took action to help tackle low inflation, and at the same time launched a bond-buying programme and reintroduced rates for what it calls its fine-tuning operations at 0.1% either side of the repo rate.
The lower rate, at -0.2%, functions like a deposit rate with the central bank, while the higher rate, at zero, functions like a lending rate.
In simulating a 10 basis point margin contraction, Rosquist and Vijayarajah say SEB’s 2015 net profits could decline by up to 3.1% on the year before, with Swedbank’s net profits falling by 2.4%, and falls of 2.1% and 0.8% for Handelsbanken and Nordea, respectively.
These declines are based on analysis where the banks do not move to mitigate the impact of negative rates, which can include hedging, running down deposits, charging customers more, or offsetting margin pressure by boosting fee-based revenues. During its 2014 annual results conference call on February 3, Göran Bronner, chief financial officer of Swedbank, said that while the bank had already seen pressure on deposit margins in its Swedish banking division, it has “been mitigated by continued repricing of mortgage loans”. Bronner said the bank has also been repricing corporate loans.
SEB said in its 2014 annual report that “negative effects of lower policy rates in all markets have been offset by increased financing of structured transactions and mergers and acquisitions and improved lending margins”.
However, the one way it simply cannot mitigate is by passing negative rates on to retail customers.
“Nobody would dare to do it,” says Omar Keenan, an equity analyst at Deutsche Bank in London. “I’d be shocked if we saw negative rates of interest on current accounts.”
That’s essentially why Nordic banks with a large retail banking business will have a tougher time navigating negative rates compared to those that are more focused on corporate banking.
“When interest rates come down, you ultimately need to pay less on deposits, and it’s so much harder to pass that on to your retail customers than it is to corporate clients,” says Keenan.
I’d be shocked if we saw negative rates of interest on current accountsOmar Keenan, Deutsche Bank
Most banks’ corporate cash management mandates are priced off bank interest rates anyway, he says, so “these clients are not only better aware of what negative rates may mean for them but in many cases the repricing happens almost automatically. There could be some form of cross-subsidization happening, where a bank charges corporates more to compensate for what it can’t charge on the retail side”.
He adds: “That’s a possibility, but I’ve not seen any evidence of it yet.”
On the positive side, Nordic banks are in good shape, broadly boasting healthy and robust common equity tier one capital ratios – over 20% for Handelsbanken and Swedbank – and good returns on equity compared to their European peers.
In addition the Nordic economies are growing. Growth was 1.6% last year and is forecast to rise to 1.9% this year versus 1.2% in the eurozone, and its banks are still able to deliver on healthy dividends.
However, as their fourth quarter results showed, profits are already under pressure, and could come under more this year.
Handelsbanken, for instance, undershot expectations by over 10% in reporting a 14% drop in net profit for the quarter to SKr3.34 billion. That was mainly the result of a fall in trading income and a single-customer exposure in Denmark, which pushed its bad loan charge to SKr697 million.
Danske Bank also failed to meet expectations, reporting DKr2.8 billion of net income for the quarter, hampered by trading income, which slumped by a third. It was a broadly similar story for Swedbank and SEB too.
Swedbank’s net income of SKr3.8 billion, and SEB’s SKr5.69 billion didn’t match what the market had expected, leaving Nordea to buck the trend and report a 13% rise in net income to €877 million driven largely by cost-cutting.