LONDON (Reuters Breakingviews) - The likes of SEB, Handelsbanken and Nordea are stable, well capitalised and dull. Investors have spurned them in favour of eurozone banks. Yet the Swedes’ generous dividends are attractive – and if Nordea’s move to Finland leads to lighter regulation, they may get more so.
The Swedes have market capitalisations considerably higher than their book value, because their charms are pretty well-flagged. Their capital ratios are high, they pay 70 percent of their earnings to investors and their average costs are just 44 percent of income – all of which knock most European banks into a cocked hat.
What stops them rising higher are the onerous demands of Swedish regulators and politicians plus the risk of rising household indebtedness. The former prompted Nordea’s decision to relocate its headquarters to Finland, a move it claims would save it 1.1 billion euros. Peers could follow if Sweden insists on tougher regulation. Besides, core tier 1 ratios already average over 20 percent, well in excess of European rivals.
Household debt cannot be downplayed. The average Swede has debt equivalent to around 180 percent of net disposable income, compared with a eurozone average of around 120 percent, according to OECD data. However, Moody’s believes the banks could withstand house price falls of up to 30 per cent with a limited impact on earnings.
While shares in the Swedish banks have slid, those in Italian, German and Spanish banks have rallied sharply this year, buoyed by the prospect of rising rates and better economic growth, after trading at deep discounts to book value. Analysts’ consensus, compiled by Berenberg, projects 15 per cent annual earnings growth for European banks over the next three years. But whatever the optimism over interest rates rising, short-term euribor rates – against which many eurozone loans are actually priced – have declined. Loan growth also remains subdued.
The potential for earnings disappointment in the euro zone thus remains high. Moreover, Sweden’s remaining banks – which already have dividend yields of 5 or 6 percent compared with 3.5 percent for the Eurostoxx banks index – have an opportunity to press the regulator to go easier on capital requirements and fees, unless it wants others to go the way of Nordea. That suggests they deserve a warmer reception.