SNL Financial: The Nordic revenue warning for Europe’s banks

Nordic banks have disappointed and this has serious implications for European banks.

In recent reporting seasons, disappointment would have been unthinkable; reliability was the Nordic banks’ stock in trade. Yet the third-quarter 2015 revenue and income figures from the biggest Swedish lenders simply look bad.

Low or negative interest rates have hit revenues, resulting in double-digit declines in net attributable profit at Nordea Bank AB, Swedbank AB and Skandinaviska Enskilda Banken AB; Svenska Handelsbanken AB fared a little better but still saw a 6% drop in profits.

The implications for the rest of Europe’s banks are stark.

"Nordic banks are the proverbial canary in the coal mine, with [third-quarter] results illuminating the fragile nature of bank revenues and the increased level of dividend uncertainty," Berenberg analysts wrote, emphasizing also the regulatory pressure on capital.

Very few European banks perform as well as the Nordics, achieving double-digit returns on net interest margins around 100 basis points, Edward Firth, bank analyst at Macquarie, told SNL.

"They have done pretty well. They are running off net interest margins around 150 basis points while Lloyds Banking Group Plc is generating similar returns off margins at 260 basis points," he said, observing that few European bank managements shared the Swedish banks’ hawkish concentration on costs.

Simon Adamson, a bank credit analyst at CreditSights, pointed out to SNL that they have had ultralow and sometimes negative interest rates in Sweden for some time.

"Banks have been talking about margin pressure but it has taken some time to be really visible," he said. "They have probably gone as far as they can to preserve their margins and it has just hit them in the third quarter. Overall, their profitability is very good compared to most European banks. If you look at the U.K. banks’ results, they too were pointing to margin pressure."