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PP RUEHIK
DE RUEHSM #0701/01 3130615
ZNR UUUUU ZZH
P 090615Z NOV 09
FM AMEMBASSY STOCKHOLM
TO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC 4861
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 STOCKHOLM 000701 
 
TREASURY FOR DAVID WRIGHT 
 
USEU FOR MATT HAARSAGER 
 
SIPDIS 
 
C O R R E C T E D  C O P Y (clarification in para 6.) 
 
E.O. 12958: N/A 
TAGS: EFIN PREL ECON SW
SUBJECT: SWEDISH BANKING SECTOR STABLE, BUT CHALLENGES REMAIN 
 
STOCKHOLM 00000701  001.2 OF 003 
 
 
 
 
¶1.  Summary: All four major Swedish banks continued to see 
deteriorations to their credit portfolios in the third quarter 
primarily as a result of exposure to the Baltic region and Ukraine, 
but signs of improvement appeared in the form of decelerating credit 
losses. Market commentators continued to express confidence in the 
stability of the Swedish banking sector, but also noted that 
significant challenges remain in the form of sizeable credit losses. 
Swedbank and SEB especially remain at the risk of accelerating 
credit losses as a result currency devaluation in the Baltic region. 
With its decision to keep the benchmark rate flat and extend 
additional loans, the central bank recognized that the situation on 
financial markets, while much improved, has not returned to 
pre-crisis levels. Amid concerns of a housing bubble, the Central 
Bank Governor has warned that rising housing prices are not 
sustainable, and called on households and banks to plan for interest 
rates to rise over the long run. End Summary 
 
Swedbank Losses Up but Credit Losses Decelerate 
-------- --------- ----- 
¶2.  Swedbank on 20 October was the first to report third quarter 
results, which included a before tax loss of SEK 2.582 billion 
($369.1 million), an increase of SEK 733 million ($104.8 million)in 
losses from the previous quarter primarily due to continued large 
loan loss provisions in the Ukraine, Latvia, and Lithuania. The loss 
is in stark contrast to the SEK 3.113 ($445.1 million) in profits 
from a year ago. Despite the worse than expected loss, Swedbank's 
CEO Michael Wolf expressed optimism as credit losses in the Baltic 
region are no longer worsening at the same pace as before. Credit 
losses in the Baltic region decreased from net SEK 4.0 billion ($572 
million) in the second quarter to SEK 3.3 billion ($469 million). 
Latvia registered the highest ratio of impaired loans at 19.74 
percent, followed by Lithuania (12.33 percent), and Estonia (6.42 
percent). According to reports in Stockholm Daily Svenska Dagbladet, 
Swedbank expects to seize and administer property in the Baltic 
region worth SEK 5 - 15 billion ($0.715 - 2.145 billion) between now 
and 2011 through its newly formed Swedbank subsidiary Ektornet. 
Swedebank's year-to-date loan losses in the Baltic region amount to 
SEK 11.5 billion ($1.6 billion) and gross total impaired loans 
amounted to SEK 26 billion ($3.72 billion) vs. SEK 7 billion ($1 
billion) at the end of 2008. 
 
¶3.  Swedbank's share of impaired loans in Ukraine increased to 43 
percent as of 30 September, compared with 5 per cent at the start of 
the year as a result of a large depreciation of the Ukrainian 
currency increasing the loan payment burden for many Ukrainians with 
foreign currency denominated loans. Impaired losses stood at SEK 6.2 
billion ($887 million) since the beginning of 2009 until September. 
 
¶4.  Swedbank continues to profit from its Swedish operations. 
Working profits increased by 8 percent to SEK 2 billion ($268 
million) in comparison to the same period last year. Another 
positive improvement is the decrease in the share of impaired loans 
in Sweden from 0.23 percent in the second quarter to 0.05 percent in 
the third quarter. 
 
SEB Bottom Line Improves but Falls Short of Last Year 
---- ----- 
¶5.  Rival SEB's third quarter report revealed a plummeting operating 
profit and continued provisions for credit losses, primarily in the 
Baltic region and Russia. Operating profit in the third quarter 
plummeted by 85 percent compared to the previous year, but after tax 
the profit margin improved from a second quarter loss of SEK 174 
million($24.9 million), primarily the result of SEK 2.394 billion 
($340.9 million) in impairment charges related to SEB's investments 
in Eastern Europe, to SEK 37 million ($5.3 million). Lithuania is 
currently the largest risk country for SEB, its credit losses there 
total almost SEK 1.5 billion ($213.6 million) whereas credit losses 
in Latvia and Estonia combined only total SEK 1.15 billion ($163.9 
million). Provisions for the Baltic region amounted to SEK 2.642 
billion ($376.7 million) or 79 percent of the group's total. Credit 
loss provision continued to increase in Lithuania and Latvia, but 
have decreased in Estonia in comparison to the previous quarter. 
SEB's CEO Annika Falkengren also announced that SEB will not apply 
for an extension of the state guarantee program, which is to end on 
31 October) and stressed that SEB has not previously taken advantage 
of the program. 
 
Nordea and Handelsbanken Beat Expectations 
-------------- 
¶6. Nordea and Handelsbanken reported better than expected results 
due to a jump in earnings from basic lending operations and lower 
loan loss provisions despite registering shrinking profit margins. 
Nordea's operating profit of EUR 832 million ($1.236 billion) was up 
by 2 percent, but down by 2 percent when compared to the same period 
 
STOCKHOLM 00000701  002.2 OF 003 
 
 
last year. Impaired loans, mainly related to Denmark and the Baltic 
region, increased to EUR 3.851 billion ($5.721 billion), up by 9 
percent compared to the second quarter, but showed signs of 
stabilization. In the two previous quarters, the increases were 19% 
and 33% respectively. The provisioning ratio increased from 49 
percent in the second quarter to 51 percent. In the Baltic 
countries, gross impaired loans amounted to EUR 522 million ($776 
million) or 7.05 percent of total loans, compared with EUR 418 
million ($621.4 million) or 5.5 percent at the end of the second 
quarter. The increase in impaired loans was 25 percent from the 
previous quarter, compared to a growth rate in the second quarter of 
63 percent. Handelsbanken reported an operating profit of SEK 3.255 
billion ($464.3 million) down by 6 percent compared to the second 
quarter and 13 percent when compared to the same period in the 
previous year. With zero exposure to the Baltic region or Ukraine, 
the level of impaired loans decreased from SEK 4.385 billion ($625.1 
million) in the second quarter to SEK 3.710 billion ($528.9 million) 
in the third quarter or 0.24 percent of all lending. Overall loan 
losses increased in all of Handelsbanken's areas of operation, 
except for Finland, with the most dramatic increase in the UK. 
 
Market and Media Reactions 
------  ------- 
¶7. The banks' third quarter results caused mixed reactions in the 
stock market. While Swedbank's stock remained unchanged following 
the announcement of the loss and Nordea's increased by 2.8 percent, 
SEB and Handelsbanken's stock lost 4 percent and 4.3 percent, 
respectively, on the day of the announcement.  Since the beginning 
of the year, stocks of the four banks, however, have well 
outperformed the OMX Nordic 40 index that tracks the 40 largest and 
most actively traded stocks on the Nordic exchange. Year-to-date 
figures also suggest investor confidence in the banks' future 
position in the Nordic market; their stock price increased by at 
least 42 percent (SEB), with Nordea registering the largest gain 
with 73 percent. 
 
¶8. Several commentators pointed out that Swedbank's situation is 
much better now than at the beginning of the year. The bank is well 
capitalized, and the trend of increasing credit losses seems to have 
been broken. The report was further positively received as it tells 
about the very low level of credit losses in the Swedish operations. 
This further reinforces the message that the banks have tried to 
convey, that the banks have managed to handle credit losses much 
better this time than they did during the previous, domestic, 
banking crisis in the early nineties. Jan Almgren, Columnist and 
analyst at Stockholm Daily adopts a more cautious approach 
summarizing Swedbank's report "as bad as expected and then some". 
Although not all results were worse than expected he advises against 
premature celebrations, with 7 billion in losses this year alone, 
"Swedbank has a long and winding road ahead" Almgren writes. 
Overall, as the Swedbank report is published only days after 
Swedbank's Estonian pension-scandals, the general view among 
analysts and media reports is that Swedbank has now hit bottom. 
 
¶9. SEB's results have been less anticipated because it has generally 
performed better than Swedbank and has a smaller exposure to the 
Baltic region. According to Andreas Cervenka at SVD "the 'Wallenberg 
bank' stands on solid ground." Considerations of employee bonuses, 
however, are likely to draw widespread criticism in the future as 
the bank will have the opportunity to again reinstate the bonus 
system once it sheds the state guarantee program. Already talks of 
raising the CEO's salary as a result of her giving up her bonus 
earlier this year caused quite a stir. Currently SEB has allocated 
SEK 1.5 billion to employee bonuses. 
 
Riskbank Keeps Rates Flat, Provides Additional Liquidity 
------------------- 
¶10.  Sweden's central bank, the Riksbank, on 23 October kept the 
benchmark interest rate (repo) unchanged at 0.25 percent and 
announced its decision to extend new loans amounting to SEK 100 
billion ($14.7 billion) to the country's banks to ensure sufficient 
liquidity in the market. (The loan auction was held on November 2 
and the final amount lent was SEK 95.3 billion.)  The loans are at a 
fixed interest rate and with a maturity of 11 months and "should 
contribute to continued lower interest rates on loans to companies 
and households," the Riksbank said. The central bank justified its 
decision by noting that while the situation on financial markets was 
much improved, it had not yet returned to pre-crisis levels. On 
November 5, Riksbank Governor Stefan Ingves told the Parliament 
Finance Committee that the Riksbank currently expected to hold the 
repo rate unchanged at a low level until autumn 2010 in order to 
contribute to a stable economic recovery and attain the inflation 
target of 2 percent. 
 
¶11. Reactions to the Riksbank decision have been mixed.  The 
decision to keep the interest rate at 0.25 percent was expected but 
 
STOCKHOLM 00000701  003.2 OF 003 
 
 
most analysts were surprised by the loan offer.  Nordea's chief 
economist Annika Winsth calls the action both "unexpected and 
unnecessary". Cecilia Skingsley, Chief analyst at Swedbank, is also 
surprised but maintains that a new loan always was a possibility. 
All leading Swedish banks believe that the benchmark interest rate 
will be raised sooner than the Riksbank projection of 4th quarter of 
¶2010. 
 
A housing bubble in the making? 
-------------------------- 
¶12. Much speculation in Sweden surrounds whether a housing bubble is 
in the making.  With an interest rate of close to zero percent both 
demand and prices are up.  Mortgage applications are up 15 percent 
for condominiums and 8 percent for houses compared to the same 
period in 2008. Even the Riksbank noted in its report that the 
current housing-prices are "above a level that is sustainable in the 
long-term." In his speech to the Parliamentary Committee on Finance, 
Ingves explained that the Riksbank cannot adapt monetary policy on 
the basis of individual markets unless they threaten the inflation 
target or financial stability. Ingves reiterated that it is "hardly 
sustainable" for housing prices to continue their rise of around 8 
percent a year since 1996. Since lending and housing prices are 
largely beyond the Riksbank control, he said, it is important for 
households to make realistic calculations, and banks to make 
responsible credit assessments since interest rates will rise in the 
long-run.  He noted that the Swedish Financial Supervisory Authority 
"is prepared to take action if they consider it necessary." 
 
Comment 
-------- 
¶13.  Although Baltic investments remain a problem for Swedbank and 
SEB, there is little fear in Sweden that their losses there will 
significantly affect the Swedish market. The fact that Swedbank's 
total losses were larger than expected was viewed as less important 
than the decelerating trend in expected credit losses, offering hope 
that the worst could be over in the troubled Baltic region. Both 
Swedbank and SEB have lifted their core tier one capital ratio to 
12.3 percent and 11.8 percent, respectively,--among the highest in 
Europe, and have the backing of the state guarantee program if 
necessary. 
 
¶14.  The staggering absolute level of losses in Eastern European 
operations, however, could require recapitalization of subsidiaries 
in the future. Political risks in Latvia and Ukraine, combined with 
a sharp economic downturn, remain high and credit losses could 
quickly accelerate if Latvia is forced to devalue. While Swedbank's 
chief risk officer, Goran Bronner, sought to reassure investors and 
shareholders that the bank could absorb a 15 percent controlled 
devaluation in Latvia, a larger devaluation combined with investor 
concern about the Baltic region as a whole-a devaluation in Latvia 
would put pressure on neighboring Estonia and Lithuania to 
devalue-could result in a confidence crisis and a setback for the 
recovery of the Swedish banking sector.  End comment. 
 
BARZUN