The fact that last year’s winner will be this year’s loser is not uncommon in the stock market. In 2013, stock prices for the four major Swedish banks growth ranged between 36 percent, Handelsbanken, and 53 percent, SEB. At the same time the overall market rose by 23 percent. This year it’s the opposite. The index has risen 6 percent and SEB is the best bank with a share price increase of the same amount. Swedbank whose share price fallen 4 percent has fared the worst, while its share passed by far the best in five years. Since the fall of 2009 it underwent the rise by 152 percent, almost twice that of SEB.
It can be noted that even if the big banks’ performance is largely similar, the shares may develop differently during some periods. But the dismal share performance this year would depend on industry-specific factors rather than individual accomplishments. Uncertainty about how much capital banks must have to succeed has probably hampered price performance over the past six months. Add to the picture political moves. Given that there are plans to introduce a special bank tax at 4 billion, it is perhaps not surprising that foreign investors reduced their holdings in major Swedish bank shares. But hopefully they will be regaining interest this spring.
The statistics from the Riksbank came in this week, showing that households continue to borrow more to buy homes. In August, housing loans increased by 6 percent over the same month last year. The total of mortgage loans now amounts to 2,430 billion. The worries are fuelled by an increase of the housing bubble, while the short-term brings good news for bank shareholders in the form of lending growth when the reports for the third quarter will be presented, since it is the major banks that the Swedes tend to have their mortgages. The most outperforming are Handelsbanken and Swedbank, both of which have market shares above 20 percent, while Nordea and SEB are around 15 percent each.
SvD noticed recently that the banks’ margins on mortgages have increased. For borrowers, it is bad news, but for shareholders it is the quite the opposite. Marginal increase shows that banks partly charge for their actual borrowing costs and that customers will pay for higher risk. In addition, rising interest rates are likely to bring additional 0.2-0.3 percentage points when risk weighting for mortgages increased from 15 to 25 percent. The more capital the banks need to have, the higher their funding costs, which in turn leads to more expensive lending rates.
The amendment is part of the decision on capital requirements of FSA adopted in early September. Altogether, the new requirements to the core Tier I capital (basically equity) needs to be between 14.7 and 19 per cent, the lowest for Nordea and Swedbank maximum. This means that the core Tier I capital is related to risk-weighted assets, which is the sum of outstanding loans with different security multiplied by the respective risk weight. In simple terms it means that loans with good collateral, such as real estate with low leverage, bear a lower risk weight than loans where the risk that the bank will lose money is considered higher.
Previously banks used to own 6,000 crowns in equity for every million lent by private homes as collateral. That amount will increase to 18,000 by current risk weights of 15 percent and a core Tier I capital ratio of 12 percent, which is the minimum requirement in 2015. An increase in the risk weights makes it rather required 30,000 in equity per million dollars in mortgages. The increase means that the FSA sees increased risk of credit losses on mortgage loans is linked to a long period of rising prices for loan interest, especially in Stockholm.
The FSA putting its foot down is positive in the sense that it makes it possible for banks to calculate how much capital they need to have in order to meet the requirements. Already by mid-year all banks were over the crossbar. The biggest difference is that for Handelsbanken, by the end of June, the core Tier I capital ratio 20.1 against the 17.5 that FSA had calculated. It increases the hope that spring’s special dividend may be repeated in future. Some expect higher dividends in all banks providing dividend yields of around 5 percent.
On the negative side is that interest rates appear to remain low for a long time to come, making the outlook for net interest income had to be scaled down a bit. Meanwhile, earlier this year, signals came from, among others, Handelsbanken and SEB that are more active. Better economy, rising stock market and more business transactions leave a positive impression in commission income. A development that primarily benefits SEB, which has two-thirds of its earnings from the company.
The effects of the new complex regulations clears increases the likelihood that banks will soon present new financial targets for returns on equity. Previously, the common benchmark was 15 percent. Most likely, we will know more in connection with the accounts in January.
What about the 4 billion in extra tax that politicians want to put on big banks, then? In 2013, the total pre-tax profit 92 billion. Increasing the tax rate by 4 billion, this means that the tax rate will rise from 22 to 26 percent. That is back to the same level as before the tax cut in 2013. A bigger problem is if investors begin to worry that there may be more charges for banks. As with higher risk weights, banks have declared that higher taxes will ultimately be borne by customers through higher interest margins.
With the hope that the economy improves and that the proposed measures like amortization requirements, attenuates increases in house prices are rectified, the banks’ profits will continue to rise in coming years. The oppinion that bank stocks will deliver better total return than the market as a whole in 2015 thus looks quite promising.