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UPDATE 2-SEB bolsters capital against European contagion
July 16, 2012 / 6:23 AM / in 5 years

UPDATE 2-SEB bolsters capital against European contagion

* Core tier one capital above 15 pct

* Euro zone woes will weigh on bank -CEO

* Q2 opg profit 3.95 bln SEK vs 3.33 bln in poll

* Net interest income up 8 pct on the quarter

* Shares up 8 percent (Adds CEO comments, background)

By Mia Shanley and Oskar von Bahr

STOCKHOLM, July 16 (Reuters) - Swedish banking group SEB said it had the right buffers in place to protect it even if Europe’s deep sovereign debt problems infect its traditionally robust Nordic markets.

SEB Chief Executive Annika Falkengren said that, despite an increasingly uncertain macroeconomic environment, the bank was in a sturdy position after it reported a jump in its core tier one capital - the leading indicator of a bank’s financial strength in the eyes of regulators - in the second quarter.

Swedish banks are some of Europe’s most well capitalised lenders and have benefited from relatively low funding costs thanks to their capital buffers and low-risk profiles.

But while they have outperformed rivals in other parts of the continent - serving as a safe haven for investors - Falkengren said SEB was not immune from the euro zone’s debt woes.

“Sweden is a very small, open economy,” Falkengren told Reuters. “If Europe, as I see it from my perspective, over the next couple of years kind of just muddles through, that of course will affect us.”

SEB posted second-quarter operating profit well above forecast on Monday, beating expectations on almost all income lines, keeping a tight grip on costs and writing off fewer bad debts than expected.

Nordic lenders’ performance has been buoyed by economic growth and strong public finances in both Sweden and Norway.

SEB, whose shares were up almost 8 percent at a more than three-month high by 1130 GMT, is the first of the four major Swedish banks to report quarterly earnings, and helped boost shares in Nordea, Swedbank and Handelsbanken .

Nordic bank shares have risen some 20 percent so far this year compared with a 3 percent drop in the DJ European STOXX banking index.

Falkengren warned that austerity measures in many countries could increase sovereign risk and create subdued economic growth, which could impact SEB’s main markets.

“It is a more challenging environment for a bank to be active in a very low interest environment,” she said, adding that weak sentiment would weigh on corporate transactions, trading turnover and overall customer activity.

SEB’s core tier one capital level rose to 15.3 percent in the quarter from 13.9 percent in the first quarter after regulators approved a new way to measure non-retail real estate assets. This puts the lender well ahead of regulatory deadlines for holding 10 percent core tier one capital by 2013 and 12 percent by 2015.

Swedish regulators have been stricter and quicker than those in many other European countries in demanding banks boost capital to stabilise the sector after years of crisis.

Operating earnings at the bank in the April through June period were 3.95 billion Swedish crowns ($562.2 million), compared with the 3.33 billion seen in a Reuters poll of analysts and 4.20 billion crowns reported in the same period a year ago.

“Basically, all P&L items surprised positively,” said Kimmo Rama, an analyst at Evli. “Net interest income line was very strong ... mainly reflecting repricing of the portfolio and lower funding costs.”

The bank’s core net interest income landed at 4.5 billion crowns, beating a 4.2 billion forecast by a poll of analysts.

SEB said costs in the quarter amounted to 5.7 billion crowns, below the 5.8 billion mean forecast by analysts. Analysts had said costs would be key in the second quarter for SEB, which aims to keep them below 23.1 billion crowns in 2012.

“This was very strong cost control,” said Nick Davey, an analyst at UBS. “Unlike peers SEB hasn’t made any big announcement of restructuring charges or any big layoffs. And yet they have managed to surprise positively on costs now for at least two or three quarters in a row.”

Falkengren said the bank was standing by its cost-cutting goals and could achieve this by focusing on offshoring and streamlining current operations. ($1=7.0259 Swedish crowns) (Editing by Jon Loades-Carter)

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