Wednesday, September 24, 2008

Swedbank Troubles Continue

Swedish media reports of rumors that one of Sweden's largest banks, Swedbank, could face a takeover bi, either from Danish bank Danske bank or Norwegian bank DNB Nor. Also, credit spreads for their mortgage backed securities have widened.

Swedbank is perceived by the markets to have more trouble than other Swedish banks for two reasons. One is their high presence in the Baltic states, which have entered a recession and whose situation with high credit driven inflation combined with fixed exchange rates in many ways are similar to the Swedish economic problems of the late 1980s and early 1990s I told you about in the previous post. Other Swedish banks have significant activity in the Baltic states too, but Swedbank's exposure is higher than the others.

The other is that Swedbank had a larger stake in now bankrupt Lehman brothers, some of which will be lost.

In their latest earnings report no significant problems seemed to exist, as profits in fact increased from the previous year despite an increase in credit losses. However, that was before the hit from Lehman. And while that will only be a temporary hit, credit losses in the Baltic states will likely significantly increase.

It is primarily the uncertainty over the Baltic situation which has caused Swedbank stock to plummet more than 60% from year ago levels to only about 100 SEK per share. Based on the annualized earnings per share of 25 SEK per share from the first half of 2008, the stock would appear to be very cheap. However, given the general mistrust toward financial stocks and the likely sharp increase in credit losses in particularly the Baltic states but probably also Sweden and given the fact that the financial turmoil is likely to reduce the profits of their financial crisis, the stock looks risky in the short term.


Anonymous Anonymous said...

I have more than 100 000 SEK over the limit which the government guarantees you will get bank in case of bankruptcy. Should I worry about Swedbank going bankrupt?

7:46 PM  
Blogger stefankarlsson said...

No, at least not at this point. They're still making profits and will likely continue to do so. While profits will certainly fall because of higher credit losses in both Sweden and the Baltic states, it is unlikely that profits will be turned into losses, much less losses which would make them bankrupt.

It is possible, but also unlikely that the situation could worsen dramatically, but even if such a unlikely scenario actually occurrs you will have plenty of time to hear about such deterioration to withdraw the money.

9:31 PM  
Anonymous Anonymous said...

There is always Treasury Bills or "Riksgäldskonto" (Treasury Account) 4,5% interest is not bad today.
When there is a Bear Market, the most important thing is the "Return of" money, not the "Return on" money.

Göran, Sweden

10:01 PM  
Anonymous Anonymous said...

Sorry Stefan, but I'm afraid you missed a very important point in your analysis on Swedbank.

Banks don't go bankrupt, because they make losses in their P&L, they go bust, because they run out of liquidity. Swedbank depends to a large extend on wholesale funding in their Swedish and their Baltic operations. Anyone who analyzes the Baltics, where some countries have current account deficits of 25%, and are pegged at a fixed exchange rate to the Euro, is going to realize that we are having an "Argentinian situation" coming!!! The currency peg is unsustainable. Either Swedbank is going bust, because the Baltics have to devalue their currencies or they go bust, because the fixed income market refuses to fund their reckless lending in those countries in Euros.
You mentioned you follow the Austrian school of Economics. Well, some Baltic countries had inflation rates in the mid teens this year and Swedbank is giving martgages at 6% in Euros in those countries. Basically they create 9% negative real interest rates. No wonder house prices appreciate rapidely. Swedbank is creating inflation by increasing the money supply. Credit growth in 2006 was around 80% year-on-year in the Baltics.
And I disagree with your advise that there is plenty of time to withdraw your savings which is over the limit that's guaranteed by the government. It took Lehman's and Bear Stears only days to run out of liquidity and even Swedbank got stuffed with Lehman losses so they didn't see it coming themselves.
If you want to analyse Swedbank, please have a look at their Annual
Report balance sheet and notes to the accounts of the mother company in Sweden and the accounts of their Baltic subsidiary (called Hansabank). Forget about the P&L, is meaningless.
I think Swedbank is going to be a case study at business schools for years to come. In a very short period of time, you will understand my words.

For disclosure: I don't have a short position in Swedbank nor do I have derivative instruments betting on Swedbank either way. This is my own humble opinion and analysis.

3:12 AM  
Blogger Flavian said...

I believe that the supposed problems in the Baltic countries might be exaggerated. All Baltic countries have low real exchange rates in comparison with western european countries. However, due to huge deficits in their balance of payments they have to shift to export-led growth rather than domestically driven economies.

I think they will manage this shift better than most commentators expect.

6:51 AM  
Blogger stefankarlsson said...

Interesting. I am being criticized both for being too bullish and to bearish on the Baltic countries in general and Latvia in particular.

Flavian: as I've told you before it is not relevant that prices may be somewhat lower in the Baltic states because that reflect their lower income levels. As the Balassa-Samuelsson theory shows(follow link if you don't remember what it meant), poorer countries should have lower price levels and adjusted for the Baltic income levels, prices are not low.

Anonymous3: Swedbank suffers virtually no risk of going bust because of liquidity problems because they are a commercial bank with unlimited potential access to liquidity from the Swedish central bank. The Bear Stearns and Lehman brothers cases were different because Bear Stearns was an investment bank which at the time did not have access to liquidity from the Fed (though the Fed did indirectly later provide it, which is why no creditor to Bear Stearns lost money). Lehman brothers collapsed because they were insolvent. Thus, the only way in which depositors in Swedbank could suffer would be if it went insolvent. And they are a very long way from that as they are in fact still making money.

As for the Latvian economy you are indeed right that they had serious excesses and is thus a perfect example of the Austrian business cycle theory in action and that is why they are now experiencing a recession and that is why the recession will certainly last for a while longer. However, so far Swedbank's credit losses have been remarkably limited, and while they can certainly be expected to increase significantly, it seems far-fetched at this point that they would come even close to levels that would make Swedbank insolvent.

10:20 AM  
Blogger Flavian said...

I think that the Balassa-Samuelson theory might be at least partially contradicted by reality. Hong kong is rich and has an extremely low price level as far as most consumer prices are concerned. Japan has lower prices than Chile.

However that does not have to meen that the Balassa-Samuelson theory is altogether mistaken, but that it needs to be nuanced. Labour is expensive relative to goods in rich countries, but economic growth is a process of falling prices.

9:37 AM  
Blogger stefankarlsson said...

Flavian, because there are other factors involved in determining exchange rates (such as interest rate policy) the empirical correlation is of course not perfect, but it is a lot stronger than for the traditional PPP theory.

BTW, it is not really true that Japan and Hong Kong has low prices. Most cost of living comparisons put Tokyo and Hong Kong as relatively high cost cities, mainly because of high housing costs. I think you are mislead here from your reliance on the Big Mac index.

3:11 PM  
Anonymous Anonymous said...

I live in Lithuania and i can confirm that housing prices are way too high for us working here :(

I hate bankers with their easy money out of thin air creating inflation. To hell them all - i took out all my savings and converted to gold

5:36 PM  

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