Nordic banks: hit return

Nordic banks practise what they preach. Chastened by their own crisis in the nineties, they were better placed when the global downturn struck - and remain pacesetters at cost-cutting and prioritising returns. First-quarter results from Handelsbanken, Nordea, Swedbank and SEB confirm this.

On Wednesday, Barclays' investors pondered its results announcement and wondered how the UK lender - with its shrinking revenue, hefty cost base and legacy litigation - could possibly hope to haul its 3.4 per cent return on equity above its cost of capital. Across the North Sea, two Nordic lenders provided some tips.

Handelsbanken, a high-street commercial bank unburdened by an investment bank, delivered better than expected, albeit flat, net income of SKr3.9bn on revenue up 3 per cent from a year ago. Funded largely by cheap retail deposits, its net interest income rose 4 per cent (38 per cent in the UK, where it is expanding). Steady margins boost earnings quality. Its fee and commission revenue also had the feel of an annuity, climbing 12 per cent. Costs rose faster than overall income, but they were growth-related, not conduct-related, as in Barclays' case. The Swede's cost-to-income ratio was 46 per cent, versus Barclays' at 71 per cent.

Nordea, more of a universal bank, also reported better than expected net income (€1bn) on revenue up 9 per cent to €2.7bn. Net interest income fell, but speculative pressure against the Danish krone to euro peg boosted hedging demand among Nordea's corporate and institutional clients. Its more durable income from the savings and investment business rose as assets under management hit a record €290bn. Despite its broader operations, Nordea still runs a tight ship: its cost ratio dropped 5 percentage points from a year ago to 44 per cent. Barclays, take note.

With returns on equity ranging from 13 per cent (Handelsbanken) to Swedbank's 15 per cent, Nordic banks were never going to come cheap, trading at between 1.5 times estimated full-year book value (Nordea) and 1.9 times (Handelsbanken). But with yields ranging from 4.7 per cent in the case of Handelsbanken to 6 per cent for Swedbank, it is a price worth paying for boringly good performance, hawk-like cost control and a regulator determined to keep the region's banks in the safety vanguard.

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