Swedish banks struggle to cope with negative interest rate environment

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STOCKHOLM — Swedish banks are struggling to cope with the country’s exotic monetary policy of ever lower negative interest rates.

Second-quarter earnings reports from three major Swedish banks this week showed lenders were successful in improving loan margins, but continued to struggle with deposits.

Skandinaviska Enskilda Banken AB and Nordea Bank AB said net interest income fell 6% and 4% respectively, both partly blaming the negative rate environment. Swedbank AB‘s

Net interest income rose 3% due to increased loan volumes and higher margins on mortgages, but the bank also said negative rates were hurting.

Logically, in the inverted environment of negative interest rates, instead of paying interest on deposits, banks would charge customers to withhold their money.

Swedish lenders cautiously apply the reasoning to large corporations and institutional clients, charging them for the money they leave in the bank, but are reluctant to take their residential clients into negative territory.

“They wouldn’t understand what is going on,” says Christian Clausen, managing director of Nordea Bank AB, Scandinavia’s largest lender.

Sweden has been living in an unorthodox monetary landscape since February, when the country’s central bank, known as Riksbank, followed Denmark and Switzerland by cutting its main policy rate below zero. The aim is to prevent the Swedish krona from appreciating against the euro, which has been losing ground since the European Central Bank launched a massive stimulus package. A stronger krone would inevitably affect exports.

Although the Swedish economy is healthy, the central bank tested new lows earlier this month, taking its key rate to minus 0.35%.

For banks, the new world of negative rates poses a series of headaches.

In addition to redesigning legal contracts and tweaking unsuitable IT systems, banks are now forced to pay the central bank, at a rate of 0.45%, when they park their money there overnight.

For the four largest Swedish banks, that overnight storage cost is expected to exceed SEK 5 billion this year, or nearly $ 600 million, according to a forecast tally compiled by the Wall Street Journal.

None of the banks have said they plan to pass that cost on to their retail customers, fearing that charging them would damage hard-earned relationships.

“No one wants to be the first to start charging deposits,” said Karl Morris, analyst at Keefe, Bruyette & Woods. “They would lose all of their deposits, so they can’t change that, it’s just something they have to put up with.”

Introducing negative rates on deposit accounts would be a logistical nightmare for bank workers, involving many complicated conversations with customers and taking up a lot of time, said Barclays analyst Christoffer Rosquist. “Banks are focused on promoting certain products and negative rates could become an unnecessary distraction,” he said.

Instead, the banks said they were trying to get a bigger slice of the customer’s total business, making up for what they lose on deposits by selling more products like stock funds and cash. fixed income investments.

Lenders also said they cut mortgage rates below the main benchmark rate in the second quarter, improving margins on household loans and offsetting some of the pressure on deposits.

However, Swedish banks may need to consider sharing news of negative rates with their retail clients, said Andreas Håkansson, analyst at Exane BNP Paribas.

“If rates were to come down even more, I think banks need to think about it, but I think it’s at least 50 basis points,” he said.

Write to Anna Molin at [email protected]

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