The safe haven status of Nordic banks threatened by Baltic risks linked to the Russian conflict

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Nordic banks could be caught in the fallout from sanctions on Russia, even with limited direct exposure to the nation.

Swedbank AB (publ) and Skandinaviska Enskilda Banken AB (publ) both face second-order risks as they draw more than 10% of their pre-tax profit from Russia’s neighbors in the Baltic region.

The Baltic operations of the two Swedish lenders have been developed because of the likelihood that Estonia, Latvia and Lithuania will suffer if the Russian economy goes into a tailspin following the embargoes following the invasion of the Ukraine. These risks could undermine the attractiveness of investing in Nordic banks, which have traditionally been seen as shelters from turbulence due to strong capital buffers and low levels of problem lending.

“If downside risks materialize, we wonder whether the Nordics will be widely viewed as relative ‘safe havens’ this time around,” he added. Swiss credit said in a March 8 memo.

Swiss credit reduced its share price target to SEB by 16% and cut 7% net profit estimates for 2022 and 2023, saying the indirect effects of the conflict are likely to ripple through earnings. Swedbank suffered a 15% reduction in its price target and a 6% reduction in its profit forecast for this year and next.

Finland-based Nordea Bank Abp may also be feeling a pinch due to its home country’s traditional trade ties with Russia, Credit Suisse said.

Training effect

Swedbank and SEB will both provide updates on the impact of the conflict on earnings in their upcoming interim reports, according to separate spokespersons. Both lenders also said they have little direct exposure to Ukraine or Russia.

SEB said business in its home markets, including the Baltics, is not directly affected by the invasion. “However, the war has a major impact on the global economy, on trade, on energy prices and on markets, which of course will affect both us and our customers,” said a porter. speech by e-mail. The bank got 11.5% of the Baltic region’s 2021 pre-tax profits.

Swedbank said “uncertainty is causing negative reactions in the market, but the bank remains strong.” He did not comment directly on its Baltic operations, which contributed 16% to 2021 pretax profit. Nordea declined to comment.

The secondary impact of the war on the Baltics is a “major concern” for lenders, said Salla von Steinaecker, banking analyst at S&P Global Ratings. Swedbank’s and SEB’s Baltic operations will face a more difficult and volatile operating environment due to the Russian-Ukrainian conflict, she said.

The Baltic countries are in danger if Russia suffers an economic crisis because of their trade links. Credit Suisse expects a drop of more than 50% in Russian imports in 2022, which lead to a decrease of 3.9% Lithuania, while Estonia and Latvia would take a hit of 2.4% and 2.0%, respectively, according to Credit Suisse. Finland would see a fall of 0.8%, compared to falls of 0.3% for the EU, 0.1% for the United Kingdom and between 0.1% and 0.2% for Sweden, Denmark and Norway, the bank noted.

The Baltic economies would also suffer from soaring energy costs and high inflation, and because war-related uncertainties are undermining consumer confidence, DBRS Morningstar said in a March 7 report. This risks reducing loan demand, asset quality and profitability at the Baltic subsidiaries of SEB and Swedbank, said Mario De Cicco, vice president of global financial institutions at the credit rating provider.

“The Russian-Ukrainian conflict adds further uncertainty to an operating environment that has already been affected by the COVID-19 pandemic,” De Cicco said. Still, there has not yet been a significant credit deterioration among Nordic banks, and their Baltic branches have great capacity to absorb losses, he said.

Swedbank’s loans to Estonia, Latvia and Lithuania amounted to 204.26 billion Swedish crowns at the end of 2021, or 11.7% of total loans, while for SEB this figure amounted to 158.82 billion Swedish crowns, or 9.0% of total loans.

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Strong defensive candidates

Major Nordic Lenders to have so far avoided the worst of a European bank sell-off since the US government warned of an imminent Russian invasion of Ukraine on Feb. 11, but performance has been mixed. Swedbank and SEB shares fell 16.5% and 17.7%, respectively, while shares of Nordic counterparts DNB Bank ASA and Svenska Handelsbanken AB (publ) are down less than 10%.

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A Berenberg analysis of bank stock performance over the past two decades found that the six largest Nordic lenders have have historically outperformed their European counterparts in times of crisis. Exhibitions in the Baltic in the context of the war have now slightly altered this status ais a “collective crisis haven,” Berenberg said in a March 4 memo.

Yet Berenberg labeled Nordea, DNB and Handelsbanken “strong defensive candidates” given intangible exposures to the Baltic, Russia and Ukraine and strong prospects for capital return.

Analysts at Credit Suisse, meanwhile, favor DNB, Handelsbanken and Danske Bank A/S as the “farthest” from geopolitical risks.

As of March 16, US$1 equaled 9.45 Swedish crowns.

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