Nordic Financial 4Q 2015 Preview

Strong Swedish macro supportive
Upbeat Swedish macro but World Economic Forum see increased risks aheadWe expect NII to be more or less flat from Q3, as effects from lower interest rates balance lending growth and margin improvements. Furthermore we expect both the NII pressure and the regulatory headwind to continue in 2016. We previously lowered our dividend payout ratios in all of the Swedish banks by 5% to avg. 62.5%, but even after the adjustment the Swedish banks yields 5.8% (15e) which we find very attractive. More importantly we find a 5% leverage ratio obtainable for all the Swedes.

Normalized financial income in 4Q

Although we previously expected higher capital requirement to raise NII margin in 2016 we now expect net interest income to be more flattish ahead as there is continued pressure on deposit margins. Also, 4Q is seasonally weak as loan losses traditionally is higher in the quarter but strong Swedish macro and normalized financial income should make 4Q overall decent. We have lowered our 16e and 17e figures ~3% for all the Swedes but we still estimate 4.5% lending growth in 2015-16.
SFSA still believe in risk based regulatory framework
The Swedish FSA still sees an risk-based approach towards capitalization as desirable as this should prevent banks from entering high-risk segments. A pure leverage ratio approach, on the other hand, will be implemented internationally in the years to come. E.g. Switzerland will likely implement a 5% limit for its largest banks which is in-line with US requirements. The Swedish banks currently have a avg. lev. ratio of 4.8%. Importantly, in our scenario analysis, we find that all the Swedish banks will obtain a 5% leverage ratio within 2018.
Swedes have avg. 5.8% dividend yield
Our top-picks in the sector are unchanged as both Nordea and Handelsbankenare rated BUY. We find the strong macroeconomic picture in Sweden to balance the increased international risk level. Historically such high dividend levels have triggered positive share price reactions and we remain fairly positive on the Swedish banks. We expect the Swedish banks to post an average 14.4% ROE in 4Q. We reiterate our Neutral recommendations on SEB, Swedbank and BUY on Handelsbankenand Nordea.