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Why Swedish bank tortoises give big EU hares a drubbing

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If you were buying bank shares for the long term a decade ago, should you have picked the tortoise or the hare? The tortoise is the correct answer. Aesop would be proud. Over the past 10 years the FTSE Eurofirst banking index, dominated by racy investment banking types such as Deutsche Bank and Credit Suisse, has fallen 50 per cent. Swedbank, a less exciting institution, has risen by a similar amount while compatriot Nordea is up almost 400 per cent.

Swedbank reported first-quarter numbers on Tuesday, although if you are the kind of investor for whom quarterly fluctuations are exciting, then Swedbank is probably not the stock for you. Still, they do demonstrate why the bank has loyal fans. Swedbank manages to do what many banks say is impossible – generate a healthy return on equity (14 per cent in the first quarter) despite having a relatively high amount of equity in its funding mix. Its Basel III Tier 1 capital ratio is over 16 per cent.

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The only ways to achieve such returns would be through either huge volumes or low costs. The Swedish economy is not helping on the volume front, so for Swedbank, the answer is the latter. Costs fell 7 per cent in the first quarter and the group has a cost-to-income ratio of 45 per cent. SEB, another Swedish bank reporting yesterday, said that costs were 56 per cent of income. By contrast, last year both Deutsche Bank and Credit Suisse had ratios of over 80 per cent. Swedbank's loan impairment charges are also low.

All of which leaves Swedbank as a safe, albeit (at 1.7 times tangible book value) fairly pricey, place for bank investors to see out the turmoil elsewhere. But what happens if growth returns and the hares start running again? The answer was demonstrated during the banking rally between last July and January this year when Nordea and Swedbank underperformed the big European universal banks. Anyone investing for the very long term, or interested in the 7-per-cent dividend yield, will not mind a bit. For the more bullish, that may leave a cause for some concern.

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