By Erik Durhan
STOCKHOLM—Swedbank /zigman2/quotes/203208387/delayed SE:SWED.A -3.13% AB said Thursday it swung to a net profit in the third quarter as sharply lower credit losses, strong trading gains and an improvement in the bank's Baltic operations outweighed a decline in net interest income.
The Stockholm-based lender said net profit for the quarter was 2.59 billion Swedish krona ($389 million) compared with a 3.34 billion krona net loss a year earlier. The figure beat analyst estimates for a profit of 1.55 billion krona, helped by continued improvements in its key Baltic markets and better credit quality.
"Swedbank's positive trend continued to improve during the third quarter," Chief Executive Officer Michael Wolf said.
Net interest income, the bank's main source of revenue, fell 21% to 3.98 billion krona from 5.02 billion krona a year earlier, and credit impairment losses declined to 120 million krona from 6.12 billion krona. Analysts had forecast net interest income of 4.05 billion krona and credit losses of 928 million krona.
With the global financial crisis skewing banks' results, many analysts prefer looking at quarter-to-quarter comparisons to get a better idea of emerging earnings trends. Swedbank's net profit in the second quarter was 1.57 billion krona and net interest income was 3.8 billion krona.
"Factors that had recently put pressure on net interest income have now begun to have a positive effect. Market interest rates in Sweden in particular have begun to rise, lending margins have strengthened slightly and the cost for local funding in the Baltic countries has decreased," Mr. Wolf said.
Swedbank operates widely in the Baltics and considers Estonia, Latvia and Lithuania as its home markets. The economies in those countries have recovered over the past year with overall asset quality improving.
The bank said the Baltic economies continue to stabilize. "The Baltic banking business area reported a quarterly profit for the first time since the fourth quarter of 2008. Significantly lower impairment losses were the main reason. Profit before impairments increased for the second consecutive quarter," the bank said.
In a conference call Mr. Wolf said that Swedbank still needed to guard against fallout from the economic weakness seen in the last two years.
"The income line is down 14% in this year's first nine months compared to last year, while costs are down 4%. So of course we need to continue to be very cautious on the cost line, we cannot trust the income line to help efficiency in the near future."
Trading gains rose to 574 million krona from 87 million krona a year earlier, beating analyst expectations after Swedish peer Handelsbanken's trading gains surprised on the downside in its third-quarter earnings on Tuesday.
Swedbank said that overall it had a slow trading quarter, especially in July and August, and that the trading result was helped by "two large contributors, our market operations and the different valuation effects coming together with the wholesale funding."
Mr. Wolf said the bank aims to be "among the best in class when it comes to funding costs. That is what we are focusing our attention on," adding that he aims to have a "decent capital buffer, with the outlook that some people have on the economy."
Evli analyst Kimmo Rama described the earnings as very strong. "Once again, lower loan losses surprised. This time significantly below expectations, almost 88%. A very nice surprise."