Does bank profitability need to improve?

The profitability of banks has been widely debated lately. Profits for the three Swedish banks and Nordea amounted to approximately SEK 100 billion for the first half of the year, i.e. SEK 200 billion on a full-year basis, and (S) and (V) have proposed a special bank tax in light of this. We can all agree that 200 billion is a very high profit, but is it TOO high a profit, especially in view of the fact that Swedish households are having a tough time financially due to high inflation and high mortgage costs? At the same time, we probably all agree that SEK 100 billion and even SEK 50 billion are also a lot of money. So what is an appropriate profit level?

First, let’s dispel an untruth. It is not the mortgages that drive the banks’ profitability, and it is also a low proportion of the banks’ profits. For example, Nordea only has 8% of its income from Swedish private individuals, and this includes all income from funds and deposits, so an estimated 4-5 percent comes from Swedish mortgages. The ratio is of course higher for the other banks, but it is a smaller part of the profit that comes from Swedish mortgages. And in Sweden, banks’ margins on mortgages have fallen from 1.35 percent in March 2022 to 0.41 percent in June this year, according to statistics from the Swedish Financial Supervisory Authority.But to the question of what is a “reasonably” high profit level. Basic rule 1A in business administration is that it is totally irrelevant to look at an absolute level to measure profitability. It must be related to something, such as profit margin or return on equity. The latter is the most comprehensive measure because you put profitability in relation to the entire business, turnover, costs, and capital tied up. So far this year, the banks’ return on equity is around 15-20 percent. This also happens to be on par with how other listed companies report, around 20 percent. In order for the banks to be able to acquire and build capital in the same way as other companies, the yield also needs to be at approximately the same level. So, from that perspective, the profitability is “just right.” But one should also add that the banks’ profitability is likely to fall in the future. And there is also great uncertainty regarding how the current economic situation will affect the banks’ credit quality, not least their exposure to the real estate sector. Real estate companies are the single largest customer group for the banks, and if they have problems repaying their loans, it is important that the banks are able to handle this. There is nothing that creates more concern in the markets than if banks have problems managing problem loans. So my simple conclusion is that it would be desirable if the banks’ profitability increased further.