Swedbank exec explains difference in interest rates in Estonia and Sweden

Jon Lidefelt..
Jon Lidefelt.. Source: SCANPIX/LETA/Paula Čurkste

Jon Lidefelt, Swedbank's head of banking for the Baltic region, tells ERR in an interview why home loan interest rates are different in Estonia and Sweden and why he is against taxation of banks' record profits in the Baltics.

Inflation is very high in Estonia and the other Baltic states. What's the view from Stocholm.

It is very high. But I think we need to broaden the view. We have a devastating war in neighboring Ukraine, following Russia's terrible invasion of a peaceful country. Apart from the terrible suffering in Ukraine, this also led to economic effects for the world around us. It's partly very high inflation, high energy prices and central banks trying to curb inflation by hiking interest rates. I know we have many people in Estonia, Latvia, Lithuania and also Sweden who are struggling to make ends meet under these circumstances. It is tough for many people to buy food, pay for energy etc.

Do you see differences between Estonia, Latvia, Lithuania and Sweden? You are active on many markets.

The situation is quite similar throughout the markets. Inflation has been higher in Estonia, Latvia and Lithuania compared to Sweden. On the other hand, inflation also peaked a little sooner in Estonia than in Sweden. What's important for us at Swedbank is that we're here in Estonia, we've been here for many years. We are long-term in Estonia and want to support our customers both during the good times and bad.

As I understand it, your clients have not had too much trouble repaying loans until now. But it could happen this fall or in the future. What will be your policy for payment holidays, reductions?

What will be done needs to be discussed between each individual client and the bank. We have a local management team here who are very knowledgeable about the market. It's up to them to act based on individual customers' needs. I think that Swedbank has shown its long-term commitment to clients, also during the coronavirus period, by supporting customers that were having temporary problems. Also supporting customers seeking to invest, whether private clients looking for a new house or corporate clients who want to invest in a new product line or something like that. How we support customers is individual.

How high will Euribor get according to your forecasts?

Our prognosis is that it will go up a bit more, hit 3.75 percent during the summer and then start coming back again next year. But prognoses are very uncertain at this time, so we'll have to see.

What about interest rates? People are dissatisfied with loan payments getting more expensive due to the Euribor hike, while rates of return on deposits are not as high. I noticed you hiked the latter to 3.5 percent recently. Why did it take so long and why was the increase so little? Some banks are offering 4 percent return on savings in Estonia.

If you look at the lending side, most loans are linked to market rates, meaning they automatically become more expensive when rates go up. If you look at the margin we put on top, that hasn't increased and has rather gone down in recent years. But the whole point of the central bank pushing up the rates is to curb inflation. So that is an automatic thing that happens. On savings accounts, we have good offers both for fixed-term and floating deposits. We are a bank with a long-term tradition of savings. We have worked hard in Estonia to introduce and promote savings, which is good for customers and the society. Parts of those savings must be in deposit accounts and other parts in other forms. We have made saving in mutual funds and rigid stocks accessible. I think we have a competitive offer.

But is 3.5 percent really enough, or could it be higher, seeing as loan interest rates are around 5.7 percent.

The interest rates for loans are linked to Euribor, plus our rate, and I think 3.5 percent is around where Euribor is as well. The exact decision on interest rates is for the management here, and it's not something I'm involved in on a daily basis.

On the rates in Sweden and Estonia, I looked up the standard loan offer on your website, which here in Estonia comes to around 5.7 percent. It is around 4 percent in Sweden. Why are there better conditions in Sweden?

It's very hard to compare, because the structure of a mortgage in Sweden and here in Estonia are different. Here you get a margin on top of your Euribor that is fixed for 20-25 years, or the duration of the loan, You don't really have that in Sweden. The rates in Sweden go up and down on a regular basis. Given that, I believe the difference is not that big at the end of the day.

So, you're saying the conditions are effectively the same if you look at...

I'm saying they're different products and different markets, so you can't really compare the rates that customers are paying because of the different structures. In the case of a Swedish mortgage, you don't know your margin for the whole duration of the loan, it changes as you go along. Here you have the fixed margin we have guaranteed for the duration of the loan.

Have you considered lowering your margins now that the Euribor rate is going up?

We have, as I said on another question question. Our margins have been compressed a little compared to a year ago. On top of that, we have introduced zero margin loans for green mortgages, green leasing, investing in solar panels where we even have a zero interest rate for two years. I think we have a very good offer.

Swedbank has done very well for itself last year and the first quarter of this one. Your profit in Estonia was considerable, and the head of our FSA said that he hopes banks understand they have to give back to society, or society's thoughts will turn to such matters. He was talking about interest rates. What do you think?

I think it's true that we're doing well, and I'm very proud of how we're doing. It allows us to support our customers and the Estonian society during tough times. You also need to look at profits over a time. We have also done less well. We don't need to go back too far to get to when interest rates were negative, and the cost fell to us. Every euro deposited in our bank cost us when we deposited it in the ECB. But still we stuck to our business model because we thought that was good for the customers and good for us in the long run. Now, we're here, and, as I said before, we can support our customers in difficult times, as well as supporting customers who want or need to invest. So I think strong and profitable is what a sustainable bank needs to be.

Then, you are right. We also have a long tradition of contributing to society. We are active in education and many other things here. I'm firm on that we should continue [this line], and it is up to the management here to decide how to spend the money.

But we are doing more. We have these zero margin or even zero interest rate loans because we think it's a good way to show our long-term commitment to our customers. We're also looking for ways to step up our social commitment, and we'll come back with more details when we've decided what that will be exactly. But it is important for us to be an integrated part of society and contribute. So we will continue with that.

Lithuania is introducing a bank tax on windfall profits. What do you think, and would it be fair everywhere?

I think that we don't generally comment on taxes. But it is important to understand in this case that if you want long-term growth in society, you need to have a stable business environment. Predictable, stable and fair. When you then single out one sector – today a bank, while it could be something else in the future – you're creating uncertainty. Profits go up and down, and it wasn't too long ago when we made a loss in Lithuania, also here in Estonia. Now, it seems we are making a profit again due to the rapidly increasing interest rates. But coming and introducing temporary taxes like this creates uncertainty and hampers growth long-term. We are against that.

Having said that, we're happy to be among the biggest taxpayers in Estonia. We understand that you need to have tax income to pay for defense, healthcare, education etc. But the key is to make sure it's fair and predictable because then you also cater for long-term growth.

You mentioned defense, and talked about the war previously. Has the war changed the situation for us in that we're considered economically riskier or a war zone?

I think it has changed us all, with the terrible things we have in a neighboring country. Estonia, Latvia, Lithuania and partly Poland saw many years ago the true ambitions of President Putin, which many other European countries didn't. Looking back to the annexation of Crimea in 2014, Estonia, Latvia and Lithuania substantially reduced their dependence on Russia. Therefore, the direct economic hit was not as big as many thought. I spent a lot of time trying to convey that message to investors because the further away you are from the region, the easier it is to reach the conclusion on which you based the question.

But are we a higher-risk zone then?

Economically, Estonia is no more dependent on Russian than many other countries. The question was energy, which is also about to change or largely has changed. The short answer is no. You're a part of NATO, we are part of the EU, and we're in this together. But the further away you are, looking at a map you see that it's very close to Russia, which is when it is easy to get this impression. For us that are working here, we see through it and understand. We're part of the EU, you're part of NATO, which Sweden might also be eventually. It's not black and white, but I think it's something we need to work on together with the Estonian government and other large corporations here, to paint an accurate picture of Estonia, and Latvia and Lithuania.

What about the anti-money laundering issue, which was a huge thing for Estonia and for Swedbank in general? Is it a closed chapter for you or not yet?

We have been very open about our historical shortcomings and efforts to improve in this area. I'm very proud of the journey that we have managed in Estonia and other parts of Swedbank. Having said that, money laundering is a societal issue, so we will never be done with the fight against money laundering. Being a bank, we're part of the financial system and have extra responsibility to keep on fighting money laundering with various authorities. We will never be done but have come far on our journey.

I rather mean financially and legally. Birgitte Bonnesen was cleared in court and you've paid all your fines now.

There are a couple of cases still – we have discussions here in Estonia with the prosecution and ongoing investigations in the U.S. All of those are related to our history and we're working on closing them. We will make it public when we have more information about those cases.

Former heads of Swedbank in Estonia have been handed suspicions but nothing more so far. Could it end in a way where no one is punished in Sweden, while Estonian bank managers might be found guilty?

Let's see. We are cooperating with the authorities. We'll let justice run its course. I think you are aware that more or less the entire management of Swedbank and the board of directors in Sweden has changed in the past few years as a consequence of these historical issues.

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Editor: Marcus Turovski

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