Sweden is emerging as a bright spot in European banking. Scope has upgraded its issuer ratings on Swedbank and Svenska Handelsbanken in recent weeks and maintained its high rating on Nordea. As fears of a housing crash recede, prospects look brighter.
Sweden’s major banks are very profitable. Returns and efficiency ratios are among the strongest in Europe. And their capital ratios are higher than those of most European peers. This will probably remain the case even after changes proposed by the Swedish regulator to the way mortgage risk-weight floors are calculated.
“Regulatory adjustments that will reduce the headline capital ratios of Swedish banks are purely technical in nature and reflect no change to the solvency position of the banks,” said Jennifer Ray, executive director in the financial institutions team at Scope Ratings. “They will be expected to maintain a similar level of nominal capital against the same basket of risks.”
Large Swedish banks currently maintain good access to senior unsecured funding and other market segments, particularly covered bonds. They also have robust liquidity reserves. But like other European banks, they are nominally exposed to a shift in wholesale market funding conditions and this remains a (somewhat latent) concern if the market suffers sustained credit-spread widening and constricted access windows.
The banks currently enjoy very low credit costs. “While we do not necessarily expect the cost of risk to remain so favourable, the banks appear well positioned to deal with the normalisation of the credit cycle and higher resulting credit costs,” said Ray.
Scope’s recent rating actions on Swedish banks are noteworthy, as the credit positives deriving from the banks’ business profiles and forward prospects outweigh concerns about a hard landing in the country’s over-heated housing market, which Scope considers unlikely. Swedbank’s Issuer Rating was upgraded on 24 May by one notch [to A+ Stable]; as was Svenska Handelsbanken’s [AA- Stable]. In its 24 March rating update on Nordea, the Issuer Rating was maintained at AA-Stable.
There had been concerns about the impact of a collapse in the Swedish housing market on the banks as recently as last year; specifically around the part the banks were playing in perpetuating the cycle, with memories of Sweden’s banking crisis of the 1990s still lingering.
“Although potential for further pricing weakness remains, we’ve taken a more measured view on the housing market, on the basis that a whole host of structural factors have supported the boom. We came to the view that while the major banks have been expanding their property portfolios, this has been against a backdrop of a growing economy and a rise in household wealth,” said Ray. “We sense the larger banks have become more cautious over time and are certainly more focused on cashflow and valuations in making lending decisions.”