Fitch sees positive 2016 for major Nordic banks

Fitch sees potential for upgrades of major Nordic banks in 2016, it said yesterday (Thursday), with SEB and Swedbank leading the positive outlook, although the timing of such rating actions would depend on how successfully sustainable long term performance and conservative credit risk profiles are balanced.

The rating agency kept its stable outlook for the Nordic banking sector, underpinned by its expectation that banks will retain a regional focus and continue to ensure strong buffers against risks combined with solid risk management.

“The resilient operating environment should support strong asset quality and the banks’ ability to generate capital via retained earnings,” said Fitch.

It noted that Nordic banks’ risk-weighted capitalisation is among the highest in the world, benefitting from significant volumes of low risk-weighted assets, such as mortgage loans.

Fitch described Nordic banks’ leverage ratios as “sound”, but noted that these are “less outstanding” than their risk-weighted capital ratios and expects them to focus increasingly on leverage in 2016. Meanwhile, Fitch said that the implementation of bail-in legislation – effective 1 January in Denmark and foreseen early next year in Sweden – will affect the choice of instruments issued by banks.

“We expect further issuance of AT1 securities and greater clarity on some form of subordinated instruments for loss absorption before senior unsecured,” it said.

The rating agency reiterated its view that indebted households are sensitive to eventual rises in interest rates, and that a significant house price correction could reduce consumption. Swedish house prices have more than doubled since 2005, Fitch noted, while household indebtedness has increased to almost 180% of disposable income from less than 140%.

“A fall-out from a significant house price correction, although unexpected, could affect the sector outlook, particularly in Sweden,” it said. “We believe the banks could withstand a material correction without large retail loan losses. However, their operating environment would probably deteriorate, primarily from lower consumption.” n