Fitch sees Swedish systemic mortgage risks rising

Systemic risks in Sweden’s mortgage market are increasing, Fitch said on Wednesday, adding that any disruptions could hit the wider banking sector, although it noted that banks are mitigating the risks while households have good debt servicing capabilities and rated banks are strongly capitalised.

Stating that the health of Sweden’s banking system is heavily dependent on effective mortgage and housing markets, Fitch said that while credit losses on mortgage loans are low, systemic risks are increasing, with rising house prices, heavily indebted consumers and generously structured loans.

“Disruptions in Sweden’s mortgage market would be likely to have widespread negative implications for the banking sector,” said Jens Hallén, senior director, Fitch Ratings.

“Mortgage loans are important for funding because the financing model for the banks relies on good quality loans, which can be used as collateral for covered bonds issued into the wholesale markets.”

Fitch cited material concentration risk, with retail mortgage lending representing on average 50% of loans extended by Nordea, Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken and Swedbank, compared with a 36% EU average.

Adding to the systemic risks, Fitch said, are long amortisation terms, with a high 70% of mortgage loans outstanding in Sweden being interest only, and with there being no statutory requirement for households to amortise housing loans.

However, Fitch noted that borrower behaviour has been changing, with more than seven out of 10 new borrowers taking out amortising mortgages in 2014, and added that it believes an introduction of stricter amortisation plans would reduce systemic risks.

In April, plans from the Swedish FSA (Finansinspektionen, or FI) to require that new Swedish mortgages originated from August should be amortised down to a LTV of 50% were rejected by parliament.

Fitch noted that Swedish house prices are among the highest in the developed world, with personal indebtedness levels also well above the EU average. While banks have managed mortgage risks in the past, with losses on mortgages low even during the 1990s crisis, Fitch said a significant downturn in house prices would hurt banks’ risks profiles.

“Changes to interest payment tax deductibility and property taxes could lead to falling property prices,” said Hallén. “Such issues have been aired by the Riksbank but political support for them is limited.”

Noting that 60% of mortgage loans are extended on floating rates and that the average household debt-to-income ratio reached 371% for new borrowers in 2014, according to FI, Fitch said sensitivity to rising interest rates is likely to be considerable.

However, the rating agency said that strong prudential oversight, such as an 85% LTV limit on mortgages, is keeping risks in check.

It also said that stress tests carried out by the Riksbank indicate that households have good debt servicing capabilities and rated banks are strongly capitalised, although the tests do not consider the impact of a slowdown in consumer spending on banks’ corporate portfolios nor feature reverse stress-tests.

“Nevertheless,” said Hallén, “the stress test results are consistent with our view that Fitch-rated Swedish banks have robust buffers to manage mortgage-related and other risks.”

Fitch noted that the ratings assigned to Sweden’s four leading banks range from A+, on positive outlook, to AA-, stable.

Meanwhile, FI on 23 June decided to increase the countercyclical capital buffer for Sweden to 1.5%.

FI in September 2014 took the decision to set a CCB at 1.0%, to apply from 13 September 2015. In May it proposed that the buffer should be set at 1.5% from 27 June 2016, given present economic conditions.