Moody’s: negative Swedish rates to squeeze banks

Feb 27th, 2015

Negative interest rates will squeeze Swedish banks’ margins and reduce their profitability, Moody’s said on Monday, after Sweden’s central bank reduced its repo rate from 0.0% to negative 0.10% on February 12.

Riksbank imageThe rating agency said that while the Riksbank’s rate cut may reduce funding costs for Sweden’s banks, the negative impact on their interest rate margins will outweigh such benefits.

Moody’s noted that, according to Swedish regulator Finansinspectionen, banks have in recent years been able to extract higher lending margins by not fully reflecting the reduction in their funding costs in their lending rates. The costs of covered bond funding have declined even as deposit pricing nears its floor, the agency added.

To date, Moody’s said, competitive pressure has eased as all major Swedish banks have required higher margins to comply with higher capital requirements, introduced in August 2014, and to meet their double-digit return on equity targets with these larger capital bases.

However, the rating agency said that with funding costs already low increasing competitive pressure will hit banks’ margins.

“Although the rate cut may lead to funding cost reductions that assist bank profitability, we think funding prices are already at very low levels, so that any emerging competitive pressure on asset margins will reduce profitability,” the rating agency said.

“In particular, we expect competitive pressures to pick up as smaller lenders, including SBAB Bank AB publ and Skandiabanken AB, have announced their willingness to boost mortgage lending.”

Moody’s added that it also expects the low interest rates to lead to further increases in household indebtedness, which reached 150% at year-end 2013, according to Eurostat.

“We consider the increased indebtedness a structural vulnerability of the system, making the economy more susceptible to the risk of future interest rate increases and property price corrections,” it said.

Moody’s report echoes another on 12 February when it said that although record low interest rates in Denmark will offer short term opportunities to the country’s banks, the institutions’ margins will suffer if negative rates prevail in the long term.

Email this to someoneShare on LinkedInTweet about this on TwitterShare on Google+Share on FacebookShare on RedditDigg thisPin on PinterestShare on Tumblr
Tags: , ,