Moody’s still negative on Finnish banking system

The outlook for the Finnish banking system remains negative, said Moody’s yesterday (Wednesday), citing as driving factors its expectations of a continued weak operating environment, increasing household indebtedness, and high reliance on wholesale funding in the context of prevailing capital markets volatility.

However, the outlook on all rated Finnish banks is stable following downgrades in May, noted Moody’s, saying that it considers that the banks will be able to cope with the moderate negative pressure in the banking system at their prevailing rating levels.

The rating agency highlighted how Finnish banks are operating in a challenging economic climate characterised by limited GDP growth, forecast as being a modest 0.3% in 2013, due to a deterioration in export growth, mainly as a result of the crisis in the euro-zone affecting demand from key trading partners. A slowdown in export growth has been most pronounced in basic manufacturing sectors such as forestry products and iron and steel, according to Moody’s.

A weak operating environment may put pressure on the quality of Finnish banks’ assets, said Moody’s. The rating agency acknowledged that Finland’s banking system had a relatively good problem loan ratio compared with other European jurisdictions as at the end of 2011, and that it was only slightly above those of Sweden and Norway, with problem loans below 2% of total gross loans. However, Moody’s said that it expects an increasing number of corporate bankruptcies in 2013 that could increase pressure on the quality of assets owned by Finnish banks.

Also putting pressure on asset quality could be the growing level of household indebtedness from historic lows, during a period of low interest rates, as it could increase the risk of debt repayment problems, said Moody’s.

The rating agency said that it views as positive a recent proposal that the Finnish Financial Supervisory Authority impose loan-to-value restrictions on mortgage lending, especially after a recent survey by the authority highlighted that 40% of housing loans were above a recommended 90% limit.

As for funding access, Moody’s noted that Finnish banks are viewed positively by international investors. Market funding does not account for a particularly high share of the banks’ total funding compared with many other European banking systems, standing at around 53% at the end of 2011 — which rises to 68% if asset weighted to adjust for Nordea Bank Finland’s greater market funds reliance — it said, and deposits have grown. However, the role played by market funding does leave the banks vulnerable to changes in fragile investor confidence, according to Moody’s.

Moody’s said that the Finnish covered bond market has grown in absolute terms, especially during the financial crisis when other funding options were limited. However, the rating agency does not see it as “having the track record and scale to serve as a reliable source of market funding”.

The rating agency highlighted as a positive element a stabilisation in the residential real estate sector. Although rising, house prices are in line with fundamentals such as income growth, and construction plans are within long term estimated housing needs for Finland, said the rating agency.