Moody’s upbeat on Sweden, but warning on boom

Moody’s has improved its outlook on the Swedish banking system from negative to stable, citing the positive impact of strong economic growth on asset quality and profitability, but the rating agency also warned of the consequences of a housing boom.

Announcing the move yesterday (Thursday), the rating agency said that it expects Sweden’s GDP growth to continue to be driven by robust domestic demand fuelled by a low interest rate environment in the country, with unemployment also falling.

“We expect the Swedish operating environment to remain supportive of bank performance, and forecast GDP growth to accelerate to 2.6% in 2015 and 2.7% in 2016, outpacing that of most other European nations,” said Giovanni Fontana, a vice president at Moody’s.

Problem loans are expected to remain, at around 1% of total loans, among the lowest in Europe, underpinned by the solid outlook, the rating agency said, adding that default risk in banks’ lending books is also mitigated by high household wealth and generous social welfare payments that protect householders’ ability to repay their mortgages.

However, Moody’s warned that asset risk is increasing on the back of a Swedish housing boom and attendant high household indebtedness of 172% of disposable income.

“In our view, a longer term continuation of current house price inflation, with prices in greater Stockholm increasing by 14.9% in the year to the end of June, has become more likely given the protracted period over which interest rates are expected to remain low,” said Fontana. “This would increase the downside risk that a slowdown or reversal in property market growth could weaken consumer confidence and general economic activity, leading to reduced credit volumes and losses in loan portfolios, particularly related to small and medium sized enterprises and commercial real estate.”

Moody’s expects the asset-weighted average Tier 1 capital level of rated banks to strengthen marginally, from 21% at end-June to 22%-23%.

“Swedish banks will retain solid capital buffers to cover increasing regulatory requirements, in particular the higher countercyclical buffer from mid-2016,” it said. “Furthermore, large banks will most likely continue to issue loss-absorbing instruments, such as Additional Tier 1 securities, to meet the stricter Basel III rules in Sweden and comply with the upcoming minimum requirement for own funds and eligible liabilities (MREL).”

The rating agency said Swedish banks’ reliance on market funding will leave them vulnerable to global investor sentiment, but added that, given their strong financial performance, they should maintain full access to international markets over the 12-18 month outlook period.