Scope warns on Swedish real estate overvaluation

Concentrated exposure to domestic real estate is a key risk factor and a negative driver of Swedish bank ratings, Scope Ratings said yesterday (Thursday), warning that the Swedish property market is overvalued by 20%-30%.

Scope said this large risk concentration is a negative factor affecting the credit profiles of rated Swedish banks.

Exposure varies between banks according to their degree of geographical diversification and business model, Scope said, with Nordea (rated A+) benefiting from the lowest exposure to Swedish real estate, at 16% of total loans, while the exposures of Handelsbanken (A) and Swedbank (A-) are more than 10 times larger than their capital bases, at 55% and 69% of total loans, respectively, according to the rating agency.

Scope warned that a sharp deterioration of Swedish real estate assets performance “could significantly impact banks’ profitability, asset quality and, under more stressed assumptions, funding and capital”.

The rating agency highlighted the availability of mortgage credit on generous terms, a prolonged period of declining low real interest rates, limited amortisation requirements, a tightly regulated market, and an accommodating tax environment as factors contributing to a market overvaluation of 20%-30% compared with historical standards.

“Our conclusion is that while some of these factors appear to be structural,” said analysts at Scope, “the prolonged period of rising prices has pushed expectations regarding future price developments to all-time highs, just at the point in time where authorities seem most determined to curb excesses. While a soft landing is plausible if loose monetary policy and macro-prudential tools are finely calibrated, we believe there are inherent downside risks to this scenario.

“Given our analysis, we view favourably the Swedish FSA’s drive to increase the capital cushions of the banks as well as the recent proposals to increase the mandatory amortisation of mortgages which are over 50% of the property value as they bolster the banking system’s robustness to potential shocks.”