S&P goes negative on Nordic 10

Nov 22nd, 2012

Ten Nordic banks had their outlooks revised from stable to negative by Standard & Poor’s on Monday because of increasing economic risks arising from a longer than expected recession in the euro-zone.

S&P highlighted how Finland, Norway and Sweden have strongly export oriented economies, which mainly rely on European trading partners. A “more protracted and deeper than we previously expected” downturn in the euro area has led to a decrease in export demand that could increase the pressure on the Nordic banking systems in the long run, said the rating agency.

Sweden was the most affected by the rating action, with the outlook on seven Swedish banks — namely Nordea Bank, Landshypotek, SBAB, Skandinaviska Enskilda Banken (SEB), Sparbanken 1826, Svenska Handelsbanken, and Swedbank (alongside subsidiary Swedbank Sjuhärad) — revised from stable to negative.

S&P cited a sharp slowdown of the Swedish economy — leading to rising corporate bankruptcies, increased lay-offs, and a build-up of substantial household indebtedness — as a factor that is increasing economic risks for Swedish banks. The rating agency also noted that a weakening in the automatic stabilisers that helped the economy during the country’s early1990s crisis could make a protracted downturn “more painful” for the banking system.

“We could lower our ratings on banks operating in Sweden,” said S&P, “if we see a sustained economic decline over the coming 18 to 24 months, with rising bankruptcies, falling property prices, and rising unemployment.”

In Finland, economic risks for the banking industry have increased “moderately”, said S&P. Two Finnish banks, Pohjola and Bank of Åland, had their outlooks revised to negative.

“We believe that a more negative economic scenario could put additional pressure on the banking sector’s financial performance, increase impairment costs, and potentially lead us to lower the ratings on both banks,” said S&P.

In addition to a decrease in exports related to the euro-zone recession, S&P mentioned internal issues such as subdued domestic demand, restructuring of the pulp and paper and electronic manufacturing industries, and rising house prices as factors putting pressure on the Finnish economy.

In Norway, economic risks remain low, but they are increasing, said S&P. This could affect the standalone credit profile (SACP) of some banks, such as DNB Bank, Storebrand Bank, and Gjensidige Bank. However, S&P noted that in case of a downgrade of their SACPs the outlooks on DNB and Storebrand would be stable because of expected government and group support, respectively.

However, the outlook on Gjensidige Bank, and subsidiary Gjensidige Bank Boligkreditt, was revised from stable to negative, with S&P saying that in case of a decrease in its SACP, the bank would not benefit from any uplift from group support, as it is not yet seen as a strategic part of Gjensidige insurance group.

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