Swedish covered ratings reflect risks, says S&P, despite housing fears

Dec 11th, 2015

Standard & Poor’s said on Tuesday that although there are concerns about the health of the Swedish housing market, its ratings of covered bonds in Sweden already reflect such risks, with the rating agency citing state support and resilience of its ratings to a sharp fall in house prices.

Riksbank imageS&P said that, while economic risks for Swedish banks are relatively low in a global context, imbalances are growing at an unsustainable rate, particularly linked to continuously climbing house prices and already-high household debt.

“We believe that the development in house prices in the past 18-24 months is no longer fully explained by fundamental factors and, in connection with Sweden’s high and growing household and private sector debt are exacerbating existing imbalances,” the rating agency said in its latest Banking Industry Country Risk Assessment (BICRA), which it published on the same day as its research on covered bonds.

S&P added that, in spite of the authorities’ efforts to introduce amortisation requirements, which are expected to be introduced next year, it believes that low interest rates, tax incentives, and a structural shortage of housing will continue to push existing imbalances in Sweden.

However, the rating agency said its assessment of components of both bank ratings and covered bond ratings relies on its opinion that the state would support the Swedish covered bond market if a new funding crisis emerges, as it represents a main funding source for the banking sector.

S&P assigns a jurisdictional supported rating level of “very strong” – the highest level – to Swedish covered bonds.

The rating agency also noted that its scenario analysis of the effect of various house price declines on its Swedish covered bond ratings suggests that even in a severe case where house prices fall by 30%, the covered bond ratings are likely to remain resilient.

Plans to stabilise house prices and reduce household debt may also be positive for covered bondholders, as the underlying assets’ credit quality is likely to improve, S&P added.

S&P noted that access to the central bank supports the liquidity of Swedish covered bonds. It referred to recent proposals from the Riksbank that would limit the use of covered bonds in repo transactions, but said it continues to expect that authorities will provide more accommodative measures to ensure the covered bond market continues functioning in times of stress.

Regarding its bank level ratings, S&P said that from the macro perspective, it sees a structural lack of deposits and high share of net external debt positions of the Swedish banking systems as risks.

This is partly offset, according to the rating agency, by its expectation that Sweden’s domestic bond market will continue to be liquid and that the government has an incentive to ensure a functioning covered bond market. Via its bank support law the Swedish government can also provide government guarantees to preserve financial stability, as was the case for Swedbank in 2008-2009, it added.

However, S&P said that even with these supporting factors, it considers system-wide funding an intermediate risk – as opposed to low or very low – in the Swedish banking system, mainly due to the high share of net external debt in the system compared to other systems globally.

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