Nordic Credit Rating (NCR) applies a score of 'a-' for the Swedish banking market and views the domestic operating environment as stable. Swedish banks have outperformed most of their international peers in recent years due to steady lending growth and increased margins. Until 2018, the Swedish economy had been driven by significant construction activity to address a material housing shortage and accommodate a growing population. Since then, lower building activity and a weaker international outlook have led to lower GDP forecasts for 2020/2021. Environmental, social and governance (ESG) issues related to the Baltic money laundering scandal are considered in our final assessment. The banking market score (a-) is a component of NCR's issuer ratings for financial institutions. Depending on the nature of a rated entity's exposure and geographic profile, the score can affect up to 20% of the overall credit rating.
"Swedish banks continue to stand out among European peers with respect to asset quality and loss performance," says Sean Cotten, Chief Rating Officer at Nordic Credit Rating. "Moreover, the banks have strong regulatory capital ratios and robust earnings despite increased compliance investments."
Swedish investors tend to be highly focused on ESG issues, and Swedbank, Danske Bank and SEB have encountered ESG challenges in their Baltic operations, which have impacted their domestic customer perception and market share. The banks' need to address internal compliance issues and the potential for material fines in the wake of international investigations have weakened the Swedish bank market during the past year (see Swedbank's controversy spills over to Swedish savings banks, 29 Mar. 2019).
Looking ahead, increases in risk weights for commercial real estate exposures proposed by the Swedish regulator could materially affect the banking market. Real estate activities represent around 60% of Swedish banks' corporate exposure (compared with only 27% at the EU/EEA level according to the European Banking Authority). Higher capital requirements and higher required interest rates from commercial real estate exposures could push more creditworthy real estate borrowers into the capital markets, affecting growth prospects for Swedish banks. Banks could be forced to pursue growth in other channels (for example, retail mortgages and/or consumer lending) or reduce their currently-high return on equity expectations as a result, with consequences for share prices and risk appetite. In addition, NCR expects that margin pressure from existing and new competitors could affect banks' future earnings from mortgage lending as policy rates are expected to remain stable throughout 2020 and 2021.
Sweden – scoring of national indicators
| Subfactor | Score | Rationale |
|---|---|---|
| Sovereign strength | aa | Major credit rating agency average: AAA, minimum: AAA. |
| Output growth | a | We expect slowing economic growth due to a reduction in recent capital investment and a weakening of the international outlook. |
| Credit growth | bbb | Credit growth is more than twice GDP growth, but remains stable and we expect it to slow as interest rates normalise or economic growth subsides. |
| Housing prices | bbb | A cooling housing market has led to lower building activity. This could trigger a new housing price boom. |
| Unemployment | a | Unemployment is higher than in Nordic neighbours in large part due to high unemployment among recent immigrants. Long-term unemployment is the lowest in the EU. |
| Available stable funding | a | Available stable funding in the form of deposits and domestic covered bonds falls short of monetary financial institution (MFI) private-sector loans, but access to other forms of long-term senior financing remains strong. |
| International cycle | bb | Global growth prospects are weakening, though supported by significant monetary stimulus. Trade rhetoric and a hard Brexit could affect economic growth. Asset prices are at or near peak levels but are expected to remain high. |
Analyst contact details:
Geir Kristiansen, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, +46 732 324 378, sean.cotten@nordiccreditrating.com