June 3 (Bloomberg) -- Sweden's Riksbank said lending by the Nordic country's commercial banks in the Baltic region and tumbling property values at home have increased their ``vulnerability'' and raised the risk of losses.

``Although the Swedish banks have so far succeeded in resisting the financial turmoil relatively well, their vulnerability to other risks has increased,'' Governor Stefan Ingves said in a statement on the bank's Web site today. ``Lending to companies and households in the Baltic countries is still a source of concern.''

Swedish banks have expanded into Latvia, Lithuania and Estonia to tap into faster economic growth, triggered by entry into the European Union in 2004. The Baltic economies, the EU's fastest growing in 2006, are now slowing after the surge in growth stoked inflation, prompting banks to cut lending.

Growth in the Baltic countries ``is now slackening more quickly than expected,'' Ingves said today.

Swedbank AB, the largest bank in the Baltic region, generates a third of its earnings from Estonia, Latvia and Lithuania, while SEB AB, the second-largest lender, gets one-fifth of its operating profit there.

``Growth is slowing, and while many anticipated this, it has happened at a faster pace than we thought, especially in Estonia,'' Riksbank Deputy Governor Lars Nyberg said at a meeting with journalists in Stockholm today. ``At the same time, inflation is on the rise in all countries, particularly in Latvia. These are strong warning signals.''

Property Threat

Estonia's economy grew 0.4 percent in the first quarter after expanding 4.8 percent in the fourth and 10.1 percent a year earlier. Inflation in Estonia touched a 10-year high of 11.4 percent in April. Prices in Latvia soared 17.5 percent in April.

The possibility of ``substantial falls'' in Swedish property prices also presents a threat to the country's banks, Ingves said.

The average price of real-estate in Sweden dropped 4 percent in April from March, Statistics Sweden said on May 14.

The global credit crisis, which the country's banks have so far largely avoided, is spreading to ``new assets, markets and players,'' Ingves said.

``Although there are some indications that the situation in the credit market is easing slightly, the uncertainty in the financial markets will probably persist for a long time to come,'' he said. ``The possibility that the problems will worsen further cannot be ruled out.''

The Nordic region's banks have to date ``coped well'' with the market turmoil caused by the credit shortage, Deutsche Bank AG said in a report on April 24. The Riksbank has so far not deemed it necessary to add liquidity into Sweden's interbank market.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;

Last Updated: June 3, 2008 05:56 EDT