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Sweden’s Housing Boom Stirs Danish Bust Deja Vu: Nordic Credit

Danske is raising prices and curbing lending growth to help boost capital and pad itself against losses. Photographer: Linus Hook/Bloomberg
Danske is raising prices and curbing lending growth to help boost capital and pad itself against losses. Photographer: Linus Hook/Bloomberg

Danske Bank A/S, which is cutting 3,000 jobs after being dragged through housing bubbles in Denmark and Ireland, is now bracing for a possible adjustment in Sweden’s property market.

“We are concerned about the house prices in Sweden in particular, which have not seen the correction as in other economies,” Eivind Kolding, chief executive officer at Denmark’s biggest bank, said in a Nov. 8 interview in London. “This is something that we have very much on the radar.”

Danske, which is based in Copenhagen, saw writedowns swell more than 15-fold since Denmark’s housing market peaked in 2007. The boom-to-bust cycle spawned a recession, leaving more than a dozen banks insolvent. Danish house prices, which have plunged 25 percent since their peak, still have further to fall, the government-backed Economic Council said Nov. 1. In neighboring Sweden, house prices have continued their ascent since the National Housing Credit Guarantee Board in August said a bubble had formed.

Swedish Finance Minister Anders Borg has sought to rein in the nation’s banks by imposing stricter capital requirements than those set elsewhere. Borg has also warned that lenders including Nordea Bank AB will need to apply tougher risk weights on mortgages to reflect a more realistic loss probability.

If It Bursts

Borg signaled last week he wants Sweden’s banks to raise their capital buffers even further, arguing “the capital requirements that we have today are based on far too low risk weights,” in remarks delivered following a Nov. 9 parliamentary hearing.

Credit default swaps on Nordea have risen 6 percent to 90 basis points since a low on Oct. 18, according to data available on Bloomberg. Similar contracts on senior debt issued by Danske eased 8 percent to 151.3 basis points in the same period.

Without curbs, banks will continue to compete for market share, even if doing so fans imbalances, Kolding said.

“If we jointly all agree that, now, we will not loan out more, then we could adjust the bubble,” he said. “But we are in a competitive environment. I don’t think it’s our responsibility to prevent bubbles. But it is our responsibility to make sure that, if a bubble bursts, it doesn’t impact the bank too much.”

Norway’s housing market may also be at risk, though the oil-backed economy is probably in a better position to sustain price increases, he said.

‘Serious Consequences’

Sweden’s krona lost as much as 0.4 percent against the euro today and traded 0.3 percent lower at 8.6149 as of 4:04 p.m. local time. The krona fell as much as 0.6 percent against the dollar, before trading 0.4 percent lower at 6.7824.

Swedish bank lending to households rose 50 percent to 2.65 trillion kronor ($392 billion) in 2011 from 2006, driven by an 86 percent increase in mortgage lending to 2.12 trillion kronor, according to Statistics Sweden.

Riksbank Governor Stefan Ingves, who also chairs the Basel Committee on Banking Supervision, has voiced concerns about credit-driven imbalances in Sweden’s housing market. Failure to stem private indebtedness “could have very serious consequences,” and lead to a repeat of Sweden’s 1990s financial crisis, he said in an opinion piece in Svenska Dagbladet last month.

More Gains

Swedish house prices are climbing even as economic growth slows. Prices rose 2 percent in the third quarter from the three months through June, Statistics Sweden said this month. Swedish gross domestic product will expand 1.1 percent this year after growing 3.9 percent in 2011, the European Commission said Nov. 7. Danish output will grow 0.6 percent in 2012, from 0.8 percent in 2011, according to the commission.

The number of Swedish households expecting real estate prices to continue rising grew this month, according to a survey published yesterday by Stockholm-based bank SEB AB. Forty-two percent of households interviewed said they were betting house prices will go up, compared with 38 percent in October. Twenty-seven percent saw declines, down from 28 percent last month, SEB said.

The central bank left its repo rate at 1.25 percent last month after cutting it by a quarter point in September. The bank, which says its forecasts assume household debt levels won’t rise, predicts the repo rate will average 1.3 percent in the fourth quarter next year, and 1.9 percent a year later.

The yield on Denmark’s 3 percent note due November 2021 eased two basis points to 1.098 percent as of 10:05 a.m. in Copenhagen, or about 24 basis points less than similar-maturity German bunds. Sweden’s benchmark 10-year note yielded 1.391 percent.

World Record

Swedish household debt has swelled to 170 percent of disposable incomes from 90 percent in the mid-1990s, the central bank estimates. Danske’s impairments in Sweden rose almost seven-fold in the first nine months to 315 million kroner ($54 million), the bank said Oct. 30.

Denmark still holds the world record for household indebtedness, at 322 percent of disposable incomes in 2010, Standard & Poor’s estimates.

Shareholders have rewarded Danske for its strategy of cuts this year. Kolding, who took over as CEO from Peter Straarup in February, has promised to trim the company in an effort to boost returns on equity and resume shareholder payouts.

Danske shares have gained 29 percent this year, compared with a 12 percent increase in Nordea’s stock. The 38-member Bloomberg index of European financial companies rose 15 percent in the period.

Higher Fees

Danske is raising prices and curbing lending growth to help boost capital and pad itself against losses. The bank last month reported a 1.31 billion-krone net profit in the third quarter, compared with a loss of 384 million kroner a year earlier.

Danske, which has targeted a core Tier 1 capital ratio of at least 13 percent by the end of next year, will keep risk-weighted assets “fairly flat,” Kolding said.

“We will not reduce, but will keep, our risk-weighted assets at the level that they are,” he said. “Fortunately, you could say, it happens in an environment where there is not a lot of growth so that should mean that our market shares should be kept more or less intact.”

Danske, which may pay out dividends next year after shelving payouts since the crisis began in 2007, plans to raise prices throughout the Nordic region to better reflect the bank’s risks, Kolding said.

“We have done a lot of price increases in Denmark,” he said. “We see quite some potential in some of our other markets.”

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