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Swedish Household Debt Growth Is Swedbank’s Biggest Worry

Swedbank CEO Michael Wolf
Michael Wolf, chief executive officer of Swedbank AB. Photographer: Casper Hedberg/Bloomberg

Sweden’s biggest mortgage lender is deliberately losing market share in an effort to protect itself from impairments amid record household indebtedness.

Sweden’s housing market probably faces “some sort of adjustment,” Michael Wolf, Swedbank AB chief executive officer, said in an interview at the bank’s headquarters in Stockholm yesterday. “You are seeing it gradually as we speak. I am not concerned about a house bubble -- I am more concerned about the debt level.”

The threat posed to Sweden’s financial stability by rising household debt burdens has prompted Riksbank Governor Stefan Ingves to warn he’ll respond with monetary measures. Ingves, who’s also the chairman of the Basel Committee on Banking Supervision, said yesterday central banks can’t ignore credit-driven imbalances in property markets. Sweden now needs to “de-risk” itself by cutting private debt, according to Wolf.

Household debt has surged to 170 percent of disposable incomes, compared with 90 percent in 1996, central bank data show. Other Nordic lenders have indicated they’re wary of developments in Sweden. Danske Bank A/S, which is cutting 3,000 jobs after enduring housing busts in Denmark and Ireland, said last month it’s bracing for a possible adjustment in Sweden’s housing market.

Stricter Rules

Sweden has responded by requiring its banks, which control assets more than four times the size of the $550 billion economy, to meet stricter capital standards than those set elsewhere. Finance Minister Anders Borg told banks last month they face higher risk weights on their mortgage assets, and the regulator has since tripled its requirements.

Sweden is pursuing a pro-active regulatory policy after enduring a banking meltdown in the 1990s, which saw the government step in and take control of toxic loans. Household debt levels now are even higher than they were at their peak during that crisis.

“After 1992-1994, the debt level peaked at 135 percent, and that gives you at least a proxy for what might be sustainable,” Wolf said. For now, Swedes are “addressing their debt levels and house prices are gradually sort of flattening out,” he said. “Sweden is de-risking itself.”

Lost Market

Swedbank has lost market share in the past three years, and the lender now has about 8 percent to 12 percent of new mortgages. While Swedbank controlled 29 percent of the total Swedish mortgage market in 2007, its share fell to 27 percent in 2010 and to 26 percent in 2011, according to information on the lender’s website.

The bank’s proportion of new lending should rise to as high as 25 percent once “the market is pricing risk correctly and lending standards become more stringent across the banking sector,” Wolf said.

Swedbank advanced 0.2 krona, or 0.2 percent, to 124.8 kronor as of 12:22 p.m. in Stockholm trading. The Swedish krona weakened 0.2 percent to 8.6467 against the euro.

Swedbank, which suffered severe losses in the Baltics after expanding there before the former Soviet states’ boom turned into a bust in 2009, has been more restrictive in its lending practices since, Wolf said. Mortgages make up half of Swedbank’s balance sheet and account for 15 percent of its profit, he said.

Measures Discussed

The central bank has discussed the possibility of introducing loan limits relative to household incomes, or forcing borrowers to amortize their mortgages to stem imbalances. While an 85 percent cap on loans relative to property values was introduced in 2010, more measures could be needed to curb debt levels further, the Riksbank said.

Though household borrowing has slowed since the loan-to-value cap was introduced, mortgage lending was still growing an annual 4.6 percent in the third quarter.

The Stockholm-based regulator said today lending to Swedish households rose an annual 3.9 percent in the third quarter, while total lending, which includes loans by Swedish banks given outside the country, was 0.7 percent. Loan losses at Sweden’s largest banks were 2.8 billion kronor ($424 million) last quarter, slightly higher than in the previous three-month period, it said.

Household borrowing should slow to match Sweden’s economic growth rate, Wolf said. Gross domestic product expanded 0.5 percent in the third quarter from the three months through June. GDP will probably expand 0.9 percent this year and 1.8 percent in 2013, the central bank estimates.

‘Safe Distance’

Sweden’s banks already have ratios that exceed the 12 percent core Tier 1 capital they need to hold by 2015, and next year’s 10 percent target. Svenska Handelsbanken AB and Swedbank, the European Union’s best-capitalized major banks, had core Tier 1 capital ratios of 17.9 percent and 17.3 percent, respectively, at the end of September.

“You should be at a very safe distance from the minimum requirements and I think we’re meeting that criteria,” Wolf said. “In light of that, then, of course it’s efficient for society if we can distribute capital. With the profit and cash-flow generation we have now and the very limited credit demand, there is no need for that capital that is being built to be used, because there is no demand,” he said.

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