Extreme monetary conditions are adding to the risk of a “property market correction” in Scandinavia’s largest economy, according to Moody’s Investors Service.

Switzerland faces similar hurdles, though the risks to the housing market are more pronounced in Sweden, Moody’s said. Banks in both countries will see their lending income suffer as policy rates remain below zero, according to the rating company.

“As benchmark rates remain in negative territory, we expect tightening
interest margins to increasingly put pressure on revenues for banks in
Sweden and Switzerland," Oscar Heemskerk, associate managing
director at Moody’s, said in a statement. "Negative interest rates also increase the sector’s vulnerability to high household indebtedness and a property market correction, particularly in Sweden."

Switzerland’s policy rate has been at minus 0.75 percent since January last year. Sweden’s Riksbank, which this week holds its second monetary policy meeting of 2016, cut its benchmark repo rate by 15 basis points in February, to minus 0.5 percent. That move “is putting further pressure on deposit margins. As a result, Moody’s anticipates net interest margins to tighten slightly this year,” Heemskerk said.

The negative-rate environment in Sweden is adding to “banks’ exposure to the downside risk of significant house price corrections,” he said.

Though Swedish household indebtedness is high, risks are balanced by high wealth levels, generous unemployment benefits and a shortage of homes that is likely to buoy prices, according to Moody’s.

Banks don’t necessarily face big losses on mortgage loans, but the rating company says it “would expect any substantial property price decline to curb credit growth and weaken general economic activity, leading to losses arising in banks’ SME and CRE portfolios.”

Sweden’s four biggest banks start reporting first-quarter earnings this week, led by Svenska Handelsbanken AB on April 20. Swedbank AB, Nordea Bank AB and SEB AB all publish their results next week.

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