Swedish Banks Vulnerable on Short-Term Funds, Moody’s Says

Swedish lenders’ reliance on short-term funding has left the country’s banking system vulnerable to swings in sentiment, according to Moody’s Investors Service.

Swedish banks “remain highly reliant” on market funding, with 58 percent of their total capital needs raised in the market, while covered bonds and short-term funding each account for 20 percent of the total, Moody’s said in a report today. The lenders generate 35 percent of their funding from deposits and the rest is mostly subordinated debt, Moody’s said.

“Short-term funding reliance on foreign currency renders Swedish banks vulnerable to global investor sentiment,” Moody’s said. “Most of the major Swedish banks continue to have significant asset and liability maturity mismatches, a structural risk in the banking system, but we expect the banks to make gradual progress in closing the gap.”

Swedish Finance Minister Anders Borg has warned Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB that they depend too much on funding in foreign currencies and has proposed that they help pay for the Riksbank’s currency reserve. The biggest banks in Sweden already face stricter capital rules than those set elsewhere in Europe and are required to have core Tier 1 capital ratios above 12 percent by 2015.

Sovereign Ratings

The Aaa sovereign credit ratings and stable outlooks of Sweden, Norway, Denmark and Finland “are driven by shared strengths and a sustained economic resilience relative to most other Aaa rated peers,” Moody’s said in a separate report today. Even so, “this economic resilience masks highly indebted private sectors and high house prices, which could inhibit private consumption over the coming years,” it said.

The comments from Moody’s on Swedish banks echo remarks from Standard & Poor’s, which on July 19 put the credit ratings of Handelsbanken and state-owned mortgage lender SBAB on review for a potential downgrade, saying the banks are too reliant on short-term funding. S&P on Sept. 25 ended the review by affirming the ratings, though it kept its negative outlook for both bank’s credit grades.

Structural Mismatch

“The system’s reliance on short-term wholesale funding to finance long-term assets stems in part from clients’ increasing demands for short-term interest rates on mortgage lending,” S&P said July 19.

Moody’s today also warned that “the accumulation of household debt has generated key vulnerabilities for the Swedish banking system.” The country’s financial system has “become more exposed to asset-quality deterioration and interest-rate rises, with half of new mortgage lending at variable rates,” it said.

Sweden has taken measures to try to stem credit growth and rising house prices, including introducing a cap on mortgages at 85 percent of a property’s value in 2010 and tripling risk-weights on mortgages to 15 percent this year.

While those steps helped slow credit growth to 4.5 percent last year from a pace of more than 10 percent in the five years through 2008, borrowing has again begun to accelerate. Lending grew an annual 4.8 percent in July and August, according to Statistics Sweden.

Apartment prices, which more than doubled since 2000, rose 14 percent in the 12 months through August while prices of single-family houses advanced 4 percent, according to data from Svensk Maeklarstatistik. The central bank estimates private debt will grow to 177 percent of disposable income in 2015.

“We view positively that the Riksbank and the Swedish FSA are increasing regulatory oversight on household indebtedness” by “studying the levels of debt per household, and considering amortization requirements,” Moody’s said.

Moody’s has a stable outlook on Sweden’s banking system, unchanged since November 2012, according to today’s report.

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