Banks Can Withstand Swedish Housing Price Slump, Fitch Predicts
A price slump on that scale would be “very manageable for the banks,” and would have “little impact on the level of impaired assets or loan impairment charges,” Jens Hallen, director for financial institutions at Fitch, said yesterday in an interview in Stockholm. “We don’t expect to see any significant loan losses directly from the Swedish banks’ mortgage portfolios.”
Sweden is forcing its banks to build up bigger capital reserves than lenders elsewhere and wants the industry to apply tougher risk weights to mortgage assets. The pro-active approach has helped make Svenska Handelsbanken AB (SHBA), Swedbank AB (SWEDA) and SEB AB the best-capitalized banks in the European Union.
“Their capital is strong and their profitability levels are good, so they can absorb losses,” Hallen said. “What’s limiting risks of significant impairment charges in the first place is households’ ability to pay, and effectively the incentives to continue to pay on your mortgage.”
Sweden’s four biggest banks, including Nordea Bank AB (NDA), already exceed a 12 percent core Tier 1 requirement that takes effect in 2015. This year’s minimum requirement is 10 percent. That compares with a 7 percent rule set by the Basel Committee on Banking Supervision that’s due to become effective by 2019.
The government of Prime Minister Fredrik Reinfeldt says the stricter rules are needed to protect taxpayers. The country’s 1990s financial crisis resulted in the state taking over some banks’ toxic loans.
Sweden’s central bank has also argued in favor of stricter controls. The Riksbank favors a cap on household debt after levels rose to a record this year. House prices, little changed over the past two years, have risen about 25 percent since 2006.
Household debt, now at about 173 percent of disposable incomes, far exceeds the 135 percent peak reached at the height of the 1990s crisis. That “gives you at least a proxy for what might be sustainable,” Michael Wolf, the chief executive officer of Swedbank, said in an interview on Dec. 4.
The level “can affect the sensitivity of Swedish households, in particular if a significant correction in house prices is combined with an increase in interest rates or higher unemployment,” Hallen said. Still, “we don’t believe it is a bubble,” he said. Prices will probably decline over the next 18 to 24 months, Fitch estimates.
Aside from borrowing caps, the Riksbank has also discussed forcing homeowners to amortize their debt. That would follow an 85 percent loan-to-value cap introduced in 2010, a measure that helped slow household borrowing growth from more than 10 percent between 2004 and 2008, to 4.5 percent in December.
Sweden’s Financial Supervisory Authority said last year it will triple the risk weights banks must apply to their mortgage assets amid concern lenders were underestimating the probability of losses. The proposals would send risk weights to 15 percent.
Nordea’s loan loss ratio in Sweden rose to 7 basis points of total lending in the fourth quarter, from 3 basis points in the third. That was the lowest ratio in all the bank’s markets and compares with 55 basis points in Denmark, 13 in Finland and 11 in Norway, according to its fourth-quarter report. Credit impairments at Swedbank’s Swedish retail unit jumped 48 percent to 102 million kronor in the three months through December, from 69 million kronor in the third quarter.
Nordea’s core Tier 1 capital ratio reached 13.1 percent of risk-weighted assets at the end of last year, while Swedbank’s was 17.4 percent and SEB’s 15.1 percent. Handelsbanken had a ratio of 17.9 percent at the end of the third quarter.
Financial Markets Minister Peter Norman last month warned lenders against amassing too much capital, and gave the industry the go-ahead to raise dividend payouts.
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