Swedish banking market is strong, despite potential housing market volatility
Nordic Credit Rating (NCR) applies a score of 'a-' for the Swedish banking market and views the domestic operating environment as stable. Swedish banks have outperformed most international peers in recent years due to steady lending growth and increased margins. Sweden's economy has been spurred by significant construction activity to address a material housing shortage and accommodate the growing population. However, we expect rising interest rates and a recalibration of housing prices to reduce the pace of capital investment and weigh on economic growth over the next two years. The banking market score is a component of NCR’s issuer ratings for financial institutions. Depending on the nature of the rated entity’s exposure and geographic profile, the score can affect up to 20% of an issuer’s overall credit rating.
“Despite uncertainty around future housing prices, the Swedish banking market continues to perform well”, says Sean Cotten, Lead Analyst for financial institutions at NCR, and adds “competition is increasing for the incumbent banks, but, generally, the banks remain positive outliers in terms of capital, earnings and loss performance among global peers.”
Swedish GDP growth is expected to be 2.9% for 2018, fuelled by low interest rates, a weak currency, strong exports, an expansionary fiscal policy, high immigration and still-high investments in housing and construction. However, there are expectations for lower growth of 2% and 1.8% in 2019 and 2020, respectively, as housing investments drop from peak levels. Consequently, unemployment is expected to fall to 6.1% in 2019 before rising slightly. NCR expects the current low interest environment to persist in the coming years, with the Swedish repo rate remaining below zero until the latter half of 2019 and growing steadily thereafter.
Sweden's banks demonstrate strong performance in key areas. The banks have high regulatory capital ratios, providing valuable capital flexibility and affording large dividend payments to shareholders. The banks have also demonstrated improved earnings and efficiency as margins on mortgage lending have steadily increased and automation and customer behaviour have allowed for significant cost savings, smaller branch networks and reduced staffing even as volumes and revenues rise. Finally, Sweden continues to stand out among European peers with respect to asset quality and loss performance, allowing for efficiency gains to be passed through to shareholders. Looking ahead, NCR expects that margin pressure from existing and newly started competitors could affect banks' future earnings from mortgage lending as interest rates begin their rise towards normality.
Sweden – scoring of national indicators
| SUBFACTOR | SCORE | RATIONALE |
| Sovereign strength | aa | Major credit rating agency average: AAA, minimum: AAA. |
| Output growth | a | We expect slowing economic growth due to a reduction in recent capital investment. |
| Credit growth | bbb | Credit growth is more than twice GDP growth, but growth remains stable and we expect it to slow as interest rates normalise. |
| Housing prices | bbb | As of Sep. 2018, nominal housing prices have a three-year annual growth rate of 3.5%, but price levels are uncertain given increasing volumes of newly produced apartments. |
| Unemployment | a | Unemployment is somewhat higher than in Nordic peers in large part due to unemployment of recent immigrants. Long-term unemployment is the lowest in the EU. |
| Available stable funding | a | Available stable funding in the form of deposits and domestic covered bonds falls short of monetary financial institution (MFI) private-sector loans, but access to other forms of long-term senior financing remains strong. |
| International cycle | bbb | Global growth prospects are improving, though supported by significant monetary stimulus. Increasing trade rhetoric and the prospect of the UK leaving the EU without a trade agreement could affect economic growth. Asset prices are at or near peak levels. |
If you have any questions, please contact:
Sean Cotten, Lead analyst, +46 732 32 43 78, sean.cotten@nordiccreditrating.com
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Nordic Credit Rating AS is a credit rating agency headquartered in Oslo with a branch in Stockholm. The company provides credit ratings to companies and financial institutions in the Nordic region, and bases its analysis on local insights. Nordic Credit Rating is registered with the European Securities and Markets Authority (ESMA).
