Nov 28, 2012
London, November 26th 2012 – The outlook for Sweden's banking system has been changed to stable from negative, says Moody's Investors Service in a new Banking System Outlook published today. The stable outlook primarily reflects Moody's expectations that over the next 12-18 months (1) asset quality will be strong overall; (2) strengthening capital levels will provide a good buffer against modest asset-quality deterioration; and (3) continued moderate lending growth and low provisioning levels will continue to support profitability.
The new report, entitled "Banking System Outlook: Sweden", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
While Sweden's relatively open economy is not fully immune to the ongoing downturn in the European economy, Moody's says that the Swedish economy has out-performed most euro area economies, partly insulating Swedish banks from the ongoing euro area debt crisis. Moody's estimates that GDP growth in Sweden will be slower in 2012-13 but at stronger rates than those seen across the rest of Europe -- which is unlikely to materially impair the banks' asset quality and profitability metrics.
A key driver of the change in outlook to stable is that Moody's expects that asset quality will continue to be one of the main credit strengths of Swedish banks. Problem loan levels remain well below those of other systems and we expect loan-repayment capabilities will continue to be supported by low interest rates and households' resilient financial profiles. Moody's expects that this will continue to support banks' asset quality over the outlook period. However, Moody's recognises that corporate exposures are somewhat more exposed to non-Swedish economic performance and the commercial real estate sector is sensitive to economic cycles, which may introduce some negative pressure on asset quality.
Against this backdrop, Moody's views Swedish banks' current capital levels as adequate. In addition, the rating agency believes that further capital improvements will occur following the regulator's requirement for higher capital ratios for the four largest banks, ahead of Basel III. Swedish banks' earnings are primarily driven by net interest income hich, while subject to pressure on margins, continues to provide a stable source of income. In addition, bottom-line profitability has been bolstered by the banks' strong historic asset-quality performance.
However, Swedish financial institutions are reliant on market funding and Moody's says that this reliance continues to represent a key system vulnerability. The banks' market funding is partly through the covered bond markets, which Moody's views as more stable than other forms of wholesale funding. However, the banks' high reliance on market funding renders them vulnerable to swings in investor and market sentiment and is thus a material source of credit risk. In particular, in times of market stress, this funding can become more expensive -- thereby exertingpressure on the banks' net profitability -- and restricted.
Re-disseminated by The Asian Banker