The exposure of Swedish banks varies according to their degree of geographical diversification and business model. Among the Swedish banks we rate, Nordea (A+, stable outlook) has the lowest exposure to Swedish real estate due to the higher degree of business and geographic diversification, while the exposures of Handelsbanken (A, stable) and Swedbank (A-, stable) are more than 10 times larger than their capital bases.

Scope Ratings regards this large risk concentration as a negative factor affecting the credit profile of the banks. Indeed, while real estate assets have so far performed well, exhibiting low level of credit losses and boosting the financial fundamentals of the sector, a sharp deterioration of real estate assets performance in Sweden could significantly impact banks’ profitability, asset quality and, under more stressed assumptions, funding and capital. Real estate valuation metrics, such as the price-to-rent and price-to-disposable income ratios, point to an overvaluation compared to historical standards of 20%-30%.

Scope views favourably the Swedish FSA’s drive to increase the capital cushions of the banks as well as the recent proposals to increase the mandatory amortisation of mortgages which are over 50% of the property value as they bolster the banking system’s robustness to potential shocks.

In the research report published today Scope Ratings highlights several concurring factors that have led to the current levels of overvaluation. The report also includes a severe stress test of the real estate related exposures of Handelsbanken and Swedbank, the two banks with the largest exposures to real estate-related assets.
 

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