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09 Mar 2010
London, 09 March 2010 -- The credit outlook for the Swedish banking sector remains negative,
although it is improving. Swedish banks still face a challenging
operating environment which will continue to put pressure on their financial
fundamentals during 2010, says Moody's Investors Service in
its new Banking System Outlook on Sweden. Swedish banks remain
exposed to key risks, notably asset quality deterioration,
particularly from the severely damaged economies of the Baltic countries
and constrained revenue generation resulting from credit risk and funding
costs. However, Swedish banks are in a better position than
they were one year ago thanks to a brighter domestic economic outlook,
some signs of stabilisation in the Baltic economies, and the easing
of conditions in the wholesale funding markets.
Moody's negative outlook for the Swedish banking system expresses
the rating agency's view on the likely future direction of fundamental
credit conditions in the industry over the next 12 to 18 months.
It does not represent a projection of rating upgrades versus downgrades.
After emerging from the most acute phase of the global financial and economic
crisis, the Swedish banking sector has remained solid overall,
thanks to its large banks' robust and stable domestic retail franchises
and resilient traditional core pre-provision profitability,
which has represented a good buffer to absorb deterioration in the main
financial ratios. "However, despite having weathered
the crisis without material systemic damage, Swedish financial institutions
have exhibited vulnerabilities particularly in terms of their funding
profiles, resulting in direct -- albeit very limited
-- government intervention," says Antonella
Pisani, a London-based Moody's Vice President-Senior
Analyst, and author of the report.
Despite being able to count on adequate capital buffers to withstand the
crisis, most of the large Swedish banks took measures to strengthen
their capital in order to absorb future asset quality deterioration,
particularly from the Baltic countries, to which the Swedish banking
system is partly exposed. However, Moody's notes that,
unlike in other banking systems, this capital has been raised directly
from the capital markets without need for government injections.
"The Swedish rated banks' domestic exposures have suffered
only very modest deterioration, with the resilient and good performance
of the retail mortgage sector partly offset by slightly weaker asset quality
on the corporate sector, particularly on SMEs and property companies.
However, for their Baltic credit exposures, the deterioration
has been rapid and severe," Ms Pisani explains. Nonetheless,
Moody's maintains a cautious view even for the Swedish exposures
going forward, given that, as asset quality problems typically
emerge with a certain time lag, it could take another year or more
before the expected credit losses are fully recognised incorporating the
effects of the increase in unemployment.
Swedish banks' high structural reliance on the capital markets poses
some funding challenges over the next few years. Given that the
government support schemes are to be gradually phased out globally --
coupled with regulatory pressures to improve liquidity positions --
Moody's expects increased demand for funds in the market,
which will translate into higher funding costs and pressure on profitability.
With regard to the new Basel proposals, Moody's anticipates
that, if they are implemented "as is", their impact
will be broadly manageable for the Swedish banking sector. It cautions,
however, that these new regulatory requirements will likely entail
higher funding costs and ultimately further pressure on the sector's
earnings-generation capacity. Given their relative dependence
on market funding, most Swedish banks will find the proposed liquidity
requirements more challenging than the stricter capital requirements.
The principal methodologies used in rating Swedish banks are the "Bank
Financial Strength Ratings: Global Methodology", February
2007 and "Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: A Refined Methodology", March 2007,
which can be found at www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the rating
process can also be found in the Rating Methodologies sub-directory
on Moody's website.
The "Banking System Outlook: Sweden" is available on
* * * * *
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Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's outlook for the Swedish banking sector is still negative but it is improving
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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