The fundamental credit outlook for the Swedish banking sector is negative, reflecting the weakening credit profiles of its financial institutions as a result of the worsening domestic and international macroeconomic outlook and the associated global deterioration in the credit and liquidity environment, says Moody’s Investors Service in its new Banking System Outlook on Sweden.
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.
Sweden’s macroeconomic environment weakened in 2008 and is expected to worsen more significantly in 2009 as the outlook for the global economy continues to deteriorate.
Moody’s notes that the traditional high reliance of Swedish banks on market funding created funding pressures in Q4 2008, resulting in an increase in funding costs together with a shortening of maturities, exposing the banks to higher refinancing risks than previously. The pressures on funding continued and led to the establishment of the Swedish borrowing guarantee programme in November 2008.
The banking sector’s capitalisation has been adequate until now, but ratios are expected to come under increasing pressure with more capital needed to absorb credit losses.
Moody’s views favourably the recent capital increases by Swedish banks coupled with the establishment of a government fund for capital injections, providing the banks with an increased cushion. However, this needs to be weighed against the downward rating pressure exerted by the difficult operating environment.
“Although the asset quality of Swedish banks has generally remained strong, there is evidence of modest deterioration and Moody’s expects arrears levels to rise significantly in the short-to-medium term, particularly as the slowdown in the economy will result in rising unemployment levels,” says Antonella Pisani, vice-president/senior analyst and author of this report, Moody’s.
“After several years of strong growth, the Baltic economies have slowed sharply, which is resulting in a significant deterioration in household and company credit. There is a risk that the economic downturn in the Baltic countries will be deeper than expected, which could result in a further significant weakening in asset quality and profitability indicators for the exposed Swedish banks,” continues Pisani.
L.D.