In the latest blow, Swedbank’s ratings were slashed by Moody’s Investors Service amid concerns that its sizeable exposure to the weakening economies of the Baltic countries through its wholly owned subsidiary, Hansabank, are pressuring its financial ratios. Moody’s cut Swedbank’s bank financial strength rating from B to B– and its deposit ratings to Aa2 from Aa1. The outlook on both these ratings remains negative. Hansabank ratings were also cut.
Swedbank was a prime beneficiary of strong economic growth in the region after it entered the Baltic banking markets in 1998 through the purchase of a majority stake in Hansabank in Estonia. However, it is now a leading victim of the rapid deterioration in the Baltic business climate. At the end of the first quarter of 2008, Baltic exposure accounted for 30% of Swedbank’s total group earnings and about 15% of the group’s lending portfolio. Through Hansabank, which it took over completely in 2005, Swedbank has leading market shares in all three Baltic countries. Swedbank has sought to mitigate its Baltic exposure by expanding into Russia and Ukraine, where banking sector growth is still strong.
Moody’s says its decision to continue to apply a negative outlook to Swedbank’s ratings "reflects the possibility under the still uncertain economic conditions in the Baltic area and a slower Swedish domestic economy of a further deterioration in Swedbank’s earnings and capitalization to levels that would be incompatible with the bank’s current ratings."
For a variety of reasons, Swedbank has been under fire for most of the past year, with critics accusing it variously of irresponsible lending and a flaky commitment to the Baltic republics. In answer to the first charge, Swedbank chief executive Jan Liden denies that Hansabank’s lending policies were to blame for the lend-and-spend spiral that has led to a property bubble, high inflation and high loan-to-GDP ratios in the Baltic republics.
He points to the fact that at between 0.5% and 0.7%, the proportion of bad loans at Hansabank throughout the region is lower than the sector average. And in a sign of its commitment to the Baltic states, the Swedish bank is rebranding Hansabank as Swedbank this autumn in an attempt to quash persistent rumours that it is planning to quit the region. "The upcoming rebranding is a way of showing our long-term commitment to the Baltic market," says Liden.