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Baltic banking: Baltics blow cold for Swedbank

After years of benefiting from the strong economic performance of the Baltic states, Sweden’s Swedbank is now seeing the downside of its exposure to the region in the wake of the recent sharp slowdown in growth.

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."

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