How refreshing to see crates of knobbly apples handed out in the lobby when I visited Sweden’s financial supervisor in early November. Alas, the harvest season was also coming to an end for investors in Scandinavia’s falling bank shares.
Are Sweden’s notoriously tough capital charges, I ask, a result of greater systemic risk here?
The Finansinspektionen’s executive director for banking, Martin Noréus, suggests not. Rather, he says, it has been easier to implement them because his sector is exceptionally profitable. Nevertheless, he says, high requirements reflect a period of rapid credit growth, when risk has been perceived to be very low – particularly in the mortgage market.
For banks and their investors that means time to take stock, as worries grow about an end to a 20-year-long house-price boom only moderately interrupted by the 2008 global crash.
Swedish apartments are being sold at their highest rate since the late 1990s, according to Bloomberg, while Sweden’s widely followed Nasdaq OMX Valueguard-KTH Housing Index (HOX) is falling faster than at any point since 2008, down 3% in the month to the middle of November.
It’s not just Sweden. Government statistics show property prices in Norway also fell by 1% in the third quarter. Oslo, like Stockholm, has borne the brunt of it.
Pouring more cold water on the market, the Finansinspektionen proposed in November that the government impose stricter amortization requirements for highly leveraged residential mortgage borrowers, on top of rules on loan-to-value ratios brought in last year.
“We are well aware about the risks and the imbalances of the Swedish and Nordic financial sector,” says Noréus. “Banks are heavily exposed to commercial real estate and mortgage lending in general.”
Bankers are putting on a brave face, for now.
Casper von Koskull, CEO of Scandinavia’s biggest bank, Nordea, tells me: “This is a market that’s getting quite heated. ‘Bubble’ is a strong word, but if the market cools, that’s positive.”
Rune Bjerke, CEO of Norway’s biggest bank, DNB, was similarly sanguine at an investor day in London. He drew solace from low unemployment. “The fact that we have seen a correction is a healthy development. We have no fear for loan losses at the bank.”
Research from SEB, again, doubts Swedish house prices will fall by more than 10% and that that would not have an impact on wider economic growth.
Good for banks, bad for Ikea
Like others, Noréus says the housing market is mostly an indirect risk to banks, because borrowers are so fearful of having their houses repossessed. What is good for banks, in other words, is bad for Ikea.
“The worry about deepening household debt is that [when rates rise], some households will have to radically reduce their consumption,” explains Noréus. “That will hit sectors such as retail, construction, restaurants and travel. It’s more of a macroeconomic risk that may hit the banks in the second round.”
Are we to expect, therefore, that a bank such as Swedbank will be less impacted by the housing market, conversely because it is more exposed to mortgages than other local lenders?
Scandinavia has relatively efficient foreclosure processes – and Swedbank is less exposed to Stockholm than others. But this sounds like wishful thinking, or a deflection from the issue. Household indebtedness, mostly mortgages, has risen almost every year this century in Sweden.
At a time when other European countries have deleveraged, Swedish household debt has risen from about 100% of disposable income in 2008 to more than 160% today. This is the biggest risk facing the Swedish economy, according to the Riksbank, which has added its voice to calls for tougher amortization requirements.
Swedish banks may not be facing a repeat of their early 1990s crisis, even if property valuations have risen to unsustainably high levels, including in commercial real estate.
Although news on house prices weighed on the krona in November, Sweden now has no need to hike rates to defend a fixed exchange rate, unlike the pre-euro 1990s. Interest rate rises, too, would be from historic lows. And if the economy elsewhere in Europe continues to recover, that will further mitigate specifically Nordic problems.
Nevertheless, this may well mark the end of the years when Scandinavian banks were held up as examples for other banks in Europe. Even if mortgage losses are low, a slowing Nordic housing market will lead to lower revenue growth at the banks, when banks elsewhere in Europe are recovering.
Research from KBW in November said Nordic banks’ share premiums over other European banks could be about to fall, as rising defaults mean greater demands on capital and therefore relatively less impressive dividend policies.
After downgrading most Scandinavian banks, including an underweight recommendation on former poster child Svenska Handelsbanken, KBW now has more overweight recommendations on Italian banks.
All this might show Swedish bankers were never better, just in a better market.
Swedbank’s head of investor relations, Gregori Karamouzis, admits digital banking is relatively advanced in Scandinavia, not because they are geniuses but because the countries are small and the banks few, so it is easier to work together on projects such as Sweden’s popular mobile payments app, Swish.
More importantly, as Sweden suffered an earlier crisis and is not in the eurozone, its banks have been at a different point in the economic cycle.
They have not entirely wasted their time: they have concentrated on making their businesses more efficient rather than focusing on a more immediate search for capital. Other European banks had to do both at the same time.