Scandinavian banks downgraded by Moody's

Ratings agency Moody's has downgraded Swedish banks Nordea and Svenska Handelsbanken to Aa3, and Norwegian DNB Bank to A1; all downgraded by one notch, with stable outlook. Mutually-owned lending institution Landshypotek was cut by two notches to Baa2, also with a stable outlook.

The agency said it made the downgrade because of "the potential for further shocks emanating from the euro area debt crisis to affect confidence in banks across Europe". It specifically quoted four key drivers behind the action in Sweden.

The first key driver was a comparatively high reliance on wholesale funding, thus leaving the banks exposed to changing investor sentiment. The second: it points to modest profitability deriving from price competition for retail loans in an already low interest rate environment.

Thirdly, it argues the economy and corporate borrowers would suffer from potential weakness in Europe, and that banks' variable-rate mortgage books are vulnerable to credit deterioration under rising interest rates. And, lastly, the more substantial downgrade of Landshypotek due to its reliance on a single market – agricultural lending – and on covered bonds.

Nonetheless, and in line with previous coverage of the Nordic banking system, Moody's reiterated that Swedish banks "remain at the higher end of the range across large Western European banking systems" and in a stronger position to manage credit risk than their counterparts in wider Europe.

Moreover, it points to three factors as mitigating the downgrades: positive growth in the economy, banks' ability to access market funding, and improved capitalisation. On the other hand, it warns that a slowdown of the economy or disruption in capital markets access might change the current outlook, and specifically warns Swedbank and SEB for their exposure to the Baltics.

According to the European Buyout Review, Nordea is the most widely used leveraged finance provider in Sweden over the last five years. Svenska Handelsbanken ranks third.

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• Topics
• Nordics
• Financing
• Sweden
• Nordea
• SEB
• Handelsbanken
• Norway