While Nordic banks have well diversified business lines in retail and corporate lending, as well as capital markets throughout the Nordic region, their relatively minor presence in the global financial system has helped partially shield them from the ongoing credit crunch. Savita Iyer-Ahrestani reports.
Inevitably, the profitability of most Nordic financial institutions has been eroded in line with the times, said Miguel Pintado, an analyst at Standard & Poor’s in Stockholm who covers regional banks. Yet no single bank has supported any major losses, Pintado said, as none had direct exposure to the subprime market. Unlike banks in the UK or elsewhere in Europe, Nordic banks haven’t been forced to increase their capital reserves, and none have experienced a significant loss in revenue. So while Nordic banks have not been totally immune to the credit crisis, they have certainly had an easier time of it than much of the rest of Europe.
“Of course, capital markets activity has been quiet, and you can see that in the top revenue line of most banks as they have had to face some mark-to-market losses,” Pintado said. “But this hasn’t been to the extent that there is any implication on bottom line profitability, and while banks have tightened their underwriting criteria, the economic prospects in the Nordic region tend to be more stable than in Western Europe.”
The relatively stronger position of the Nordic banks vis-à-vis their European peers will enable them to take advantage of the opportunities that come about as the credit crisis dissipates, said Henrik Schmidt, an analyst covering Nordic banks for Keefe, Bruyette & Woods. For the most part, the Nordic banks have strong capital ratios, and some have already leveraged the benefits: Nordea, with its strong balance sheet and credit rating, has played a significant role underwriting European leveraged syndicated loans this year, both within the Nordic region and outside it.
Iceland’s Kaupthing bank is also gearing up to exploit new opportunities. Its negligible exposure to the structured credit market has allowed it to preserve its Tier One capital ratios and maintain strong liquidity, said Thordur Palsson, managing director of business development for Kaupthing.
“It’s difficult to say for how long this crisis will continue and we are prepared for it lasting a long time,” Palsson said. “But we believe that as the dust settles, those banks that are in the strongest position will profit and we want to be one of those.”
Nevertheless, Iceland’s banks (Kaupthing included) are highly leveraged and wholesale funded, said Schmidt, and this is causing problems. The inability of these banks to fund themselves in either local or overseas markets could have an impact on their ability to do business going forward.
As is the case elsewhere in Europe, Nordic capital markets activity – the underwriting of bonds, loans and equity, domestically – has been quiet. Many companies in the region are themselves wrestling with macro factors like high commodity prices. The economic slowdown in the Baltics is another factor, particularly for banks like Swedbank and SEB, both of which have a large exposure to the region. Economic deterioration there would likely be mirrored by the quality of their loan books.
There are also increasing concerns about the covered bond markets in Denmark and Sweden, which both enjoy deep and liquid mortgage bond markets. Covered bonds constitute a large part of the bond portfolios of Danish and Swedish banks. In the case of Danske Bank and SEB, covered bonds fund their entire mortgage book, S&P’s Pintado said.
Until recently there has been no problem; even in the worst of times, when it was virtually impossible for anyone to issue senior debt anywhere, the Danish and Swedish covered bond markets remained very liquid.
“Most of the investors that invest in those bonds are local domestic pension funds, so there hasn’t been a single default in Denmark on the mortgage side for over 75 years,” Pintado said.
That might be about to change. The Danish housing market is starting to look shaky. In August, Denmark’s central bank bailed out Roskilde Bank for US$7.43bn, on account of the poor quality of its real estate loan portfolio.
Deteriorating house prices in Copenhagen mean it is likely other banks will need bail outs in the future, Pintado said. Consequently the Danish covered bond market may struggle in the next year or two.
All the same, the covered bond market in both Denmark and Sweden are “very traditional and well respected” markets, he said, providing a model for the rest of the Nordic region. Since 2007, Norwegian institutions have also been allowed to issue covered bonds, and the market there will continue to develop.