The nonperforming loan (NPL) ratio of Swedish banks’ commercial real estate lending was 0.16% at Dec. 31, down from 0.18% at the end of 2021 and 0.34% a year earlier, according to the EBA’s latest risk dashboard.
This compares to a European average NPL ratio for commercial real estate of 3.74% at the end of 2022, with ratios as high as 11.87% and 11.78% in Portugal and Greece, respectively.
The figures come amid growing investor concern over Swedish banks’ above-average exposure to the Scandinavian country’s highly leveraged commercial real estate sector. It has led analysts to project that loan loss provisions will triple this year for large Nordic lenders, and attracted short sellers to shares of Sweden’s three largest banks, Svenska Handelsbanken AB (publ), Swedbank AB (publ) and Skandinaviska Enskilda Banken AB (publ).
On average, 13.51% of Swedish banks’ total loans and advances were to commercial real estate at the end of 2022, compared to a European average of 6.92%, according to the EBA. The figure is even higher for the biggest banks in Sweden, according to the country’s financial regulator, which has assessed that commercial real estate represents between 16% and 36% of each large bank’s lending to the general public.
Resilient exposure
The Swedish commercial real sector is particularly vulnerable to rising interest rates, given its high indebtedness, and could drive significant credit losses at Sweden’s banks in an economic downturn, according to the Swedish financial regulator.
A recent scenario analysis by Bloomberg Intelligence found that a 5% write-off in commercial real estate could wipe out on average 39% of large Nordic banks’ 2023 pretax profit.
So far, however, commercial real estate exposures of Swedish banks remain resilient, thanks to conservative underwriting standards, regular stress tests, hedging policies and restrictions on loan-to-value ratios, Deutsche Bank analyst Kazim Andac said in a March 6 note.
Large Swedish lenders recorded an increase in loan-loss provisions in the fourth quarter of 2022 from the previous three-month period, although these were driven mainly by updated macroeconomic assumptions and expert portfolio adjustments, rather than worsening quality.
SEB, for one, set aside a management overlay of about 300 million Swedish kronor for its commercial real estate portfolio. This was a result of a prudent interpretation of the accounting rules to cover for potential future losses, and not any deterioration in asset quality, CFO Masih Yazdi said when presenting fourth-quarter earnings.
Substantial buffers
If “worst comes to worst,” large Swedish banks have “substantial buffers” of pre-provision profit, model overlays and excess capital to protect themselves against worsening asset quality, said UBS analysts in an April 4 note.
As of April 11, US$1 was equivalent to 10.45 Swedish kronor.
Discussion about this post