The credit outlook for rated Finnish banks remains stable, reflecting their strong domestic franchises, limited risk appetite and good financial fundamentals, Moody’s Investors Service said in its new Banking System Outlook for
“The market turmoil in the second half of 2007 has so far had marginal impact on the Finnish banks, which have limited indirect exposure to the
Meanwhile, the core customer businesses of all major banks have continued to benefit from the buoyant economic environment. As regards liquidity, the Finnish money market has functioned despite the turmoil — some larger banks have even reported increased demand for their paper in the interbank market. The prudent policies that the Finnish banks follow have thus resulted in them being seen as safer counterparties, Moody’s notes.
The Finnish banking system appears to be the most concentrated of the Nordic countries, with the three largest banking groups — Nordea Bank Finland, OP-Pohjola Group and Sampo Bank — together controlling about 75% of total lending. It is also characterised by a stronger presence of foreign, particularly Scandinavian, banking groups, which together have over a 50% market share of both lending and deposits.
Most of the Finnish banks have retained their retail focus and employ relatively similar strategies in this segment business. Given that the competition in mortgage lending has remained intense and the banks are funding these activities to a larger extent via covered bonds, Moody’s believes that margins in mortgage lending remain low. In corporate lending, the margin pressure has stabilised in recent months but the market is competitive as many foreign banks are active.
“The rated Finnish banks continue to display sound asset quality and sufficient loan-loss reserves. Good lending growth and the increase in interest rates have compensated for the margin pressure and the profitability of the banks remains at solid levels. However, both asset quality and profitability could come under pressure if the economic cycle turns and unemployment starts to increase. Indeed, there have been some signs of a higher amount of individual defaults and the growth in the housing market is slowing down,” Romo explained.
Capitalisation of the banks is solid, especially considering that most of the lending is to households in the form of mortgages, providing a buffer against losses. Moody’s expects that, as Basel II regulations become effective, most of the banks will see a reduction in their capital requirements due to their retail concentration.
Going forward, cost containment is a key challenge and should be an area of focus for the Finnish banks. In addition, banks face funding pressures as a result of savings disintermediation. Therefore, their reliance on alternative funding sources to deposits is likely to increase in the future, with an impact on funding costs.
