Negative outlook for Swedish banking system

The fundamental credit outlook for the Swedish banking sector is negative, reflecting the weakening credit profiles of its financial institutions as a result of the worsening domestic and international macroeconomic outlook and the associated global deterioration in the credit and liquidity environment, Moody's Investors Service said in its new Banking System Outlook on Sweden.
While Swedish banks have only had modest exposure to structured asset classes at risk and US sub-prime assets, the significant threat to the sector derives in particular from the sizeable exposure of some Swedish banks to the Baltic countries, which are undergoing a painful and severe economic adjustment.
Nonetheless, despite the heightened vulnerabilities, Moody's still considers the Swedish financial sector to be solid overall, thanks to its robust and stable domestic retail franchises and historically good financial fundamentals, which should represent a good buffer to absorb some deterioration in the key financial ratios.
Sweden's macroeconomic environment weakened in 2008 and is expected to worsen more significantly in 2009 as the outlook for the global economy continues to deteriorate.
Moody's noted that Swedish banks have expanded abroad to a significant extent over the past decade, with some of them, particularly Swedbank and SEB, heavily increasing their exposure to the Baltic countries. As a consequence, these banks are now highly vulnerable to the acute economic deterioration in Estonia, Latvia and Lithuania.
"After several years of strong growth, the Baltic economies have slowed sharply, which is resulting in a significant deterioration in household and company credit. There is a risk that the economic downturn in the Baltic countries will be deeper than expected, which could result in a further significant weakening in asset quality and profitability indicators for the exposed Swedish banks," said Antonella Pisani, a Moody's senior analyst.
Swedish banks have felt the impact of the global financial crisis (particularly since September 2008) on their funding positions. Moody's noted that the traditional high reliance of Swedish banks on market funding created funding pressures in Q4 2008, resulting in an increase in funding costs together with a shortening of maturities, exposing the banks to higher refinancing risks than previously. The pressures on funding continued and led to the establishment of the Swedish borrowing guarantee programme in November 2008.
The banking sector's capitalisation has been adequate until now, but ratios are expected to come under increasing pressure with more capital needed to absorb credit losses. Moody's views favourably the recent capital increases by Swedish banks coupled with the establishment of a government fund for capital injections, providing the banks with an increased cushion. However, this needs to be weighed against the downward rating pressure exerted by the difficult operating environment.