Negative outlook maintained for Finnish banking

Moody's Investors Service has published an in-depth Banking System Outlook on Finland in which the rating agency reiterates that its fundamental credit outlook for the banking system is negative, having changed the outlook from stable in April. This reflects its view that the severely contracting economy will likely contribute to a further weakening in banks' credit fundamentals.
In Moody's view, the weakening economic environment in Finland will continue to have an adverse effect on the asset quality and profitability of Finnish banks. "We expect problem loans to increase significantly, although from a low level, and, in addition to increased credit risk costs, high funding costs to continue to weigh on banks' profitability," said Kimmo Rama, a Moody's Senior Analyst. Moody's also expects fee and commission income to remain under pressure due to weakened asset management and corporate finance activities.
The Finnish banking system has proven relatively resilient to the challenges confronting banking systems globally. This is largely due to the fact that the exposure of Finnish banks to toxic financial assets and failed financial institutions has been minimal, partly explained by Finnish banks being more oriented towards traditional banking activities.
However, given that the crisis on financial markets has now spread extensively into the real economy, Moody's expects Finnish banks to be adversely affected.
An important indicator of the weakened credit environment is the increase in the number of bankruptcies. Overall, corporate bankruptcies increased by 16% in 2008, spread across all industries, but most heavily affecting the services sector. Moody's also expects the recession to have an adverse effect on the debt servicing ability of households. "Positively, a large proportion of Finnish households' mortgage loans are variable rate loans, which at a time of decreasing interest rates will reduce the burden of debt servicing," added Rama.
Like other Nordic countries, Moody's notes that the Finnish government has introduced state guarantees as a measure to support banks' funding. Currently, the government guarantees up to EUR 50 bln for refinancing purposes, limited to amounts falling due by the end of 2009. A state guarantee can be given as a security for certificates of deposits that have a maturity of three to 12 months or unsecured bond issues that have a maturity of more than one year and a maximum of five years or for mortgage-backed notes that have a maturity of a maximum of five years.
The government also offers, to deposit-taking banks only, interest-bearing subordinated loans (up to EUR 4 bln) that can be considered as banks' Tier 1 capital. So far, no Finnish banks have made use of the government's guarantee or capital loans, which can be partly explained by their adequate capital levels.