Swedish banks' commercial property problem loans lowest in Europe – EBA

Swedish banks recorded the lowest proportion of problem loans to commercial real estate at the end of 2022 compared to European peers, according to data from the European Banking Authority (EBA).

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.

"The underlying portfolio, both in commercial real estate and the balance sheet in general, looks very solid," Yazdi said.

SEB posted a decline in commercial real estate loans that are considered to be credit impaired, in Stage 3, to 129 million kronor at the end of 2022, from 173 million kroner a year earlier. Meanwhile, commercial real estate loans in Stage 2, or those that have seen a significant increase in credit risk but no objective evidence of impairment, were down to 2.21 billion kronor from 2.52 billion kronor over the same period.

A Swedbank spokesperson told S&P Global Market Intelligence that the bank's credit quality remains strong, with largely unchanged indicators, such as late payments, during the fourth quarter.

"Real estate exposure remains in line with the bank's strategy and risk appetite," it said. "In addition, we are confident in the fact that we have maintained good credit standards over time."

Handelsbanken did not respond to a request for comment.

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.

"While a substantial rise in loan losses would almost certainly be a negative for the share prices of Nordic banks short term, we think these buffers mean that we can feel comfortable with the banks' share count and that they will remain profitable even in very severe scenarios," UBS analysts said.

As of April 11, US$1 was equivalent to 10.45 Swedish kronor.