Confining people within their homes more than ever before, the global coronavirus pandemic has left many to reconsider their housing situation. In Sweden, pandemic-related trends are not only causing mortgage lending to grow, but are also changing the dynamics of the market — and the large, incumbent banks are benefiting.
The second quarter of 2020 saw an accumulative growth in mortgage loans in Sweden of 53 billion kronor, a 1.5% growth rate, according to Nordic Credit Rating. This was up from 1.3% the year before.
A drop in the borrowing interest rate and the temporary ability for borrowers to stop amortization on mortgages are likely to be driving this growth, said Sean Cotten, chief rating officer at Nordic Credit Rating, in an interview.
But the pandemic also seems to have prompted Swedes to reevaluate their housing situation, with more people moving as a result, and increasingly out of the cities.
"People are spending more time in their house and they're looking around thinking, 'maybe it's time for a change.' And they are realizing that they don't need to live two metro stops from their work," Cotten said.
This trend is reflected in the development of housing prices for April to June, where the single-family housing market surged 9.0% CAGR, while the residential apartment market dropped 7.2% CAGR, Nordic Credit Rating said in an Aug. 11 analysis, citing ValueGuard's HOX index.
Incumbent mortgage lenders, in particular, are benefiting from the pandemic, taking a larger piece of new lending than they were before the crisis broke out.
When S&P Global Market Intelligence reported on the changing Swedish mortgage market in early 2020, the largest providers were facing fierce competition from savings banks and challengers, causing them to lose market share. Swedes were "price shopping" more and more among a growing number of new actors, including nonbank providers, when looking to take up a mortgage, Cotten said.
But this competitive pressure has "sort of disappeared with the crisis," said Olivia Perney Guillot, managing director at Fitch Ratings, in an interview.
"This year, it's a very different story from last year. In the crisis, banks have massively increased their interaction with their clients. That is strengthening the big players," she said. Those interactions could be around payment holidays or other ways the banks can help clients through the crisis, she added.
Market share figures published by Nordic Credit Rating illustrate the trend. In the second quarter of 2020, Swedbank AB (publ), the country's largest mortgage lender, secured 20.1% of new mortgage lending in Sweden. This is up from 15.6% in the past 24 months, and a low of 7.2% in the fourth quarter of 2019.
Svenska Handelsbanken AB (publ), the country's second-largest mortgage provider, took 17.1% of the marginal growth in the second quarter, up from 15.4% in the past 24 months. It is the first time in years that Swedbank and Handelsbanken returned to "their natural places in the pecking order," said Nordic Credit Rating in its analysis.
Skandinaviska Enskilda Banken AB and Nordea Bank Abp, two other large banks in Sweden, also saw a rise in their share of new lending in the fourth quarter compared to the past 24 months.
"In a scenario where there's uncertainty, people tend to go to the names they know. You can clearly see that, in the most recent quarter, the more reputable, larger names took on market share," Cotten said.
Fewer mortgage transfers
For Swedbank, changing behaviors of Sweden's savings banks also contributed to its comeback on the mortgage market. In the second quarter, they provided Swedbank with larger flows as compared to the first, said CFO Anders Karlsson July 17 when presenting the bank's interim results.
The transfer of mortgage loans from savings banks has historically been an important source of income for Swedbank, which finances them through covered bonds, but this business was shrinking for the bank prior to the pandemic as savings banks were seeing opportunities to earn higher margins by keeping mortgage lending on their own balance sheets.
An increase in funding costs and uncertainty during the second quarter of 2020, however, prompted savings banks to reduce their mortgage books again by transferring more loans to Swedbank, said Cotten. Such moves bring them more certainty over their margins, he said.
As a result, savings banks secured only 2.2% of the marginal growth in the second quarter of 2020, compared to 6.1% in the fourth quarter of 2019, according to Nordic Credit Rating.
While these market changes are good news for incumbent players, the pandemic-driven forces are likely to be short-lived, Cotten said.
"There's still a long-term trend that the top four banks are losing market share," he said.
Take the example of Swedbank. Securing 20.1% of the marginal growth in the fourth quarter may be significant in light of recent market losses, but is still lower than its 23.6% share of the total Swedish mortgage market.
Furthermore, if financing costs return to pre-pandemic levels, savings banks are likely to revert to keeping mortgage loans on their own balance sheets, Cotten said. Incumbents will also continue to face competitive pressure from challenger banks and nonbank providers, he added.
One change that will likely benefit Swedbank in the longer term is that the reputational challenges it faced in light of money-laundering allegations are fading away, according to Cotten. This is one factor that in recent years has affected the bank's ability to retain customers, but which will be less significant for the lender going forward, he said.
The credit rating agency expects mortgage volumes in Sweden to grow between 5% and 6% in 2020, and house prices between 3% and 5%.
As of Aug. 19, US$1 was equivalent to 8.67 Swedish kronor.