A healthy economy
With an average growth rate of 2,5% in the period 1992–2008, Sweden has long been one of the economically strong countries of the EU27 (+1,8% France, +1,5% Germany, +1,3% % Italy). The economic-financial crisis of 2008-09 and subsequent events have further strengthened this position: with GDP equal to 100 in 2007, at the end of 2012 Sweden was at 105,2, the EU27 at 99,3, Germany at 103,7, Italy at 93,0. The developments expected for the remainder of the current year and for 2014 point to a further increase in this advantage.
After a slightly more intense recession in 2008-09 than that experienced in the rest of the continent, Sweden has managed to fuel a solid and continuous recovery, thus ranking among the 13 EU27 countries in a position to avoid a new phase of stagnation/recession. In the three-year period 2010-12 private consumption increased overall (in real terms) by 7,8% (+0,5% on average in the EU27) while investments in machinery exceeded 21% (+6%). Unemployment, although above the long-term average (7,4% in the period 1992-2008) is in any case well below the level recorded in area 2 as a whole (in 2012, 8,0% compared to 10,5 .27% in the EU11,4 and 2,5% in the Eurozone). Furthermore, for at least twenty years, the external accounts have been largely in surplus: in relation to GDP at the end of last year, the trade balance has increased by 7%, and that of the current accounts by +XNUMX%.
The economic growth forecast is favorable both for the current year (+1,5% compared to -0,1% in the EU27) and for the next (+2,5% vs +1,4%). However, if there were a need for an anti-cyclical intervention, Sweden has ample room to implement it: the public debt does not reach 40% of GDP (almost 50 percentage points less than the EU27 average), a consequence of generally positive current balances (only four exceptions after 2000) or at most negative to a very limited extent (the last public deficit exceeding 1,5% of GDP dates back to 1997).
Among the less favorable aspects of the Swedish scenario is the high level of debt accumulated by households and businesses. The overall exposure of the non-financial private sector is (2013) above 250% of GDP, a level even higher than that found in the United Kingdom or Switzerland (both around 200%). The annual service of this debt is decidedly high (over 2012% of GDP in 30) and well above the long-term trend (6 percentage points above the 1995-2007 average).
Of this debt, about a third is owned by households, a circumstance that places Sweden in the medium-high part of the ranking. To mitigate the risk of instability deriving from it is the observation (albeit dating back to 2007) that 57% of the debt rests on the first 20% of income recipients. The "full recourse" clause in Swedish law also helps to limit the number of insolvencies. Obviously, less decisive is the consideration that Swedish households can offset this debt with three times as much wealth, since the main components of this latter size (real estate and many financial assets) are of variable value and/or liquidity.
The other two-thirds of the exposure of the private non-financial sector is attributable to businesses, with a proportion to GDP twice the EU average (on a consolidated basis, in 2010 139% compared to 69%). Compared to the maximum levels reached in mid-2009, however, the ratio recorded a clear decline. Such high levels are partly explained by the relatively large presence of multinational companies, which through intense intra-group activity and cross border benefit from Swedish tax law. By deducting this type of transaction, the aforementioned ratio would fall below 90%.
A large banking system serving the entire region
There are just under 120 credit institutions operating in Sweden. Among them, the 4 largest groups centralize around 70% of total assets: in order of size, Nordea, SEB, Handelsbanken, Swedbank. Of these four groups, Nordea is definitely the most important, with a balance sheet surplus not too different from the sum of that of the other three.
The ratio of banking assets to GDP is particularly high in Sweden (over 400%, fourth in the EU27); if foreign affiliates are excluded, the ratio is reduced by about two-fifths, but still remains above the continental average.
The foreign projection appears pronounced but it is a regional rather than an international activity: given the total of loans of the four major groups equal to 100, in March 2013 54% were addressed to national customers, 36% to residents of other countries Nordics (Denmark, Norway and Finland), 4% towards operators from the Baltic countries (Lithuania, Estonia and Latvia). The share of outstanding loans to these latter countries, which are economically more fragile, has decreased sharply in recent years (between 2009 and 2012, a contraction of more than 25%).
Overall, the large Swedish banking groups favor the function of commercial bank: loans to operators in the non-financial sector (resident and non-resident) represent (2012) on average 57% of total assets (62% in Italy), with a minimum of 50% and a maximum of 70%. The lowest value is that of Nordea, the group relatively more involved in the financial turbulence of 2008-097.
When examining the Swedish credit environment it is worth recalling that in the early 90s the Scandinavian countries found themselves immersed in a very deep banking crisis. It was essentially three parallel crises, with few opportunities for contagion (financial flows cross-border were much smaller at the time), however originating from similar factors (a liberalization process causing too rapid growth in loans, in turn the origin of a real estate bubble). The crisis lasted about four years and had its most acute moment in 1991-92 when the losses recorded in bank balance sheets in relation to their respective GDP were between 2,8% in Norway and 4,4% in Finland. The crisis was resolved, above all, through a large public recapitalization the amount of which (compared to GDP) was equal to 2,6% in Norway, 13,7% in Finland, 4,4% in Sweden. Having recovered the necessary stability and solidity, a reprivatization process was started which in the case of Sweden has seen one of its last steps in recent days.
A banking system with high profitability but with some serious problems
For about four years, the financial markets have valued the shares of the largest Swedish banks more favorably than they do for US and (even more so) European lenders. Although lower than in the years prior to 2008, the profitability of Swedish banks remains appreciable with a high RoE (around 12% in 2012), a multiple of the 3-4% of a representative sample of large European banks.
The very low level of the cost of risk (15 basis points at the latest survey) contributes significantly to this enviable result, a situation which according to the Central Bank should also be confirmed in the three-year period 2013-15. A relative source of concern is the exposure to companies in Denmark and those in the shipbuilding sector (largely located in Norway). The price of real estate has stopped falling but still remains relatively high when viewed from a historical perspective.
The generally favorable macroeconomic environment in the country and large parts of the region is the most important argument in favor of Swedish banks.
As also highlighted in the latest Financial Stability Report, the large Swedish banks have some serious imbalances, including a very high dependence on the international interbank market, or a deposit base much lower than the volume of loans disbursed. At the end of 2012, the percentage ratio between loans and deposits for non-financial customers was on average 185, with two of the four largest groups well above the 200 mark. Foreign currency funding on the international interbank market is therefore very important : measured with respect to GDP, it has gone from around 20% in 2003 to just under 60% this year.
The central bank, aware of this vulnerability, intervened by imposing some constraints on the major groups, some already achieved, others still to be achieved. In addition to compliance with certain disclosure obligations, among the requirements already met it is certainly important to remember that of a level of the Liquidity Coverage Ratio of no less than 100. This is an early application of the Basel 3 rules which provide for a 60% quota by the beginning of 2015 with an increase of 10% in each of the following four years so as to reach a value of 100% at the beginning of 2019. The major Swedish banks are essentially asked to hold liquid reserves of an adequate amount to face an unexpected (stress scenario) reduction net of liabilities with a maturity of 30 days. The central bank (Sveriges Riksbank) has also required that the 100% requirement be met separately for each of the two major foreign currencies (euro and US dollar).
However, 100% quota has not yet been achieved for the other liquidity indicator (NSFR, Net Stable Funding Ratio) which aims to monitor (with a view to one year and in a context of stress) the balance between assets with reduced liquidity and long-term supply. Only one of the four largest Swedish groups (Swedbank, the smallest) has achieved this goal; the other three, however, are still well below 90%, with little progress in the last year.
At the same time, Riksbank imposed the achievement by the end of next year of a CET1 (Common Equity Tier 1) capital ratio of no less than 12%. Basel 3 prescribes (by the beginning of 2019) a minimum level of 4,5%, increased by a buffer additional equal to 2,5% of weighted assets; in the event of excessive loan growth, the authorities may require the establishment of a reserve (buffer) counter-cyclical by a further 2,5%. The target of 12% requested by the Swedish authorities is therefore very high, exceeded in Europe only by Switzerland (limited to only the two largest groups, possible origins of systemic instability). At the most recent check, three of the big four Swedish groups were above 12%, with the fourth just below.
