Baltic recovery to boost bank profits

TALLINN - Most Nordic banks could profit from renewed growth in the Baltic States starting in 2011, despite risks in their home markets from persistently high property prices or sluggish domestic growth prospects, ratings agencies say, reports Reuters. Analysts from Moody’s and Standard & Poor’s have said high capital ratios and low euro debt exposure had insulated Nordic banks from the problems haunting many other European lenders, pointing to Danske’s Irish division as a notable exception.

“Loan loss reversals will definitely be an income driver from the Baltics... and most of them [Nordic banks] will go into the black there next year,” Sean Potter of S&P told Reuters.
SEB, Swedbank, Nordea, Danske Bank, and DnB Nord all bet on growth in Estonia, Latvia and Lithuania before the 2008 crash hobbled the surging Baltics, and were left with billions of dollars in losses. “Though we still worry [about the Baltics], it is to a lesser extent,” Moody’s analyst Janne Thomsen said.
Swift comebacks by the three Baltic states from last year’s double-digit recession have made agencies up the ratings outlook to stable for SEB and Swedbank.

Nordic countries saw ultra-low interest rates in the wake of the global financial crisis, but rising rates in the non-euro zone Sweden and Norway could begin to put pressure on property values, which both ratings agencies see as inflated. “We have seen improvements and stabilization for the Nordics, but cannot give an outlook for the region as a whole,” Moody’s analyst Thomsen said, adding “things are a bit murky for Denmark.”
“For Sweden [we are] mainly focused on a possible property bubble,” she said, while adding that similar risks were present in the Norwegian market.

S&P said Sweden looks “bullet proof” at the moment and it should be able to handle lower property prices as most mortgages are still well below asset prices. “Loan-to-value [ratios] are not high, so the risk is fairly low,” Potter said. Swedish Deputy Central Bank Governor Lars Nyberg said on Dec. 10 that the country was heading toward imbalances, although there was not a housing bubble now.

Declining loan losses have made the market turn more positive for Danish banks such as Danske Bank, but property markets remain subdued and bankruptcies still run high in farming and small businesses. “Danish banks are much more vulnerable than banks in the other Nordic countries,” Thomsen said.
“Danish banks used traditional ways to get into trouble. They did not go into structured products or other new ways. They gave bad loans to bad businesses,” the expert added.

Major Nordic banks, which include Nordea, Svenska Handelsbanken and Pohjola are among the most heavily capitalized banks in Europe. Insulated from any need for raising capital and from the euro debt crisis, Nordic financial shares have risen 20.5 percent for the year versus a drop in the European sector index .SX7P of 9.1 percent.