Loan loss provisions at the largest Nordic banks are set to climb significantly in 2023 as macroeconomic challenges weigh on commercial real estate exposures.

The average cost of risk for Nordea Bank Abp, Danske Bank A/S, DNB Bank ASA, Skandinaviska Enskilda Banken AB (publ), Svenska Handelsbanken AB (publ) and Swedbank AB (publ) is expected to rise to 15 basis points in 2023 from 5 bps in 2022, according to S&P Capital IQ consensus estimates. It comes after analysts raised their loan loss projections for the six lenders over the past two quarters.

The banks' cost of risk, representing loan loss provisions as a percentage of the total loan book, came in at 5 basis points on average in 2022, up from about zero in 2021. Analysts expect this figure to stay at 15 bps in 2024 and fall to 13 bps in 2025. In 2022, consensus estimates forecast average cost of risk for the six banks at 11 bps in 2023 and 12 bps in 2024.

Property management, especially commercial real estate, will be the "key driver of loan losses" and account for half of Nordic bank provisions in 2023, the highest of any sector, UBS analysts said in a note Feb. 28. Real estate is the largest single sector exposure for the six biggest Nordic lenders at 18%, according to UBS.

Fourth-quarter provision hike

Accelerated provisioning by Nordic banks in the fourth quarter of 2022 has prompted some updates to estimates. All banks recorded a quarter-on-quarter increase in loan loss charges, driven in particular by higher Stage 2 allowances due to changed macroeconomic assumptions and expert portfolio adjustments. SEB, for example, set aside a management overlay of about 300 million Swedish kronor for its commercial real estate portfolio.

Analysts are particularly concerned over banks' exposures to the Swedish commercial real estate market, given the sector's high indebtedness and vulnerability to rising interest rates. The Swedish financial regulator in September 2022 labeled rising interest rates "the biggest threat to the commercial real estate sector."

* Access aggregate financial data for Swedish, Danish and Finnish banks.

Asset quality still strong

Property management exposures are "the main risk factor for asset quality" for Nordic banks and there could be an "upside risk to consensus," particularly for Swedish institutions, said Deutsche Bank analyst Kazim Andac in a March 6 note. So far, however, exposures remain resilient thanks to conservative underwriting standards, regular stress tests, hedging policies and restrictions on loan-to-value ratios, Andac said.

SEB's higher provisioning was a result of a prudent interpretation of the accounting rules to take into account potential future losses, CFO Masih Yazdi said when presenting fourth-quarter earnings. The Swedish lender has not yet seen any deterioration in asset quality, Yazdi said.

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

Across the six largest Nordic banks, Stage 3 ratios, which represent the proportion of the loan book that is considered credit-impaired, dropped slightly at the end of 2022 compared to a year earlier.

As of March 15, US$1 was equivalent to 10.64 Swedish kronor.