articles Ratings /ratings/en/research/articles/231018-nordic-banks-resilient-to-economic-weakening-12873554 content esgSubNav
In This List
COMMENTS

Nordic Banks: Resilient To Economic Weakening

COMMENTS

China's Monetary Stimulus Adds Strain For Banks

COMMENTS

European 'AAAm' Money Market Fund Trends (First-Quarter 2025)

COMMENTS

Why Most EMEA Emerging Markets Are Slow To Adopt Bank Recovery And Resolution Plans

COMMENTS

Forecast Change: China's Bad Loans Likely To See Larger Tariff-Related Downside


Nordic Banks: Resilient To Economic Weakening

Despite muted economic growth likely across the Nordics in the rest of 2023 and 2024, S&P Global Ratings believes that high interest rates will allow banks in the region to sustain their strong performance. While Nordic banks could see higher loan loss provisions, margin pressure, and stubborn cost inflation next year, their sound earnings capacity and financial flexibility to adjust dividends allow them to absorb expected and unexpected losses through earnings. Furthermore, their strong capitalization, which outperforms their European peers, provides them with a material buffer, if needed.

Higher interest rates significantly improved Nordic banks' earnings in the first half of 2023. The top-rated banks saw an average increase in reported operating profit of 63%, as net interest income (NII) grew by 52% year on year on average, primarily thanks to improved deposit margins (see chart 1). The numerous increases in policy rates by the Nordic central banks and the European Central Bank (ECB) since 2022 boosted interest income growth because Nordic banks' loan portfolios are mainly tied to floating rates.

Chart 1

image

We project that Nordic banks' return on average common equity will reach around 12% in 2024. Their reported average return on equity was 15.9% in the first half of the year, compared with EU banks' average of 10.8% in the second quarter. This performance continues to support our strong capital and earnings assessments for the top-rated Nordic banks, namely, Danske Bank A/S, DNB Bank ASA, Nordea Bank Abp, Nykredit Bank A/S, OP Corporate Bank PLC, Skandinaviska Enskilda Banken AB, Svenska Handelsbanken AB, and Swedbank AB.

We expect NII to bump aggregated pretax profit up to around €31.8 billion in 2023 from €18.0 billion in 2022 (see chart 2). That said, we are likely to see NII peak in 2023 as the repricing of loans at higher rates comes to an end with interest rate normalization and deposit betas ease given increased competition.

Chart 2

image

Nordic Banks' Returns Should Continue To Outperform Those Of Most Of Their European Peers

In 2022, the weighted-average return on equity for the 31 rated Nordic banks was close to 8.8%, slightly higher than our estimate of 8.0% for the top 50 European banks. Nordic banks are at the forefront of digitalization and maintain high cost efficiency relative to their European peers, with an average cost-to-income ratio of 50.1% versus our estimate of 58.3% for European banks (see chart 3).

Chart 3

image

We expect most Nordic banks to keep using technology to streamline and automate processes while enhancing customer offerings through digital channels. Indeed, we believe strong earnings in 2023 will increase their investment capacity and allow faster improvements to business models that will help them to become more client centric and efficient. Combined with their sound earnings, this should continue to support robust capital build-up over the next two years.

The revenue mix in the Nordics has remained relatively stable over the past five years, with NII averaging around 65% of total operating revenues. We saw an increased contribution from net fee and commission income in the low interest rate environment, but this trend is now reversing in favor of NII thanks to the sharp increase in policy rates. Still, there are some notable outliers, like OP Financial Group, for which insurance activities continue to represent a meaningful source of income. With the equity markets stabilizing, some Nordic banks have also continued to expand their asset management businesses and associated fee income. Although cost inflation and continued market volatility could curtail revenues, the material net interest margin (NIM) improvements and a better structural starting point for costs should support Nordic banks' bottom lines in 2023 and 2024.

Nordic banks rely significantly on wholesale funding and have benefitted from declining funding costs in recent years thanks to low interest rates. Previously, this would have offset any pressure on loan margins and interest income, not least because of high competition, but the higher rate environment has changed this dynamic. We observe that banks relying more on deposit funding report higher NII tailwinds due to the still low-to-moderate interest-rate pass-through to deposits in the Nordics. That said, covered bonds will remain a key stable funding source for the banks in the region. We continue to observe that smaller Nordic banks are increasingly active in the covered bond markets, allowing them to expand their lending businesses while maintaining lower funding costs.

We expect the current interest rate cycle to generally support Nordic banks' net interest margins. Between half-year 2022 and half-year 2023, the NIM increased by an average of 59 basis points for all Nordic banks, and we project a median NIM of 1.63% in 2024. This is higher than our expectation for the top 100 European banks, where slower growth in customer loans due to the economic slump and cooling real estate market will limit the positive effect of rising rates on the NIM. We project that the median NIM for the Top 100 European banks will reach 1.55% by 2024 (see "European Banks: Resilient And Divergent As The Economic Reset Kicks In," published Jan. 23, 2023).

Normalizing Interest Rates Could Lead To Loan Growth Up Until 2025

International and Nordic energy prices have been falling and have contributed to decreasing inflation across the board. Nevertheless, inflationary pressure remains high. As a result, the Nordic central banks and the ECB have continued to tighten monetary policy. As of September 2023, the key policy rates are 4.25% in Norway, 4.0% in Sweden, 3.6% in Denmark, 4.5% in Finland (the eurozone rate), and 9.25% in Iceland (see chart 4). It is still uncertain when and to what extent we will see rate cuts over the next two years, as several central banks have indicated that interest rates need to stay higher for longer due to the cost pressures in the Nordic economies.

Chart 4

image

However, as interest rates are easing, we expect loan growth to rebound over the next two years, and return to last year's level of around 4% by 2024 (see chart 5). Credit demand slumped as the macroeconomic environment tightened in early 2022, and the Nordic banking sector's weighted-average growth in customer loans fell steeply to -2.3% in the first half of 2023 from 4.1% in the fourth quarter of 2022. We note differences between markets with Iceland demonstrating an 8.3% nominal loan growth.

Chart 5

image

Nordic Banks Prepare For Tougher Times Ahead

Most of the large Nordic banks have already factored the uncertain macroeconomic conditions into their forecasts. Most of their forward-looking scenarios in the second quarter were unchanged from the previous quarter, with higher weightings for negative scenarios than positive ones. These negative scenarios include the potential impact from U.S. banking turbulence and the side-effects of the Russia-Ukraine war, including persistently high inflation and interest rates and falling property prices.

Following the first signs of weakening asset quality in the first half of the year, most of the large Nordic banks started to add to their loan loss provisions. We therefore project the cost of risk increasing from 4 basis points (bps) to 10bps-20bps on average over the next two years, with the nonperforming loan ratio likely to peak in 2023 (see chart 6).

Chart 6

image

The commercial real estate (CRE) sector is not immune to the weak and uncertain economic environment, and a large amount of Nordic real estate issuers are facing a refinancing of their unsecured bonds in more expensive and challenging wholesale markets through 2024.

Nordic banks generally have more exposure to the CRE sector than their European peers. As of the first quarter of 2023, CRE loans represented around 10% of large EU banks' total lending portfolios, according to the European Banking Authority, compared to around 16% for large Nordic banks in the year to date (see chart 7). While asset quality remains strong as of half-year 2023, banks' large exposures to the CRE sector (including construction) could make them susceptible to a marked deterioration. That said, unless there are ripple effects or major unforeseen incidents, the CRE sector should not experience substantial valuation losses in weaker economic conditions, and the impact of any losses on banks should be manageable.

Chart 7

image

Nordic Banks' Strong Profitability And Robust Capitalization Remain Their Key Strengths

The global banking market went through major turbulence at the beginning of the year following some U.S. bank collapses and UBS' government-facilitated takeover of Credit Suisse. In contrast, Nordic banks entered 2023 with solid balance sheets and robust capitalization, thanks to rate increases and NIM improvements. Furthermore, we believe that Nordic banks' risk-adjusted earnings remain a strong first line of defense against unexpected losses as operating conditions become more challenging.

Nordic banks have maintained their strong capital positions in the past two years. S&P Global Ratings' weighted-average risk-adjusted capital (RAC) ratio for large Nordic banks weakened slightly by 30 basis points to 13% in 2022, reflecting their normalized dividend and share-buyback activities that year. Still, this means that all rated Nordic banks have RAC ratios above our 10% threshold for a strong capital assessment, and 15 banks have RAC ratios of more than 15%, reflecting very strong capitalization under our bank capital methodology (see chart 1). This reflects banks' adequate quality of capital and sound earnings capacity, and more generally, their efforts to build capital in prior years.

The 2022 figure of 13.0% compares favorably with our estimate for the top 50 European banks' average RAC ratio of 11.3% as of year-end 2022. Following the normalization of Nordic banks' dividend distributions and their strong financial performance over the past year, we continue to incorporate into our RAC ratio projections dividend payouts in line with banks' own guidance throughout 2023.

We project an average RAC ratio of 13.0% in 2023 and 13.3% in 2024 for Nordic banks (see chart 8). The global comparison is also favorable, as the RAC ratios of the world's top 200 rated banks will likely decrease by around 5 basis points over the next two years (see "Top 200 Banks: Capital Ratios Continue To Normalize After Pandemic Peaks," published Sept. 18, 2023).

Chart 8

image

Nordic Banks Have Stepped Up Countercyclical Buffers In Their Capital Planning

The countercyclical capital buffers (CCyBs)--a macroprudential instrument available to European financial authorities to counter procyclicality--are stepping up in the Nordics. Increases in Norway, Denmark, Iceland, and Sweden have largely occurred in tandem. The rise in CCyBs is a reaction to risks building up on a national level, signaling that the financial sector could need extra capital to prepare for what may lie ahead.

Currently, the CCyB is 2.5% in Iceland and Norway and 2.0% in Sweden (see table). Denmark increased the buffer by 0.5% to 2.5% on March 31, 2023. In Iceland, a higher buffer of 2.5% will become effective in March 2024, as the financial stability committee seeks to enhance banking system resilience. Finland has not yet activated the CCyB and it remains at 0%. In line with EU law, EU member states must comply with CCyB reciprocation up to 2.5%. Thus, pan-Nordic institutions with credit exposures across borders must also comply with CCyB requirements in the other countries.

The average common equity Tier 1 (CET1) ratio for the major Nordic banks had risen to 18.7% by the half-year point in 2023 (see chart 9). We also saw the European banks' capital ratios continuing to increase, thanks to growing capital on rising profitability and flat risk-weighted assets. The weighted-average CET1 ratio reached 15.9% in the first quarter of 2023 for banks in the EU27.

Chart 9

image

Table 1

The most recent countercyclical buffer settings and FSA justifications
Setting action CCyB rate Announcement date Effective date FSA justification for most recent decision
Sweden Increase 1% 29/09/2021 29/09/2022
Increase 2% 22/06/2022 22/06/2023 The strength of the economic recovery and the banks' strong financials and good profitability mean that the buffer rate can be raised to 2% without having a negative impact on the credit.
Denmark Increase 2% 15/12/2021 31/12/2022
Increase 2.5% 30/03/2022 31/03/2023 Risks are still building in the financial sector, and therefore the buffer should be increased.
Finland Confirmation 0% 27/09/2023 Countercyclical buffer kept at 0%. The financial cycle has continued to deteriorate further but the risks of overheating of the financial system remain low.
Norway Increase 2% 16/12/2021 31/12/2022
Increase 2.50% 24/03/2022 31/03/2023 The countercyclical capital buffer rate increased with the aim of bolstering banks' resilience and mitigating the effects of bank lending during economic downturns, considering financial imbalances and the economic outlook.
Iceland Increase 2% 29/09/2021 29/09/2022
Increase 2.5% 15/03/2023 15/03/2024 Increasing the countercyclical capital buffer enhances banking system resilience in the face of risks, with banks well-prepared to meet higher capital requirements without affecting credit supply.
FSA--Financial Supervisory Authority. CCyB--Countercyclical capital buffer. Source: European Systemic Risk Board.

Nordic Banks Will Likely Maintain Sound Earnings In 2024

We believe that Nordic banks will demonstrate resilience and perform strongly despite the economic uncertainties, primarily thanks to earnings boosted by higher interest rates and an ability to remain efficient even in challenging conditions. Our rated banks are well prepared to absorb the higher loan loss provisions and potential margin contraction that we expect to characterize next year's operating environment, potentially leading to weaker results. Guided by prudent regulatory agendas, we believe that banks' strong capitalization will buffer them against unexpected losses and continue to position them favorably relative to their European peers over the next two years.

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Kristian Pal, Stockholm +46 84405352;
kristian.pal@spglobal.com
Secondary Contacts:Salla von Steinaecker, Frankfurt + 49 693 399 9164;
salla.vonsteinaecker@spglobal.com
Olivia K Grant, Dubai +971 56 680 1008;
olivia.grant@spglobal.com
Niklas Dahlstrom, Stockholm +46 84405358;
niklas.dahlstrom@spglobal.com
Harm Semder, Frankfurt + 49 693 399 9158;
harm.semder@spglobal.com
Daniella Vasilevski, Stockholm;
daniella.vasilevski@spglobal.com
Markus W Schmaus, Frankfurt + 49 693 399 9155;
markus.schmaus@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in