FRANKFURT (S&P Global Ratings) Sept. 10, 2024--S&P Global Ratings expects Finnish banks will remain resilient amid the ongoing house price correction and overall weak macroeconomic conditions. Robust earnings will endure, and asset quality deterioration will remain manageable for the system. We foresee the house-price contraction coming to an end with early signs of increased activity in the housing market as autumn starts. Accompanying this, we think the economy will enter a recovery phase in 2025.
Following our review, we have kept Finland in group '2' of our Banking Industry Country Risk Assessment. The economic and industry risk scores remain '2' and '3' and we continue to view both trends as stable.
The sharp housing market correction is coming to an end. The rapid increase in financing costs for variable-rate mortgages, combined with deteriorated consumer confidence, saw housing demand weaken. Transaction volumes decreased and there was room for the excess supply to price properties lower. Overall, nominal house prices declined by around 6.5% in 2023. However, despite prices continuing to decline in 2024, the steep fall has broadly ended. Transaction volumes and new residential construction starts are showing early signs of reinvigoration in the second half. We therefore expect nominal house prices to stabilize, and the market to gradually resume in 2025 driven by market recovery in Helsinki and other growth cities.
High inflation, elevated financing costs, and weak external demand have been stifling domestic demand and private investment. After falling into recession during 2023, Finland will likely see its GDP stagnate in 2024 (-0.25%) before returning to moderate growth of 1.5% on average in 2025-2026. For now, economic sentiment indicators remain weak, and the unemployment rate is projected to increase to around 8.0% by year-end 2024 (7.2% in 2023). While the economic recovery remains tentative, we believe that risks to the banking system are gradually receding.
Strong earnings in 2024 continue to bolster the domestic banking sector. As a predominant share of lending is tied to floating rates, this has boosted the system's net interest income (NII) and led Finnish banks to report record profits for 2023. Even though NII has started to decline, banks' profitability remained strong in the first half, and we expect the sector will deliver a still-high return on equity of around 12%-13% in 2024 (13.8% in 2023). The capital build-up through retained earnings has improved the system's already robust capitalization, with an average CET1 ratio of 18.5% and an average total capital ratio of 22.4% at the end of first-quarter 2024. In our view, the banking sector has sound buffers to absorb credit losses, even beyond our base case, given banks' strong operating profitability.
Chart 1
Asset quality pressure and credit losses will remain contained. Finnish banks' loan books have stagnated over 2023 and 2024. Lending remains dominated by retail loans, with retail mortgages representing 38%, other retail loans 13%, housing corporations 16%, corporate loans 23%, and other loans 10%. Though modest in a European context, nonperforming loans have increased over the past year, reaching around 1.7% of domestic loans at year-end 2023. This has been particularly evident in the construction industry, which has been hardest hit by the current economic downturn, but asset quality has also deteriorated in the household segment. Overall, we forecast domestic nonperforming loans to remain above the cyclical lows, but below 2% at year-end 2024. We similarly project still elevated credit losses of 20-25 bps in 2024-2025, compared with 26 bps in 2023, remaining contained compared with most European banking systems.
BICRA Snapshot
| To | From | |||||
|---|---|---|---|---|---|---|
| BICRA group | 2 | 2 | ||||
| Economic risk | 2 | 2 | ||||
| Economic resilience | Very low risk | Very low risk | ||||
| Economic imbalances | Intermediate risk (recovery phase) | Low risk (expansion phase) | ||||
| Credit risk in the economy | Low risk | Low risk | ||||
| Trend | Stable | Stable | ||||
| Industry risk | 2 | 2 | ||||
| Institutional framework | Intermediate risk | Intermediate risk | ||||
| Competitive dynamics | Low risk | Low risk | ||||
| Systemwide funding | Intermediate risk | Intermediate risk | ||||
| Trend | Stable | Stable | ||||
| Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For more details on our BICRA scores on banking industries across the globe, please see "Banking Industry Country Risk Assessment Update," published monthly on RatingsDirect. | ||||||
Related Research
- Finland, April 29, 2024
- SLIDES: Nordic Banks In 2024 Ploughing On Through Tough Terrain, Feb. 7, 2024
- Banking Industry Country Risk Assessment: Finland, Nov. 28, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Salla von Steinaecker, Frankfurt +49 69 33999 164; salla.vonsteinaecker@spglobal.com |
| Secondary Contacts: | Niklas Dahlstrom, Stockholm +46 84405358; niklas.dahlstrom@spglobal.com |
| Alexander Maichel, Frankfurt +49 69 33999 267; alexander.maichel@spglobal.com | |
| Fredrik Fors, Stockholm; fredrik.fors@spglobal.com |
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