Swedish property: banks are playing it cool as property risks heat up

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Scandinavia is known for its saunas. Property owners in Sweden are hot and bothered for other reasons. Rising debt costs are bursting a real estate bubble. Homeowners and commercial landlords are feeling the heat. But Swedish lenders Swedbank and SEB offered a cooler assessment of conditions on Tuesday.

Commercial real estate risk has been in focus since regional banks collapsed in the US earlier this year. Lenders in Sweden have an outsized exposure to the sector. A large stock of variable-rate mortgages is a further concern.

Yet the country’s largest mortgage lender Swedbank said net profits doubled thanks to better interest margins. Johan Torgeby, chief executive of SEB, echoed that sentiment, pointing to minimal new provisions for bad loans.

That does not stack up with the experience of past property crashes. Banks simply do not expect to lose a lot of money on property lending, however.

SEB has added just 2 basis points of its outstanding loan book to expected losses so far this year. During the pandemic it added 26 basis points, or 13 times more. Swedbank has increased expected losses by 10 basis points this year.

Losses are firstly a function of default risk and secondly the likelihood of recovery. Default risk is yet to peak. Some property owners are barely coping. SEB outlined what its lowest quintile of real estate credits are doing; most are cutting capex, around half are selling assets and about a third are raising equity. Renegotiation of lending terms, largely interest cover agreements, was a new feature of the second quarter. 

Even if defaults do rise, potential recoveries currently appear healthy. Loan-to-value ratios at SEB remain below half for commercial real estate and residential. A further 25 per cent fall in property values is needed to breach regulatory risk limits, SEB thinks.

That would only take prices back to where they were in 2016. With higher interest rates expected, Swedish bank investors should continue to sweat.