Continued macroeconomic uncertainty

Weaker global economy and worsening debt crisis

The global economy reported slower growth in 2011 at the same time that the financial crisis in the EMU countries worsened. This created increased turbulence in the international financial markets, along with declining stock prices and falling long-term interest rates. This is also a political crisis, where the necessary economic policy changes have not been made at the rate needed to slow escalating sovereign debt. A lack of confidence in the economic policies of debt-ridden countries, particularly Greece and Italy, led to substantially higher interest rates, which will not be sustainable. Fears of defaults and concerns surrounding huge credit impairments for European banks rose during the autumn, leading to higher capital adequacy requirements. Credit tightening by European banks has also adversely affected several eastern European countries, where the inflow of capital from foreign banks is drying up.

Solid growth in Swedbank’s home markets but worse times ahead

The Swedish economy continued to report a high growth rate in 2011. GDP is estimated to have risen by slightly over 4 per cent, driven by increased net exports and rising investment. However, economic indicators such as declining order bookings, fewer job openings, weak retail sales and downsized production plans signal that Sweden will grow at a considerably slower pace in upcoming quarters as a result of the slower global economy. Household consumption is also being held in check by high debt ratios, at the same time that uncertainty about housing prices and the labour market has grown. Credit expansion to Swedish households slowed last year, partly due to weaker loan demand, but also as a result of tighter lending. The uncertain economic conditions caused the Riksbank to cut its discount rate at end-2011, which will likely be followed by further rate cuts in the near future.

Growth in the Baltic countries is being driven by increased exports and stronger domestic demand. Estonia joined the EMU at the beginning of 2011. It is also the Baltic country with the fastest growth, its GDP having risen by an average of 8.8 per cent during the first nine months of 2011. In Lithuania and Latvia, the corresponding rate was 6.3 per cent and 5.2 per cent, respectively. Higher capacity utilisation in the business sector in the wake of higher export growth led to increased investment activity after a significant decline in 2009. Household consumption has risen as well in pace with an improving labour market and rising real wages. Inflationary pressures, which were boosted during the first half of 2011 not least by higher commodity prices, gradually eased as commodity prices declined globally. Further budget cutbacks are planned in Latvia and Lithuania to meet the Maastricht criteria and qualify for EMU membership in 2014. However, economic risks have increased leading up to 2012, not least due to lower export growth as anticipated demand in the EU countries significantly slows.

Developments in the banking sector

The financial crisis damaged confidence in the banking sector around the world, and the role of banks in society has been debated more than before. This was reinforced by the debt crisis in the eurozone and related worries in the financial markets. Prospects for a short-term economic recovery have also been hurt because several countries have had to cut costs to reduce their budget deficits and sovereign debts, leaving less room for any major stimulus measures.

Increased regulatory activity was seen in the form of stricter capital requirements, additional clarifications of Basel rules and a number of stress tests, including by the European Banking Authority (EBA). In Sweden, the Swedish Financial Supervisory Authority, Ministry of Finance and Riksbank have recommended stiffer capitalisation requirements for major Swedish banks than those mandated by the new Basel rules. In addition, the Swedish Financial Supervisory Authority is conducting a review of the risk weightings for Swedish mortgages, after which they are expected to be raised.

From an international perspective, Swedish banks are well capitalised, with core Tier 1 capital ratios that are among the highest in Europe. This is due to rights issues in 2008 and 2009, but also because risk-weighted assets have decreased. Many banks in the eurozone currently face problems with capital adequacy and are finding it difficult to access short- and long-term market financing. Several have been forced to obtain capital and/or have reduced their lending to more distant markets. Some are also expected to divest non-strategic assets.

In Sweden, higher interest rates and housing prices have contributed to lower household demand for credit. Corporate investment and credit demand is expected to slow as well.

Competition in Swedbank’s home markets

In an international comparison, the banking sector is fairly concentrated in Swedbank’s home markets.

In Sweden, Swedbank, Handelsbanken, Nordea and SEB accounted for about 70 per cent of deposits and lending in 2011, according to the Riksbank. These major banks offer a wide range of financial products and services and compete in all key product segments. Swedbank is the biggest in retail banking and has a leading market position in mortgages (26 per cent), deposits from private customers (23 per cent) and fund management (24 per cent). In the Swedish corporate market, the bank’s share was 13 per cent for lending and 16 per cent for deposits at the end of 2011.

The Estonian banking sector is more concentrated than Sweden’s. The market is dominated by foreign companies. Together, Swedbank, SEB, Nordea and Sampo (owned by Danske Bank) control around 90 per cent of the market. Swedbank had a market share of 54 per cent for deposits from private customers and 47 per cent for lending. In the Estonian corporate market, the bank’s share was 36 per cent for lending and and 41 per cent for deposits.

Latvia has a more fragmented market where local banks account for 30 to 70 per cent of the various segments. In 2011 Swedbank accounted for 23 per cent of deposits and 27 per cent of lending to private customers. In the corporate market, Swedbank’s share was 18 per cent for lending and 10 per cent for deposits.

Like Sweden, the banking market in Lithuania is dominated by a few major players. Among private customers, Swedbank accounted for 38 per cent of deposits and 25 per cent of lending. In the corporate market, the bank’s share was 20 per cent for lending and 25 per cent for deposits.