‘Stay underweight Nordic banks’, strategist warns

Investors should avoid Nordic banks because they are dealing with the unravelling of credit and housing bubbles in the region, with various degrees of distress, according to a strategist.

In Denmark, household financial debt represents more than 320 percent of disposable income, putting Danish consumers among the most indebted in the world, Alberto Gallo, a strategist at RBS, has warned.

As a result, regulators are looking into ways to crack down on banks’ lending. The country’s $550 billion home loan industry is the world’s biggest per capita, Bloomberg reported recently.

To ensure that borrowers can afford paying back their loans, Nordic banks are increasingly offering interest-only, variable-rate mortgages – but this in turn has accelerated credit growth. Regulators have asked banks to ensure borrowers that go for interest-only mortgages can afford classic repayment loans as well.

House prices fell by between 15 percent and 20 percent in Denmark during the crisis and some analysts say they could fall further because of the need to cut household debt. Bloomberg said that more than half of Denmark’s households don’t amortise their mortgages.

Prudential measures for banks – such as limits on mortgage structures and on lending – could be on the cards, Gallo said.

“In our view, tight spreads on Nordic bank debt do not compensate investors for the possible risks of a deflating credit and housing boom, so we continue to be underweight the senior and sub debt of Danske Bank, SEB, Nordea, Handelsbanken and Swedbank,” he wrote in a research note.

He noted that Norway and Sweden are also trying to control their credit and housing booms but that “pinching a lending bubble is hard, and the balance between making it burst vs winding it down is tricky,” making things even harder for Nordic banks.

In Sweden, credit is still growing and house prices are still on the up, while in Norway domestic banks are forecasting that house prices will fall between 15 percent and 20 percent over the next years.

The IMF has said home prices in Norway are overvalued by around 22 percent and in Sweden by around 40 percent, Gallo pointed out.

He warned again that the UK housing bubble was dangerous over the long term.

“The UK may run into the same difficulties in a few years’ time if it continues with policies to boost the housing market,” Gallo said.