Banking
Moody’s Global
Banking System
Outlook
Table of Contents:
Summary Opinion 1 Rating Universe 4 Government Support/Guarantee Programmes 4Positive and Negative Rating Trends 4
Strengths 4
Challenges 5
Key Issues 5
Recent Rating Changes 6
Key System Performance Measures/BFSR
Drivers 7 Franchise Value 7 Risk Positioning 9 Regulatory Environment 10 Operating Environment 10 Profitability 11 Efficiency 12 Liquidity 13 Capitalisation 14 Asset Quality 16
Deposit Rating Drivers 18
Moody’s Related Research 19
Appendices 20
Appendix 1: Sovereign Credit Opinion 20 Appendix 2: Global Comparisons 22 Appendix 3: BFSR/BCA Mapping Table 27
Analyst Contacts:
London 44.20.7772.5454
Kimmo Rama
Vice President -Senior Analyst Eeva Antila
Analyst
Reynold R. Leegerstee Team Managing Director
July 2009
Finland
The outlook
1for the Finnish banking system is negative,
reflecting that the severely contracting economy will
likely contribute to a cyclical weakening in banks' credit
fundamentals. This outlook expresses Moody’s
expectations for the fundamental credit conditions in the
industry over the next 12 to 18 months.
Moody’s Average Ratings*
Long-term bank LC/FC deposit/debt rating Aa1
Short-term bank LC/FC deposit/debt rating P-1
Bank Financial Strength (BFSR) B
Country Ceilings
LC/FC deposit ceiling Aaa / Stable
LC/FC debt ceiling Aaa / Stable
*Average ratings are asset weighted
Summary Opinion
In Moody’s view, the weakening economic environment in Finland will continue to have an adverse effect on the asset quality and profitability of Finnish banks. The banking system’s problem loans are expected to increase significantly, although from a low level. In addition to increased credit risk costs, high funding costs will continue to weigh on banks’ profitability. Fee and commission income is also expected to remain under pressure due to weakened asset management and corporate finance activities.
Moody’s notes that the Finnish banking system is characterised by the strong presence of foreign, in particular Scandinavian, banking groups. Foreign banks have a market share of over 50% of both lending and deposits.
1 Outlooks for industries or sectors represent Moody’s view on the likely future direction of credit conditions in that sector over the next 12 to 18 months. They do not represent our projection of rating upgrades versus downgrades.
The Finnish macroeconomic environment weakened in 2008 as the global financial crisis deepened, increasingly filtering into the real economy. The growth outlook for the Finnish economy has deteriorated sharply over a very short period of time and the most recent conservative forecasts estimate that GDP will contract by as much as 6.5% in 2009. The steep decline is largely a reflection of the fact that the economy is highly export driven.
The Finnish banking system has proven relatively resilient to the challenges confronting banking systems globally. This is largely due to the fact that the exposure of Finnish banks to toxic financial assets and failed financial institutions has been minimal, partly explained by the fact that Finnish banks being more oriented towards traditional banking activities. However, given that the crisis on financial markets has now spread extensively into the real economy, Finnish banks are expected to be adversely affected.
The most visible impact of the global credit crisis has so far been on the profitability and asset quality of Finnish banks. Weakened trading and net fee and commission income in conjunction with higher loan loss provisions and market value adjustments have reduced the banking system’s profits significantly. It should be noted that those banking groups that are active within life insurance (OP-Pohjola Group, Aktia) have been particularly badly affected by the weak performance of investments. Additionally, due to the ongoing uncertainty, banks’ funding costs have risen, thus exerting pressure on their results. Non-performing loans have also increased, although from a low level. Positively, the banking sector’s combined net interest income grew 25% in 2008 and was primarily a reflection of improved margins (both in the retail and corporate sectors) and brisk loan growth. On average, Finnish banks have reported good efficiency levels over the past few years. However, the cost-to-income ratio of the banking system weakened to 58% in 2008 from a low 45% in 2007. Overall, the Finnish banking sector’s combined net profit for 2008 stood at €2.4 billion, a decrease of 38% from 2007.
The Finnish banks have maintained their liquid reserves at an adequate level in order to be able to withstand market disruptions. On average, the rated banks’ liquid assets accounted for 34% of total assets at end-2008. Also, the total deposit balance developed favourably in 2008. This was largely due to the heightened caution of depositors in the context of the market turmoil; as a result, the attractiveness of deposits grew, while at the same time fund savings contracted, along with falling stock prices. Total deposits within the Finnish banking system increased by 13% in 2008. Improved deposits have positively affected the banks’ funding positions and thus reduced the need for market-based funding. Moreover, the Finnish banks have also been actively focused on maintaining sufficient assets to be used as collateral with the central bank if necessary. This has given them an additional liquidity buffer in the event of the market liquidity situation remaining weak.
Recent Results of Finnish Banks Rated by Moody’s
At the end of 2008, there were 15 commercial banks, 227 member co-operative banks of OP-Pohjola Group, 42 local co-operative banks, 38 savings banks and 14 deposit-taking branches of foreign credit institutions in Finland. Moody’s rates the three largest commercial banks, the largest savings bank and the largest co-operative group – these banks account for over 80% of the market in terms of total lending and deposits.
Moody’s rated Finnish banks reported solid results in Q1 2009. Pohjola Bank’s profitability, measured as pre-provision income divided by average risk-weighted assets, recovered to annualised 1.7% compared with 1.2% in 2008. In Q1 2009 the bank booked positive trading income mainly as a result of the reclassification of a large part of the bonds in the liquidity reserve out of the fair value through profit and loss category in accordance with the amendment in IAS39 in 2008. However, the Q1 2009 result was adversely affected by loan loss provisioning of €21 million, which was roughly in line with Q4 2008 and reflects the continued deterioration in asset quality. Regarding core earnings, net interest income continued to grow strongly, reflecting improved lending margins to 0.9% in Q1 2009 from 0.8% in 2008 and 0.7% in 2008, which more than offset the slightly negative loan growth in Q1 2009.
Nordea reported a 24% decrease in pre-provision profit for its activities in Finland compared with Q4 2008. This was mainly the result of lending volumes that were 3% lower than in Q4 2008 in the corporate segment and stable in the retail segment, increasing pressure on deposit margins and somewhat higher expenses. In addition, loan loss provisions increased to €50 million in Q1 2009 from €38 million in Q4 2008.
In Q1 2009, Sampo Bank’s operations recovered from weak performance in Q4 2008. The main driver behind the trend was improved cost efficiency as integration costs started decreasing. Operating income has been stable thanks to good net interest income, which offset the decrease in fee and commission income. Loan loss provisions were at the same level as in Q4 2008 and mainly related to loans to SMEs.
Aktia Bank’s performance in Q1 2009 was positively affected by the sale of its life insurance business – whose performance was negative in 2008 - to Aktia Plc. Despite a 3% growth in lending, the bank did not increase its net interest income in Q1 2009. We note that the profitability reflects the banking group's strong involvement in providing mortgage loans to households (around 70% of total loans) as such loans have low risk due to the first mortgage collateral. However, this type of lending has is usually more resilient in a downturn. Problem loans in relation to total lending increased to 0.8% in Q1 2009 compared with 0.5% at year-end 2008.
Main Financial Drivers in the Banks’ Recent Performance
Finnish banks’ capital levels are adequate, but the total capital adequacy of the banking sector continued to decline in 2008. The banking system’s average Tier 1 capital ratio was down to 12.5% at end-2008 from 13.5% at end-2007. The decline was due to brisk lending growth and weaker internal capital generation. In 2009, the banks have began to strengthen their balance sheets via equity issues and by reducing dividend payments. So far this year, Pohjola Bank and Nordea have had equity issues. Also, in November 2008, Aktia had a Tier 2 issue of €45 million. In Q1 2009, OP-Pohjola Group reported Tier 1 ratio of 12.1%, Pohjola Bank 9.4% and Aktia 9.0%. Nordea and Danske Bank do not report quarterly figures for their Finnish subsidiaries. For Pohjola Bank and OP-Pohjola Group, these figures do not include the capital increase that was completed in May 2009.
Loan growth remained brisk in 2008. In total, loans within the Finnish banking system grew by 12% in 2008; household lending grew by nearly 9%, while corporate lending grew by over 18%. The increase in corporate lending was not purely new lending – corporates tended to replace more expensive market funding with cheaper bank loans. However, this trend came to an end in Q1 2009 when all the rated entities reported either slower or negative growth: Aktia’s lending grew by a low 3%, Pohjola Bank’s lending remained at the same level as at year-end 2008, Nordea’s lending in Finland remained unchanged for households and decreased by 3% for corporates, and Danske Bank’s lending in Finland was 2% lower than at year-end 2008.
Non-performing loans increased in 2008, but still remain at a very low level. Total non-performing loans within the Finnish banking system were at a low 0.4% at end-2008, up from 0.3% the previous year. However, growth in non-performing loans was more rapid during H2 and the trend continued in January 2009; by the end of the month, problem loans had increased to 0.5% of total banking system loans. For the rated banks, the average problem loan ratio increased to 0.9% at end-2008 from 0.6% at end-2007.
In light of the weakening credit environment, the banks have become more cautious in their lending activities and are significantly increasing the lending margins. Thus, corporate lending growth is likely to be significantly lower in 2009 than in 2008. In Moody’s view, the recession is expected to result in an increase in problem loans, with loan losses mainly likely to stem from the corporate sector. In terms of industry sectors, Moody’s is especially concerned about the banks’ credit exposure towards the construction, commercial real estate, metal and forestry sectors.
An important indicator of the weakened credit environment is the increase in the number of bankruptcies. Overall, corporate bankruptcies increased by 16% in 2008, spread across all industries, but most heavily affecting the services sector. On a positive note, bankruptcies are still below the levels seen during the recession of the late 1980s and early 1990s.The recession is also expected to have an adverse effect on the debt servicing ability of households. Positively, a large proportion of Finnish households’ mortgage loans are variable rate loans, which in a time of decreasing interest rates will reduce the burden of debt servicing.
In addition, we caution that some Finnish banks have exposures to Baltic and Central European countries. At year-end 2008, Nordea Bank Finland’s loans in Baltic states represented around 12% of its loan portfolio. Pohjola Bank is also exposed to Baltic states, but its loans to that region account for less than 1% of its lending. (We note that it started up finance-company operations in the Baltic region by acquiring K-Finance in December 2007.) As regards Sampo Bank, after becoming part of Danske Bank group, its Baltic operations
were moved directly under Danske Bank and were rebranded and converted into Danske Bank branches in June 2008. With this move, Sampo Bank's franchise is now almost wholly focused on Finnish risk. With regards the other rated banks, Aktia is solely focused on the Finnish market.
Rating Universe
Exhibit 1
Entities Rated By Moody’s
Banks BFSR BCA LT/ST Ratings Outlook
Nordea Bank Finland plc* B Aa3 Aa1/P-1 Stable
OP-Pohjola Group B Aa3 -- / -- RUR
Pohjola Bank plc** C+ A2 Aa1/P-1 RUR
Aktia Bank plc C A3 A1/P-1 Stable
Sampo Bank plc*** C A3 A1/P-1 Stable
Specialised lenders Debt rating LT/ST Outlook
Municipality Finance plc Aaa/P-1 Stable
* The Finnish commercial banking arm of the Nordea group
** The corporate banking and non-life insurance arm of OP-Pohjola Group *** The Finnish commercial banking arm of Danske Bank
Government Support/Guarantee Programmes
Like other Nordic countries, the Finnish government has introduced state guarantees as a measure to support banks’ funding. Currently, the government guarantees up to €50 billion for refinancing purposes, limited to amounts falling due by end-2009. A state guarantee can be given as a security for certificates of deposits that have a maturity of three to 12 months or unsecured bond issues that have a maturity of more than one year and a maximum of five years or for mortgage-backed notes that have a maturity of a maximum of five years.
The government also offers to deposit-taking banks only interest-bearing subordinated loans (up to €4 billion) that can be considered as banks' Tier 1 capital (for more information see “Moody's comments on Finnish government measures to support banking sector”, published on 28 February 2009). So far, Finnish banks have not made use of the government’s guarantee or capital loans, which can be partly explained by their adequate capital levels (i.e. Tier 1 ratios above 10%).
Meanwhile, the maximum amount of protection provided for deposits by the Finnish Deposit Guarantee Fund was raised to €50,000 from €25,000 in October 2008.
Positive and Negative Rating Trends
Strengths
Solid local franchises and close relationship with customers
Increased revenue diversification including wealth management services and insurance products
Sound core profitability, although we expect this to weaken
Lending mainly in variable rates, which enables banks to pass the higher cost of funding onto customers
Low level of problem loans (less than 1% of gross loans), which we, however, expect to increase
Low risk profiles and overall risk appetite – exposure to US sub-prime, SIVs or other troubled structured securities has been immaterial
Low exposure to Baltic states (although some banks exhibit somewhat higher exposure – e.g. Nordea Bank Finland’s exposure was around 12% of its loan portfolio and Pohjola Bank’s was less than 1% of its lending at end-2008)
Good core economic capitalisation
Adequate liquidity levels, with the rated banks reporting an average liquid assets-to-total assets ratio of 34% at end-2008 (end-2007: 33%).
Challenges
Preserving asset quality in the current economic slowdown
Low lending margins, which are likely to continue with wider usage of covered bonds and strong competition
High credit risk concentration by single names
Unseasoned loan portfolios after a period of high loan growth
Some indirect exposure to equity markets via insurance operations
Funding pressure from more expensive funding
Key Issues
Loan growth remained brisk in 2008 but is slowing down
Loan growth remained rapid in 2008. In total the Finnish banking sector reported total loan growth of 12% in 2008 with the total loan portfolio standing at €158 billion at end 2008. The loan growth was largely supported by the corporate sector. Overall, loans provided to the Finnish corporate sector increased by 19% in 2008 and the total loan portfolio stood at €58 billion.
Over the past couple of years the Finnish banking system has reported higher loan growth than on average in the euro-zone. In previous years the pace of corporate loan growth was typically slower than in the household sector. However, the situation changed in 2008 when the growth in corporate lending was twice higher than the growth within household lending. The key driver for the increased corporate lending was low margins as it has been more expensive for the corporates to raise direct financing from the capital markets, and as result they have had to rely on banks for financing. However, given weaker outlook for the corporate sector, lower investments and higher lending costs loan growth is expected to slow down.
Due to the international financial crisis the banks have tightened their corporate lending policies and increased their interest rates. In order to protect the availability of corporate financing, the government has increased the ceilings on Finnvera’s outstanding financial commitments. Finnvera is a specialised financing company owned by the State of Finland. It provides its clients with loans, guarantees, venture capital investments and export credit guarantees
The ceiling on outstanding commitments for export financing has been increased from €10 billion to €12.5 billion, and for domestic financing from €3.2 billion to €4.2 billion. The new ceilings came into effect in June 2009. The ceilings on outstanding commitments were last raised at the beginning of 2009. The higher ceilings are applied for a fixed term and they will be reviewed when the situation in the financial markets has been normalised.
Financial uncertainties have increased the deposit base
In early 2008, high interest rates and uncertainties, especially in the stock market, increased the popularity of bank deposits–term deposits increased especially favourably. In total, banking system deposits stood at €107
billion at end-2008 and grew by nearly 13% during the year. The growth was highest among household term deposits. However, corporate deposits also grew by nearly 14% during the year.
Of total deposits, households accounted for nearly 70%, while corporates accounted for 23%. The remainder was mainly deposited by public entities, financial and insurance companies.
Investments in funds have gradually decreased since summer 2007. This can be partly explained by their poor performance. In total, investment in Finnish funds decreased from €66 billion in 2007 to €41 billion in 2008.
Limited exposure to structured asset classes at risk
Thanks to their predominantly retail profile, Finnish banks have reported very limited exposure to the US sub-prime residential mortgage market and structured asset classes at risk.
Weakened macroeconomic outlook
The Finnish and international macroeconomic environments weakened in 2008 as the global financial crisis deepened, increasingly filtering into the real economy. The growth outlook for the Finnish economy has deteriorated sharply over a very short period of time. The most recent conservative forecasts estimate that GDP will contract by as much as 6.5% in 2009. The steep decline is largely a reflection of the fact that the economy is highly export driven.
Asset quality for the Finnish banks has generally remained strong to date. However, as shown by the last two sets of quarterly results, we are beginning to see modest deterioration and we would expect to see arrears levels to rise more significantly in the short-to-medium term, particularly as the slowdown in the economy leads to an increase in unemployment. Unemployment is expected to increase to around 10% in 2011 (from 6.4% in 2008).
Exhibit 2
Gross Domestic Product, Annual % Change
-8% -6% -4% -2% 0% 2% 4% 6% 8% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Denmark Finland Norw ay Sw eden
Source: Moody's Economy.Com, World Workstation
Recent Rating Changes
From the start of 2008 to date, Moody’s has taken rating actions on three Finnish entities for a variety of reasons, but mainly related to deteriorating financial performance linked to the worsening economic environment. The main economic risks are related to the performance of the Finnish export sector in light of the global recession, the strong euro and higher labour-related costs. Given the expected continued contraction of the Finnish economy, some further downward adjustments of ratings are likely during 2009.
This is a list of the rating changes taken:
Pohjola Bank and OP-Pohjola Group: Pohjola Bank’s C+BFSR and Aa1 long-term deposit and debt ratings and OP-Pohjola Group’s B BFSR placed on review for possible downgrade in April 2009.
The rating action was prompted by the weakening of the Finnish economic environment, which is expected to adversely affect Pohjola Bank’s asset quality and profitability, especially given its focus on corporate banking. Although OP-Pohjola Group as a whole is more retail oriented, we expect its credit fundamentals to be similarly adversely affected by the slowdown in the economy.
Sampo Bank: BFSR and long-term deposit ratings downgraded to C from B- and to A1 from Aa1, respectively, in February 2009
The rating action followed the downgrade of Sampo Bank’s parent company Danske Bank to Aa3/C from Aa1/B and primarily reflected Sampo Bank’s close integration into the Danske Bank group. It also reflected reduced earnings and possible further pressure on core earnings due to integration problems and our expectation of higher provisioning levels.
Key System Performance Measures/BFSR Drivers
The analysis of the franchise value of Finnish banks relates predominantly to the four large rated commercial banks.
Franchise Value
Concentrated system dominated by Nordea and OP-Pohjola Group
At the end of 2008, there were 15 commercial banks, 227 member cooperative banks of OP-Pohjola Group, 42 local co-operative banks, 38 savings banks and 14 deposit-taking branches of foreign credit institutions in Finland. Moody’s rates the three largest commercial banks, the largest savings bank and the largest co-operative group – these banks accounted for over 80% of the market in terms of total lending and deposits.
The largest pan-Nordic banking group, Nordea AB, is, via its Finnish subsidiary Nordea Bank Finland, also the largest banking group in Finland when measured by assets. It is important to note that, despite its Nordic subsidiaries, the bank is managed along business lines not national lines. Nordea Bank Finland has access to the group’s sophisticated risk management, benefits from economies of scale and has a large lending capacity. Finland accounts for more than 20% of the Nordea Group’s operating income.
OP-Pohjola Group is a co-operative banking group and has traditionally had a strong retail network in Finland with 604 branches across the country. Pohjola Bank, in which OP-Pohjola Group together with the co-operative member banks holds the majority of votes, focuses on corporate banking, asset management and non-life insurance services. Its products are also distributed via co-operative member banks. In addition, Pohjola Bank acts as the central financial institution to the group. Importantly, OP-Pohjola Group’s member banks, including Pohjola Bank, benefit from joint and several guarantees for each other’s liabilities, which is reflected in Pohjola Bank’s deposit ratings.
These two financial groups together control well over half of Finnish retail and corporate lending. OP-Pohjola Group’s market share in mortgage lending was 36% and Nordea’s 30% as reported by the banks as of end-March 2009. In corporate lending, Nordea is larger with a market share of 36% compared with 27% for OP-Pohjola Group. The two dominant banking groups also have a strong presence in the insurance market, where the third most important player is Sampo Group, which sold its banking operations to Danske Bank in 2006. Nordea’s market share in life insurance is about 23% compared with 24% for OP-Pohjola Group. In addition, OP-Pohjola Group has a 28% share of the non-life insurance market. OP-Pohjola Group has been focusing on the cross-selling of banking and insurance products and its market position in the insurance business
Exhibit 3
National Market Shares*, Q1 2009
0% 5% 10% 15% 20% 25% 30% 35% 40%
Corporate lending Mortgage lending Life & Pension Insurance**
Non-life Insurance Mutual funds Nordea OP-Pohjola
* As reported by the banks (Source: Nordea and OP-Pohjola's Q1 2009 Interim Reports) ** For Life & Pension Insurance and Non-life Insurance: based on annual premiums written
Sampo Bank has been owned by Danske Bank since early 2007 and will reportedly be transformed into a branch at a later stage. It has a market share of about 14% in lending and a good position in asset
management with a market share of close to 20% in mutual funds. In spring 2008, Danske Bank integrated Sampo Bank into its IT platform but the migration suffered from an IT glitch, which caused inconvenience for customers, resulting in a net loss of around 40,000 retail and corporate customers (out of more than 1 million existing customers in Finland), as well as increased integration costs. The integration was completed in Q1 2009 and operations have normalised and we expect the customer outflow to have almost stopped. However, the episode has harmed Sampo Bank’s reputation and franchise and it will take some time for it to regain the confidence of, especially, retail customers. Overall, the bank will benefit from being part of a larger and more diversified banking group and we anticipate that Sampo Bank will introduce some new products to the Finnish market, especially the mortgage market.
The largest savings bank in Finland is Aktia, which has traditionally had a good customer penetration of the bilingual coastal areas of Finland and a 4.2% market share in mortgage lending, which is the bank’s primary banking activity. Similar to OP-Pohjola Group, Aktia has expanded into the insurance business by acquiring Veritas Life in 2006 and Veritas Non-Life Insurance was merged with Aktia on 1 January 2009 and
simultaneously changed its name to Aktia Non-Life Insurance. Aktia’s market share for unit-linked insurance policies is now 4.3%. So far, these banking groups appear to have been successful in cross-selling banking and insurance products to their customers.
Overall, the international expansion of Finnish banks has been limited. In 1995, Finnish bank Merita merged with Sweden’s Nordbanken and, following further mergers, the bank was renamed Nordea in 2001. Of the Finnish banks, Sampo Bank has been active in the Baltics and to a small degree also in Russia but has sold the operations to its parent following the acquisition. To date, OP-Pohjola Group has shown limited ambition in expanding its operations outside Finland and has preferred to form alliances with partners such as Swedbank in Sweden and Hansapank in the Baltics in order to serve its customers abroad. However, it has insurance subsidiaries in the three Baltic states as well as financing services through the acquisition of K-Finance and may also choose to use this channel to offer some banking products.
Foreign banks have a wide presence
In addition to Nordea and Danske Bank, the Finnish banking and asset management landscape is
characterised by the wide presence of other Nordic banks, which have entered the market either organically or through acquisitions. Svenska Handelsbanken has over the years expanded its operations in retail business and now has a meaningful presence in the largest cities in Finland and a market share of around 5% in total lending. Its Swedish competitor SEB has concentrated on merchant banking and asset management, and has built up its position in corporate lending as well as having a solid franchise in institutional fund management
following the acquisition of Gyllenberg in the late 1990s. Swedbank has also opened a branch in Finland after reducing its ownership in Aktia. Norway’s DnB NOR has entered the market through its subsidiary DnB NORD, and is a niche player in corporate lending.
Exhibit 4
Euro-denominated Loans to Customers, Year-end 2008 32% 32% 14% 5% 4% 3% 2% 9% OP-Pohjola Group Nordea Bank Finland Sampo Bank*
Svenska Handelsbanken Savings banks Aktia Group
Local cooperative banks Other
Source: Federation of Finnish Financial Services
After the collapse of the Icelandic banking system, some of the activities of the largest Icelandic banks have returned to Finnish ownership as it was the case for FIM (previously owned by Glitnir), which was bought out by its employees, and Kaupthing, whose asset management unit in Finland was acquired by Aktia Bank in December 2008. Landsbanki Islands closed its operations in December 2008. In addition, Straumur-Burdaras, which was taken over by the Icelandic government in March 2009, sold eQ Corporation including eQ Bank to Nordnet Bank AB in July 2009.
European and US banking groups Citibank, RBS, Calyon, Deutsche Bank, EFG Bank and ABN Amro are also present with one office each (Citibank has two branches). In addition, some new start-ups in the private banking sector have emerged, which traditionally has not been so well covered by the Finnish banks.
There is also evidence of gradual consolidation in the co-operative banking sector. The number of member banks within the OP-Pohjola Group fell from 238 at year-end 2005 to 227 at year-end 2008 through internal consolidation and arrangements.
Risk Positioning
Corporate governance – no major issues
None of the rated Finnish banks has problems with corporate governance in the form of shareholder influence, key-man risk or related-party lending. Both Pohjola Bank/OP-Pohjola Group and Aktia have special voting rights, which makes it difficult for them to be taken over. However, Aktia has announced its intention to be listed on the OMX Nordic Exchange depending on the market conditions. Overall, we have not noted any significant difference in management between those banks with the voting restrictions and those without. Most banks adhere to corporate governance recommendations issued by Helsinki Stock Exchange (currently the OMX Nordic Exchange Helsinki), the Central Chamber of Commerce of Finland and the Confederation of Finnish Industries and Employers.
Risk management
Risk management throughout the banking sector is generally good and there has been substantial investment in new structures and systems as part of the preparation for Basel II. Currently, the major Finnish banks all apply internal ratings-based (IRB) models for credit risk calculations under the Basel II framework.
Significant credit risk concentration
Credit exposures of the rated Finnish banks show high borrower concentration. Sector concentration is generally more moderate as the economy is fairly diversified by sector. The largest corporate exposure of Finnish banks is to property companies.
The credit outlook of Finnish property companies has been rapidly deteriorating since last year due to the economic downturn, which has resulted in a significant fall in prices of commercial properties, eroding the value of the collateral that banks receive when lending to this type of company. Exposure to property companies is viewed as a potential source of risk.
Market risk
The market risk appetite of Finnish banks is generally moderate. Market risk consists mainly of interest rate risk from traditional retail banking operations. In general, trading books are relatively small and derivatives are mainly used for hedging purposes. Despite the above, the severity of the financial crisis adversely affected the 2007 and early 2008 results of the Finnish banks, mainly in terms of market losses on their interest-bearing securities and equity portfolios, although, so far, losses have remained manageable. Pohjola has reclassified some security holdings out of the fair value through profit and loss category as of 1 July 2008 following the IAS 39 amendment, avoiding negative effects on their net income and equity positions. Aktia and Nordea did not reclassify their financial assets.
Regulatory Environment
Regulations in line with Basel and EU standards
As part of Moody’s assessment of the financial strength of a bank, we also form an opinion on the main regulator and the regulations governing financial institutions. In Finland, the Financial Supervision Authority (FIN-FSA) and the central bank are responsible for financial stability. The supervisory authority and the central bank also have cooperation agreements in place in relation to foreign banks’ activities in Finland. We also note that Nordic supervisory authorities and central banks are cooperating extensively in an effort to safeguard the financial stability.
The Finnish regulations – in the form of both laws and guidelines from the supervisory authority – are in line with Basel and EU regulations in relation to licensing, capital, asset quality measurements and liquidity. Enforcement of the regulations is also in line with EU regulations. The regulator, FIN-FSA, is independent and supervision takes place in the form of direct onsite visits, desktop reviews and special reviews. The
supervisory authority is financed via fees paid by the entities supervised and Moody’s notes that if Nordea Bank Finland – the largest bank in Finland – is converted to a European company and Sampo Bank to a branch of Danske Bank, this will put a strain on FIN-FSA’s budgets.
Operating Environment
When assessing a country’s operating environment, Moody’s focuses on economic stability, integrity, perceptions of corruption and the functioning of the legal system.
Economic stability
The Finnish banking system has proven relatively resilient to the challenges confronting banking systems globally. This is largely due to the fact that the exposure of Finnish banks to toxic financial assets and failed financial institutions has been minimal, partly explained by the fact that Finnish banks have been more oriented towards traditional banking activities. However, given that the crisis on financial markets has now spread extensively into the real economy, Finnish banks are expected to be adversely affected.
The growth outlook for the Finnish economy has deteriorated sharply over a very short period of time. Although as recently as late last year, GDP was expected to contract by 0.5% in 2009, the most recent conservative forecasts estimate that GDP will contract by as much as 6.5% this year and that growth will be
flat in 2010. The steep decline is largely a reflection of the fact that the economy is very open; indeed, forecasts predict a substantial drop in the volume of exports.
Integrity and corruption and legal system
For many years, Finland has been one of the least corrupt countries assessed by the World Bank. Based on the World Bank’s indicator on control of corruption, Moody’s has assigned the highest score of A for integrity and corruption in Finland. The same score applies to the country’s legal system, which is assessed by the length of time it takes to foreclose on residential real estate in default.
Profitability
Profitability to be challenged going forward
Weakened trading and net fee and commission income in conjunction with higher loan loss provisions and market value adjustments have reduced the banking system’s profits significantly. It should be noted that those banking groups that are active within life insurance (OP-Pohjola Group, Aktia) have been particularly badly affected by the weak performance of investments. This was especially notable in the Q4 2008 results. Also importantly, due to the ongoing uncertainty, banks’ funding costs have risen, thus exerting pressure on their results. Positively, the banking sector’s combined net interest income grew by 25% in 2008 and was primarily a reflection of improved margins (both in the retail and corporate sectors) and brisk loan growth.
Overall, the Finnish banking sector’s combined net profit for 2008 stood at €2.4 billion, a decrease of 38% from 2007. Moody’s currently rates four banks (Nordea Bank Finland, Aktia Bank, Pohjola Bank and Sampo Bank) (see Exhibit 1), which accounted for nearly two-thirds of the total banking system’s profits in 2008. For the Moody’s-rated Finnish banks, net profits were €1.6 billion, down by around 33% from the previous year. In Q1 2009, the trends seen in 2008 continued. Most of the banks increased their net interest income as a result of higher net interest margins, which offset the slower loan growth. Fee and commission income remained weaker than in 2008. Compared with 2008, the performance of some of the banks was helped by improved trading income, for a variety of reasons: Pohjola benefited from unrealised gain instead of unrealised losses in its liquidity reserve thanks to the reclassification of a large amount of bonds; Nordea’s positive results arose from customer-driven capital markets operations; and Aktia’s sale of its life insurance operation reduced its earnings volatility. In addition, all rated entities’ net profits have been adversely affected by higher loan loss provisions, which reflected the ongoing deterioration in asset quality.
The major revenue stream for Finnish banks remains their net interest income. Due to strong lending growth, the proportion of fee and commission income has not changed much in recent years. We believe that almost half of the banks’ fee income that is related to banking business is stable, i.e. not market transaction-driven. Of the rated banks Pohjola Bank/OP-Pohjola Group has also diversified its income sources to insurance income. Overall the revenue diversification of the rated banks is relatively good.
Going forward it will be a challenge for the banks to sustain good profitability levels given the increased funding costs and likely increase in loan loss provisioning needs.
Exhibits 5-7
Pre-Provision Income % Average Assets
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2003 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Net Interest Margin (%)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 2003 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Breakdown of Operating Income - 2008
-20% 0% 20% 40% 60% 80% 100%
Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank Net Interest Income Trading Income Fee & commission Income Insurance Income Other Operating Income
Figures for Aktia are those of Aktia plc
Source: Moody's Investors Service based on Companies' reports
Efficiency
Sustaining efficiency levels will prove crucial
The ability of banks to sustain their efficiency levels will be critical if they are to maintain their competitive positions. Compared with other financial institutions in the Nordic countries, the banks’ efficiency has been good over the past few years and is largely a legacy of major restructuring in the 1990s.
Consequently, Finnish banks have reported good efficiency levels over the past few years. However, the banks’ operating expenses grew by 10% in 2008, mainly due to an increase in staff and administrative expenses. Given that at the same time operating income was down by 13%, chiefly due to weaker fee income and write-downs in the life insurance investment portfolio, the cost-to-income ratio of the banking system weakened to 58% in 2008 from a low 45% in 2007. For the rated Finnish banks, the average cost-to-income ratio deteriorated to 68% in 2008 from 55% the previous year. In Q1 2009, the efficiency measured as cost-to-income mechanically improved as a result of the improved cost-to-income levels.
Exhibit 8
Cost - Income Ratio (%)
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Going forward, in a less favourable economic environment, lower revenue growth and higher credit risk costs could weigh on cost efficiency indicators.
Liquidity
Adequate liquid reserves
The banks have maintained their liquid reserves at an adequate level in order to be able to withstand market disruptions. On average, the rated banks’ liquid assets accounted for 34% of total assets at end-2008 (end-2007: 33%). Moreover, the total deposit balance developed favourably in 2008. This was largely due to the heightened caution of depositors in the context of the market turmoil; as a result, the attractiveness of deposits grew, while at the same time fund savings contracted, along with falling stock prices. In Q1 2009 the deposits of the rated Finnish entities continued to grow – albeit usually at a slightly lower level than in 2008.
Total deposits within the Finnish banking system stood at €107 billion at end-2008, up by 13% from the beginning of the year. Improved deposits have positively affected the banks’ funding positions and thus reduced the need for market-based funding. However, at the same time, short-term funding has increased. In terms of funding, at end-2008, on average around 36% of the rated banks’ total funding was in the form of deposits, 42% in the form of market funding and 19% in the form of interbank funding. The total outstanding bonds of the Finnish deposit-taking banks were about €16 billion at end-2008, a decrease of 8% from the beginning of the year. Of this amount, some one-third will mature this year.
Reflecting the challenging market conditions and the resulting high margins, the availability of long-term funding has weakened since H2 2008. As a result, there has been hardly any issuance by Finnish banks since that time. However, overall, all the rated Finnish banks have adequate liquidity management in place to ensure that they are able to continue business in the event of market interruptions.
Moreover, the Finnish banks have also been actively focused on maintaining sufficient assets to be used as collateral with the central bank if necessary. This has given the banks an additional liquidity buffer should the market liquidity situation remain weak.
Exhibit 9
(Market Funds - Liquid Assets) % Total Assets
-5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Capitalisation
Declining capital adequacy in 2008
Finnish banks’ capital levels are adequate, but the total capital adequacy of the banking sector continued to decline in 2008. The banking system’s average capital adequacy stood at 13.6% at end-2008, down from 15.1% at end-2007. Similarly, the Tier 1 capital adequacy ratio was down to 12.5% at end-2008 from 13.5% at end-2007. For the rated banks, their average total and Tier 1 capital ratios were 13.3% and 10.8%,
respectively at end-2008. The decline was due to brisk lending growth and weaker internal capital generation. The total banking sector’s lending growth was 12%, while net profits were down by nearly 40%. In Q1 2009 OP-Pohjola Group’s Tier 1 ratio stood at 12.1%, Pohjola Bank’s at 9.4% and Aktia’s at 9.0%. Nordea and Danske Bank do not report quarterly figures for their respective Finnish subsidiaries. These figures did not include the capital increases for Pohjola Bank in May 2009.
On a positive note, despite the declining trend, Finnish banks’ total capital adequacy levels are significantly above the 8% regulatory minimum and thus they are well capitalised. In euro terms, the buffer above the minimum level amounted to €8.5 billion.
Moody’s does not believe that the Finnish banking system is heading towards the type of banking crisis seen in the 1990s. During that downturn, actual losses within the banking system peaked in 1992 and were
equivalent to around 5% of total loans while non-performing loans stood at around 17% of total loans (vs. 0.5% in January 2009). Also, the current market situation is in many ways different to that of the early 1990s. Interest rates are significantly lower and borrowers are not exposed to the same level of currency risks. Also, the corporate sector is generally in better shape.
The quality of the banks’ capital is good overall. Approximately, 90% of the banking system’s total capital consists of Tier 1 capital. All Finnish banks are applying the Basel II regulations, the adoption of which has not resulted in major changes to the banks’ capital adequacy ratios, which in turn was partly due to the transitional rules.
In 2009, the banks began to strengthen their balance sheets via equity issues and by reducing dividend payments. So far this year, Pohjola Bank and Nordea have had equity issues. Also, in November 2008, Aktia announced a Tier 2 issue of €45 million.
Loan loss absorption capacity is good
The capacity of the largest Finnish rated banks to absorb loan losses is in general good and it has been improved by recent capital increases. Moody’s determines loan loss absorption capacity by assessing the cushion that the bank has in place to cover an increase in problem loans. The capital cushion consists of excess Tier 1 capital above 6% and loan loss reserves, as of end-December 2008.
Exhibit 10
Loan Loss Absorption Capacity at end-2008
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Pohjola Bank Nordea Bank Finland
OP-Pohjola Group Sampo Aktia Finland - Moody's rated
banks
Current problem loan ratio Max level of losses absorbed by capital cushion, % of gross loans Capital cushion = Excess Tier 1 capital above 6% + Loan loss reserves as of year-end 2008
Note: Excess Tier 1 capital is calculated based on Basel II transitional rules as of year-end 2008 and does not include capital increase that occurred after that date
Source: Moody's calculations
Based on the capital cushion where Tier 1 ratios are based on Basel II transitional rules as of 31 December 2008, we can assess the ability of the banks to cope with a large increase in problem loans and therefore a significant increase in loan losses (100% severity assumed).
As can be seen from Exhibit 10, the banks could absorb a relatively large weakening in asset quality from the current levels. In general terms, Moody’s would expect to find larger capital cushions at banks with greater vulnerability to asset quality deterioration.
Exhibit 11
Reported Tier 1 Ratio, Basel II transitional rules - YE2008
0 2 4 6 8 10 12 14
Aktia Nordea Bank Finland
Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia plc
Source: Moody's Investors Service based on Companies' reports
Recent Capital Increases
Pohjola Bank announced a capital increase of some €300 million via a rights offering to its existing shareholders in February 2009. The subscription period of the issue is from 7 April 2009 to 24 April 2009. Pohjola's largest shareholders, OP-Pohjola Group Central Co-operative, Suomi Mutual Life Assurance Company and Ilmarinen Mutual Pension Insurance Company, have each committed to subscribe for their pro rata share of the Offer Shares, these commitments representing 50.2% of the shares offered in the rights offering. Related to this share issue, Pohjola has revised its minimum Tier 1 ratio target up to 9.5% from 8.5%.
Aktia had a Tier 2 issue of €45 million in November 2008.
Nordea Bank Finland’s parent company has increased its capital by €3 billion through a €2.5 billion issue of ordinary shares and the reduction of the 2008 dividend payment to 19% of the 2008 net profit. The Nordea Group manages capital from a group perspective and capital can be re-allocated to subsidiaries if necessary.
Sampo Bank’s parent companyDanske Bank has issued hybrid capital of around DKK26 billion under the Danish government’s support scheme.
Asset Quality
The recession will likely see an increase in problem loans
In Moody’s view, the recession is expected to result in an increase in problem loans and loan losses, with losses mainly likely to stem from the corporate sector. In terms of industry sectors, Moody’s is especially concerned about the Finnish banks’ credit exposure towards the construction, commercial real estate, metal and forestry sectors. We will continue to closely monitor the asset quality of the construction and commercial real estate exposures, which in total accounted for about one-third of the banking system’s total corporate lending and guarantees in 2008.
An important indicator of the weakened credit environment is the increase in the number of bankruptcies. Overall, corporate bankruptcies increased by 16% in 2008, spread across all industries, but most heavily affecting the services sector. Bankruptcy growth was strongest towards the end of the year and the trend has continued into 2009, particularly in construction. Bankruptcies however remain still below the levels seen during the recession of the late 1980s and early 1990s.
The recession is also expected to have an adverse effect on the debt servicing ability of households.
Positively, a large proportion of Finnish households’ mortgage loans are variable rate loans, which in a time of decreasing interest rates will reduce the burden of debt servicing.
However, it is likely that some households will still have problems servicing their mortgage loans. According to a Finnish FSA survey in autumn 2008, households that have to use over 50% of their net income to service their mortgages accounted for around 20% of new mortgage loans. Moreover, given that repayment periods have increased, with the average repayment schedule standing at 21 years, flexibility to renegotiate the terms of repayment is more limited.
Loan growth remained brisk in 2008. In total, loan portfolio within the Finnish banking system grew by 12% in 2008; household lending grew by nearly 9%, while corporate lending grew by over 18%. The increase in corporate lending was not purely new lending – corporates tended to replace more expensive market funding with cheaper bank loans. In Q1 2009, loan growth was limited, with all rated banks in Finland exhibiting low or even negative figures.
Total non-performing loans within the Finnish banking system increased in 2008 but remain still at a low level - 0.4% at end-2008, up from 0.3% the previous year. However, growth in non-performing loans was more rapid during H2 and the trend continued in Q1 2009. For the rated banks, the average problem loan ratio increased to 0.9% at end-2008 from 0.6% at end-2007.
In terms of the total banking system’s corporate loan portfolio, non-performing loans amounted to 0.3% of total corporate loans in 2008, marginally up from 0.26% in 2007. Moody’s cautions that, due to the relatively rapid growth in corporate lending over the past couple of years, non-performing loans within the corporate lending sector are likely to increase.
Of the total banking system’s problem loans, nearly 60% relate to household lending. However, in relative terms, the non-performing loan ratio remains low. The household sector’s non-performing loans accounted for 0.5% of total household loans, up from 0.33% in 2007. The ratio is still well below the levels of 6%-7% seen during the last banking crisis in 1992-93.
In light of the weakening credit environment, the banks have become more cautious in their lending activities. Thus, corporate lending growth is likely to be significantly lower in 2009 than in 2008. However, this does not coincide with the current lending needs of the corporate sector, which has considerable refinancing
requirements. The refinancing needs of Finnish corporates are estimated to total around €3 billion this year and €8 billion in 2010.
Moody’s believes that the forthcoming debt maturities of the Finnish corporate sector will represent a significant challenge for the Finnish banks. The absence of many foreign players – which have problems in their respective home countries – will undoubtedly exert pressure on Finnish and other Nordic banks in terms of refinancing these debt maturities. Although this could also represent an opportunity for some banks to pick up good new clients, from the perspective of credit risk, banks’ risk profiles could increase, especially given that in some cases their credit risk concentration levels are already very high.
Exhibits 12 & 13
Problem Loans % Gross Loans
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Problem Loans % (Equity + Loan Loss Reserves)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 2003 2004 2005 2006 2007 2008 Aktia Nordea Bank Finland Pohjola Bank OP-Pohjola Group Sampo Bank
Figures for Aktia are those of Aktia Savings Bank prior to 2008, Aktia plc in 2008 Source: Moody's Investors Service based on Companies' reports
Joint Default Analysis and the Baseline Credit Assessment
The previous section discussed the key qualitative and quantitative drivers of Moody’s bank financial strength ratings (BFSRs) in Sweden. BFSRs – which are assigned on an alphabetical scale from A to E – are Moody’s opinions on the intrinsic safety and soundness of a bank enterprise and, in effect, address the susceptibility of a particular institution to financial distress. They measure a bank’s standalone default risk and do not consider any systemic or other external support that might be available to the bank. For more information, see “Bank Financial Strength Ratings: Global Methodology”, February 2007.
By contrast, Moody’s bank deposit ratings – which are assigned on Moody’s traditional alphanumeric scale (Aaa, Aa1, Aa2, etc.) – additionally take into account any potential external support that might be forthcoming for a particular bank. These ratings are assigned under Moody’s “Joint Default Analysis” methodology, which operates on the principle that the risk of default (and therefore, loss) for certain obligations depends upon the performance of both the primary obligor and another entity (or entities) that may provide support to the primary obligor. This methodology takes the bank’s BFSR as the starting point and then, in a sequential process, assesses the capacity and willingness of each potential support provider to support the bank in order to arrive at the deposit ratings. For more information, see “Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology”, March 2007.
As BFSRs are assigned on their own scale, Moody’s has developed a mapping grid for translating BFSRs to a measurement on Moody’s traditional scale – this is the Baseline Credit Assessment (see mapping grid in Appendix 3).
The following section discusses the external support considerations that drive the deposit ratings of banks in Sweden in addition to their Baseline Credit Assessments derived from their BFSRs. It looks at both the support guideline for the country as a whole and an overview of Moody’s external support assessments for individual institutions.
Deposit Rating Drivers
Local currency deposit ratings
Moody’s assesses Finland as a high support country. This guideline takes into consideration the history of support for banks, the size of the Finnish banking system and its strength and degree of fragmentation.
Given the importance of the Finnish banking system to the Finnish economy as well as the history of support in the early 1990s, Moody’s considers that the Finnish authorities would provide, under certain circumstances, support to the banks in the event of financial distress.
In Finland, the sources of external support include not only systemic support but also cooperative support in the case of Pohjola Bank and parental support in the case of Nordea Bank Finland and Sampo Bank.
Together, these sources of external support lead to an uplift of two to four notches in the banks’ deposit ratings from their BCAs.
Moody’s Related Research
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Appendices
Appendix 1: Sovereign Credit Opinion
Credit Strengths
The credit strengths of Finland include:
Modern economy, highly educated labour force, and consensus-based political framework
Sound public finances with low government debt and partially funded pension system
Credit Challenges
The credit challenges for Finland include:
Preservation of government financial strength in a low-growth environment
Large number of people on public-leave schemes and thus not economically active, and a labour force set to shrink earlier than that of any other EU country
Rating Rationale
Finland's government debt ratings are Aaa. The ratings are based on "very high" economic strength,
underpinned by a high GDP per capita and a resilient, competitive economy. Finland also exhibits "very high" institutional strength, reflecting its strong government effectiveness, social stability and rule of law. Structural unemployment set against the shortage of skilled labour remains the economy's most obvious problem, with long-term joblessness and high unemployment among young people being key concerns, but recent employment gains suggest progress is being made. On the other hand, prudent and proactive economic policies have cut public debt substantially, which together with structural labour market reforms will strengthen long-term fiscal sustainability despite of the rapidly ageing population. Moreover, Finland is in a strong position to preserve healthy public finances in the current economic environment. Hence, Moody's assesses
government financial strength as “very high”. As with the other Nordic countries, susceptibility to event risk is “very low”.
Rating Outlook
The outlook for Finland's ratings is stable. Although the ageing of the Finnish population is more dramatic than that in other OECD countries, the government has reduced its debt well below the average of its rating peers, and its budget performance is still stronger than most. These attributes should ensure longer-term fiscal sustainability despite potential labour shortages. In addition, policymakers will continue to focus on raising the labour participation and employment rates to compensate for the demographic transition. Conscientious efforts by the government, business community and general population to confront the country's remaining structural deficiencies – with the emphasis being on the labour and product markets – will need to continue if Finland is to maintain its sound macroeconomic performance and financial condition over the longer term.
What Could Change the Rating - Down
A serious deterioration in public finances over a lengthy period of time that causes a reversal of the virtuous debt dynamics and endangers economic stability could exert pressure on the ratings. Another important consideration is how well the economy and banking system adjust to the adverse global market environment.
Recent Developments
The outlook for the Finnish economy has deteriorated sharply in recent months. The export sector in particular faces bleak prospects with a nominal contraction of almost 20% in 2009. Unemployment is expected to increase to around 10% in 2011 (from 6.4% in 2008). In light of soaring job uncertainty and negative wealth effects, household consumption is set to drop significantly and the household savings ratio is expected to increase in the course of 2009. All in all, Moody's forecasts GDP to contract by 5% in 2009 and a further 1% decline is forecast for 2010. Inflation will remain muted, suppressed by both low commodity prices and weak demand.
Public finances are being strained in the recession and the central government’s budget balance will slip into deficit for the first time in years. In addition, the government is committed to increasing certain welfare benefits aimed at improving basic health care, at bolstering care for the elderly, at broadening the coverage available to family caretakers and at fostering R&D. The government presented a supplementary budget in January that allocated additional financial resources to finance business and exports.
In its recent Financial Market Support package, the Bank of Finland stated that the results of most Finnish banks remained reasonably solid, especially considering the environment, although profitability declined in 2008 from a record level in 2007. Moreover, the capital adequacy of Finnish banks compares favourably with that of their international counterparts. The banks have been able to acquire short-term market funding, while long-term funding has become rather scarce. Accordingly, the government announced in late 2008 that it would provide guarantees for unsecured credit instruments with maturities of between three months and five years issued by banks or bank holding companies. The support scheme is intended to be in force until the end of 2009, but if needed, the government may prolong this period. An overall maximum of €50 billion can be drawn, corresponding to the volume of bank deposit certificates and bonds scheduled to mature through the end of 2009.
Appendix 2: Global Comparisons
A-B+ B B-C+ C C-D+ D D-E+ E A Canada (B) Singapore (B) Hong Kong (B) Finland (B) Australia (B-) Switzerland (B-) Liechtenstein (B-) Netherlands (B-) Norway (B-) Chile (B-) Sweden (B-) New Zealand (C+) Andorra (C+) Spain (C+) Jersey (C+) France (C+) Italy (C+) Brazil (C+) Denmark (C) Jordan (C) Portugal (C) South Africa (C) Germany (C) Saudi Arabia (C) Mexico (C) United States (C) Czech Republic (C) Global Universe (C) Kuwait (C) Belgium (C) United Kingdom (C-) Greece (C-) Slovenia (C-) Luxembourg (C-) Japan (C-) Israel (C-) Trinidad & Tobago (C-) Bermuda (C-) Qatar (C-) Malaysia (C-) United Arab Emirates (C-) Bahrain (C-) Oman (C-) Korea (C-) Slovak Republic (D+) Cyprus (D+) Colombia (D+) Turkey (D+) Mauritius (D+) India (D+) Austria (D+) Poland (D+) Bahrain - Off Shore (D+) Croatia (D+) Malta (D+) Morocco (D+) Peru (D+) Taiwan (D+) Hungary (D+) Cambodia (D+) Romania (D) Bulgaria (D) Thailand (D) Argentina (D) Guatemala (D) Panama (D) Estonia (D) Indonesia (D) Philippines (D) Egypt (D) Pakistan (D-) Tunisia (D-) Russia (D-) Bolivia (D-) Uruguay (D-) Ireland (D-) Mongolia (D-) Venezuela (D-) Armenia (D-) Ghana (D-) Georgia (D-) Lebanon (D-) China (D-) Ukraine (D-) Vietnam (D-) Lithuania (E+) Albania (E+) Montenegro (E+) Uzbekistan (E+) Belarus (E+) Azerbaijan (E+) Kazakhstan (E+) Latvia (E) Iceland (E) Kyrgyzstan (E)Average* Bank Financial Strength Ratings by Country, July-01-2009
B aa3 B aa2 B aa1 A3 A2 A1 Aa 3 Aa 2 Aa 1 Aa a
C Ca Caa3 Caa2 Caa1 B3 B2 B1 Ba
3 Ba 2 Ba 1 Andorra Australia Austria Bahamas Belgium Canada Chile Cyprus Czech Republic Denmark Eurozone Finland France Germany Greece Hong Kong Hungary Iceland Ireland Italy Japan Latvia Luxembourg Macao Malta Mexico Netherlands New Zealand Norway Poland Portugal Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland United Kingdom United States of America Bermuda Cayman Islands Croatia Estonia Korea Lithuania Bahrain Barbados Israel Kuwait Malaysia Mauritius Oman Qatar Thailand Tunisia United Arab Emirates Botswana Costa Rica Romania Saudi Arabia Taiwan Brazil China Colombia Dominican Republic Fiji Islands India Russia Trinidad & Tobago Kazakhstan Philippines Belize Egypt Guatemala Honduras Jordan Morocco Papua New Guinea Turkey Albania Armenia Azerbaijan Bulgaria Jamaica Peru St. Vincent and the Grenadines Venezuela Indonesia Mongolia Panama Uruguay Belarus El Salvador Argentina Cambodia Lebanon Suriname Ukraine Vietnam Pakistan Paraguay Bolivia Bosnia and Herzegovina Moldova Nicaragua Turkmenistan Ecuador
Country Ceilings for Long-Term Bank Deposits
Domestic Currency, July-01-2009
*Weighted by Assets
C Ca Caa3 Caa2 Caa1 B3 B2 B1 Ba
3 Ba 2 Ba 1 Ba a 3 Ba a 2 Ba a 1 A3 A2 A1 Aa 3 Aa 2 Aa 1 Aa a Canada (Aa1) Singapore (Aa1) Finland (Aa1) Australia (Aa2) Norway (Aa2) Sweden (Aa2) Switzerland (Aa2) Chile (Aa2) France (Aa2) New Zealand (Aa2) Germany (Aa2) Hong Kong (Aa2) Netherlands (Aa2) Jersey (Aa3) Spain (Aa3) Denmark (Aa3) Japan (Aa3) Portugal (Aa3) Czech Republic (Aa3) United Kingdom (Aa3)
United States (Aa3) Italy (Aa3) Kuwait (Aa3) Global Universe (Aa3)
Mexico (Aa3) Luxembourg (Aa3) Austria (Aa3) South Africa (A1) Qatar (A1) Belgium (A1) Saudi Arabia (A1) Slovenia (A1) Trinidad & Tobago (A1) United Arab Emirates (A1) Malaysia (A1) Israel (A1) Korea (A1) Brazil (A1) Greece (A2) Slovak Republic (A2) Ireland (A2) Taiwan (A2) Oman (A2) Croatia (A2) Bahrain (A2) India (A2) Mauritius (A3) Cyprus (A3) Poland (A3) Thailand (A3) Jordan (A3) Turkey (A3) Romania (A3) Colombia (Baa1) Malta (Baa1) Morocco (Baa1) Hungary (Baa1) Philippines (Baa1) Egypt (Baa1) Tunisia (Baa2) Russia (Baa2) China (Baa2) Estonia (Baa2) Peru (Baa2) Indonesia (Baa2) Uruguay (Baa3) Guatemala (Baa3) Bulgaria (Baa3) Cambodia (Ba1) Vietnam (Ba1) Argentina (Ba1) Belarus (Ba1) Armenia (Ba2) Venezuela (Ba2) Ghana (Ba2) Pakistan (Ba2) Lebanon (Ba2) Mongolia (Ba3) Georgia (Ba3) Bolivia (Ba3) Ukraine (B1) Uzbekistan (B1) Albania (B1) Lithuania (B1) Azerbaijan (B2) Latvia (B2) Kazakhstan (B2) Kyrgyzstan (Caa) Iceland (C)
Average* Long-Term Bank Deposits by Country
Domestic Currency, July-01-2009
Alderney Australia Bahamas - Off Shore Banking Center Canada Cayman Islands - Off Shore Banking Center Denmark Eurozone Guernsey Isle of Man Japan Jersey Liec htenstein New Zealand Norway Sark Singapore Slovakia Sweden Switzerland United Kingdom United States of Americ a Bermuda Hong Kong Kuwait Panama - Off Shore Banking Center Qatar United Arab Emirates Bahrain - Off Shore Banking Center Cayman Islands Mac ao Taiwan Chile China Czec h Republic Estonia Israel Saudi Arabia Bahrain Botswana Korea Oman Poland Bahamas Lithuania Malaysia Hungary Ic eland Mexic o Russia South Afric a St. Vinc ent and the Grenadines Thailand Trinidad & Tobago Barbados Mauritius Panama Tunisia Bulgaria El Salvador Latvia Romania Croatia Kazakhstan Azerbaijan Brazil Colombia Costa Ric a Egypt India Moroc c o Peru Armenia Guatemala Jordan Indonesia Montenegro Philippines Turkey Uruguay Vietnam Albania Belarus Fiji Islands Lebanon Mongolia Papua New Guinea Suriname Belize Bosnia and Herzegovina Cambodia Dominic an Republic Honduras Jamaic a Pakistan Paraguay Turkmenistan Ukraine Venezuela Argentina Bolivia Ec uador Cuba Moldova Nic aragua
Country Ceilings for Long-Term Bank Deposits
Foreign Currency, July-01-2009
*Weighted by Assets Ba a 3 Ba a 2 Ba a 1 A3 A2 A1 Aa3 Aa2 Aa1 Aaa C Ca Ca a 3 Ca a 2 Ca a 1 B3 B2 B1 Ba3 Ba2 Ba1 Canada (Aa1) Singapore (Aa1) Finland (Aa1) Australia (Aa2) Norway (Aa2) Sweden (Aa2) Switzerland (Aa2) France (Aa2) New Zealand (Aa2) Germany (Aa2) Netherlands (Aa2) Jersey (Aa3) Spain (Aa3) Denmark (Aa3) Hong Kong (Aa3) Japan (Aa3) Portugal (Aa3) Liechtenstein (Aa3) United Kingdom (Aa3)
United States (Aa3) Italy (Aa3) Luxembourg (Aa3) Kuwait (Aa3) Austria (Aa3) Qatar (A1) Belgium (A1) Global Universe (A1) Slovenia (A1) Chile (A1) Czech Republic (A1) United Arab Emirates (A1) Saudi Arabia (A1)
Bermuda (A1) Israel (A1) Greece (A2) Slovak Republic (A2)
Ireland (A2) Taiwan (A2) Andorra (A2) Korea (A2) China (A2) Oman (A2) Bahrain (A2) Cyprus (A3) Poland (A3) Malaysia (A3) Bahrain - Off Shore (A3) Malta (Baa1) Trinidad & Tobago (Baa1) South Africa (Baa1)
Mexico (Baa1) Thailand (Baa1) Hungary (Baa1) Mauritius (Baa2) Tunisia (Baa2) Estonia (Baa2) Russia (Baa2) Romania (Baa3) Bulgaria (Ba1) Panama (Ba1) India (Ba2) Morocco (Ba2) Peru (Ba2) Colombia (Ba2) Egypt (Ba2) Brazil (Ba2) Azerbaijan (Ba3) Jordan (Ba3) Armenia (Ba3) Guatemala (Ba3) Uruguay (Ba3) Indonesia (B1) Montenegro (B1) Philippines (B1) Vietnam (B1) Turkey (B1) Latvia (B1) Lithuania (B1) Mongolia (B2) Lebanon (B2) Albania (B2) Belarus (B2) Kazakhstan (B2) Cambodia (B3) Georgia (B3) Ghana (B3) Pakistan (B3) Uzbekistan (B3) Venezuela (B3) Ukraine (B3) Argentina (Caa1) Bolivia (Caa1) Kyrgyzstan (Caa) Iceland (C)
Average* Long-Term Bank Deposits by Country
Foreign Currency, July-01-2009
Appendix 3: BFSR/BCA Mapping Table
BFSR/Baseline Credit Assessment Mapping
BFSR Baseline Credit Assessment (BCA)
A Aaa A- Aa1 B+ Aa2 B Aa3 B- A1 C+ A2 C A3 C- Baa1 C- Baa2 D+ Baa3 D+ Ba1 D Ba2 D- Ba3 E+ B1 E+ B2 E+ B3 E Caa1 E Caa2 E Caa3
