Banks, EU – Baltic States, Financial Services, Loan

"All of the big banks can withstand extreme pressure in the coming period," the Stockholm-based financial watchdog said in its stress test of Sweden’s four largest banks today. "There is currently no need for any of the big banks to strengthen their capital adequacy based on the regulatory requirements."

Swedish banks face soaring loan losses in the Baltic States, which are suffering the severest recessions in the European Union, informs LETA/BLOOMBERG from Stockholm.

Swedbank, the largest bank in the Baltics, has 17% of its lending in the region, while SEB, the second-largest, has 13%. Together, the two have lent more than 366 billion kronor in the region.

The watchdog's "conservative base scenario" forecasts losses on 15% of the banks' Baltic loan portfolios and on 38% of loans made in Ukraine, while losses in Sweden will reach 1.5%.

That will lead to total loan losses of 203 billion kronor during 2009, 2010 and 2011, while total income will be 296 billion kronor, meaning the four largest banks will remain profitable on an aggregate level.

Swedbank rose 7.7% to 42 kronor at 11:29 a.m. in Stockholm trading. A close at that level would represent the bank's steepest gain since May 18. SEB added 4.9% to 34.2 kronor while Nordea rose 3% to 61.7 kronor. "Svenska Handelsbanken" gained 4.1% to 140.5 kronor.

Swedbank and SEB will report net losses in 2010 because of their operations in the Baltic states and in Ukraine, the watchdog said. Nordea Bank, the Nordic region's largest bank, has lent on a smaller scale in the Baltics, while Svenska Handelsbanken has no significant operations in the region.

In the agency's worst-case scenario, which it regards as "unlikely but not impossible," loan losses in the Baltics will reach 34% while credit losses in Ukraine will be 58% of the banks' total lending in the country. Losses in Sweden will stand at 2.1% and at 4.2% in the rest of the Nordic region, resulting in total loan losses of 350 billion kronor at the four largest banks over three years.

"In extreme scenarios, the market will most likely require a higher level of capital, which can place pressure on financing possibilities for banks that are most affected," the FSA said.

In the worst-case scenario, Swedbank capital adequacy ratio will drop to just under six%, above the legal four% requirement, while SEB and Nordea will fall to about eight%, the watchdog said. In the base scenario, Swedbank capital adequacy ratio will fall to nine%, "Nordea" and SEB to just above ten%, and Handelsbanken to 11%.

The Riksbank, the world's oldest central bank, has taken measures to ensure it can uphold financial stability in Sweden and provide the Nordic country's banks with liquidity.

The bank said last month it would bolster foreign reserves by 100 billion kronor by borrowing from

Sweden's National Debt Office. It said today, on june 10, it plans to borrow three billion euros from the European Central Bank to be "well prepared" to safeguard financial stability and has activated a swap agreement with the ECB, under which it will be able to borrow as much as 10 billion euros (14 billion dollars) in exchange for kronor for as long as three months, to ensure it has enough currency reserves.