“It doesn’t come as a complete surprise to me, even if I don’t agree that the banks should be downgraded,” said financial analyst Peter Malmqvist to daily Svenska Dagbladet (SvD).

Since mid-February when Moody’s announced that they were reviewing 114 European banks and among these the four major Swedish banks, the companies have been aware that a potential downgrade was in the cards.

Shortly after midnight Moody’s announced that it was lowering its ratings on Nordea Bank AB and Svenska Handelsbanken AB by one notch to Aa3, its fourth highest rating.

Moody’s explained their decision by saying that Swedish banks have a comparatively high reliance on wholesale funding, leaving banks susceptible to potential changes in investor confidence amidst the ongoing euro area debt crisis.

Another reason was their modest profitability, driven by price competition for retail loans in what was described as a low interest rate environment.

According to Moody’s, the resulting low profit margins would potentially make it challenging for Swedish banks to rebuild capital in the event of unexpected losses.

The firm also said that there were risks to asset quality, despite the banks’ robust performance to date, given that the weakness in Europe could potentially affect the Swedish economy, and thus corporate borrowers.

They also said that the Swedish banks’ large, mostly variable-rate mortgage books would be vulnerable to credit deterioration if interest rates rise.

However, at Nordea they are not fazed by the firm’s decision.

“We think this confirms that we are one of Europe’s strongest banks. We are one of three banks in Europe with a double A-rating,” said Erik Durhan, press spokesperson for Nordea to Expressen.

“We will see if it has any effect, but we don’t think it will.”

The firm also downgraded its ratings on specialized agricultural lender Landshypotek AB down to Baa2.

According to the company, this was done because its focus on a single business (agricultural lending) and reliance on covered bonds funding could make the institution particularly vulnerable to a deteriorating environment or market disruption.

However, Moody’s also confirmed its ratings for the two other leading Swedish banks SEB at A1 and for Swedbank at A2 as the outlook is considered to be stable for these banks.

However, despite the downgrade, Moody’s noted that Swedish banks are in a stronger position than their European peers to manage the credit risks emanating from the challenging European operating environment.

The Local/rm