Fitch Ratings says in a special report that Scandinavian banks are expected to extend their strong performance in 2007, supported by a favourable economic environment.

"The Scandinavian economies have shown higher growth rates than the euro-zone average, which has stimulated business activity," says Olivia Perney Guillot, Senior Director in Fitch's Financial Institutions Group. "All significant business lines have performed well in 2006. Increased confidence has stimulated retail and corporate banking activity, and capital markets business has benefited from strong M&A activity and volatile equity markets".

Reported profitability remains healthy, with business volume growth generally offsetting the effect of further margin pressure. In retail and corporate banking, the banks have experienced relatively high lending growth rates, across the four Scandinavian countries, as well as large sales and usage of credit cards, higher demand for savings products and strong securities brokerage activity. In addition, the capital markets were favourable despite turbulences on the Nordic stock exchanges in Q206. Higher demand for advisory, merger and acquisition services, new issues, IPOs, investment in private equity markets and alternative investment funds, hedging and derivative products, custody and brokerage services, etc, boosted fee income in 2006. Asset management and life insurance operations are benefiting from increasing wealth in the Scandinavian countries, where private individuals are looking for long-term savings products.

Credit costs have been kept extremely low across the region and Fitch does not expect them to increase significantly in the near future. Nevertheless, net credit costs are unlikely to continue to benefit from large loan impairment releases to a similar extent seen in the last few years. "Credit quality remains very strong, with low-risk mortgage lending representing a significant portion, often up to 40%, of the overall portfolios," adds Ms Perney Guillot. "However, loan impairment allowances are low as a proportion of total lending, and any decline in the performance of the loan portfolios is likely to have a direct impact on reported profitability."

One of the key issues facing Scandinavian banks is the implementation of Basel II. With the high proportion of mortgage lending in the banks' balance sheet, and the good quality of lending overall, risk-weighted assets are expected to fall under Basel II. The capital strategies of the banks under Basel II have not been fully articulated yet, and Fitch will carefully monitor the approaches to be adopted.

The major Scandinavian banks are:

-Danske Bank: Issuer Default Rating 'AA-(AA minus)' with a Stable Outlook, Short-term Rating 'F1+', Individual Rating 'B', and Support Rating '1',
-Nordea Bank AB: 'AA- (AA minus)' with a Stable Outlook, 'F1+', 'B', '1',
-Skandinaviska Enskilda Banken: 'A+' with a Positive Outlook, 'F1', 'B', '1',
-Svenska Handelsbanken: 'AA- (AA minus)' with a Stable Outlook, 'F1+', 'B', '1',
-Swedbank AB: 'A+' with a Stable Outlook, 'F1', 'B', '1',
-DnB NOR Bank: 'A+' with a Stable Outlook, 'F1', 'B', '1',