Subdued economic outlook is weakening the financial sector's operating environment – real estate market risks particularly increasing


Subdued economic growth and the uncertain economic outlook have kept the risks in the Finnish financial sector high in the first half of the year. Risks are increasing particularly in the real estate market. The financial sector's strong capital position provides protection against risks caused by the weakening operating environment.

Subdued economic growth and uncertainty weakened the operating environment of the Finnish financial sector in the first half of 2023. Finland's GDP contracted in the second quarter by 0.4% compared with the corresponding period in 2022. In addition, new orders received by companies decreased and the number of bankruptcies increased as consumers’ purchasing power was weakened by the rising cost of living and the upward trend in the commonly used reference rates. Unemployment and furloughs also increased, consumer confidence remained low and business outlook gloomy.

The weak business cycle, accompanied by rising maintenance, repair, construction and financing costs, tested the real estate and construction sector considerably. At the same time, the sector's profits have been under pressure as sales of new-build residential properties have slowed and competition for tenants is weakening opportunities for rent increases. Declining property prices, subdued trading activity and market uncertainty are increasing the financial sector's credit, investment and liquidity risks.

“The financial sector has considerable exposures to the housing and real estate market. Moreover, the debt servicing capacity of households and companies has weakened and there are early signs of a rise in credit risks. The subdued economic development and uncertainty about the future will keep risks high also going forward. The financial sector's resilience is best sustained by a strong capital position, thorough risk management, and regulatory and statutory requirements supporting financial stability and compliance with them,” says Tero Kurenmaa, Director General of the Financial Supervisory Authority (FIN-FSA).

Real estate risks are one of the FIN-FSA's supervisory priorities in 2023. The supervision of credit risks, including the real estate sector, is one of the priorities of banking supervision, and in the supervision of the insurance and pension sector particular attention is paid to the valuation of real estate investments and valuation practices. Liquidity management and valuation of fund assets have, in turn, been the priorities of the supervision of funds for some years now. Earlier this year, the FIN-FSA conducted a thematic review on the liquidity stress testing of open-end real estate funds.

Banking sector's capital position remained strong and net interest income continued to grow – signs of a rise in credit risks in real estate and construction industry loans

The banking sector’s capital position improved slightly in the first two quarters of 2023. The banking sector's Common Equity Tier 1 (CET1) capital ratio at the end of June was 17.4% (12/2022: 17.2%) and the total capital ratio was 20.9% (12/2022: 20.6%). Net interest income continued to grow robustly, and the banking sector’s operating result improved significantly compared to the corresponding period the previous year. In addition to the growth in net interest income, the significantly stronger operating result was also partly explained by the moderate increase in expenses, as well as non-recurring charges in the reference period.

The banking sector’s non-performing assets relative to the credit stock remained at a low level, despite signs of a slight increase in the area of household loans. The Finnish banking sector’s non-performing assets remained among the lowest in Europe, however. Movements of loans between the stages of impairment are already signalling more strongly a growth in credit risks both in household and corporate loans. The heightened risks in the real estate market have been reflected as an increase in credit risks, particularly in loans to the real estate and construction sectors. The Finnish banking sector is very interconnected with the developments of the real estate market, as loans backed by residential and commercial real estate loans account for nearly 60% of banks’ stock of household and corporate loans. The liquidity position of Finnish banks has remained stable.

Employee pension sector solvency ratio unchanged

The employee pension sector's solvency ratio (126.9%) remained virtually unchanged, as return on investment (3.1%) was close to the required return on technical provisions (3.2%). The change in the value of investment assets was affected by the positive return on equities and fixed-income investments. Growth in the share of illiquid investments, such as private equity, real estate and hedge fund investments, came to a halt in the first half of the year and was 44%. Real estate investments account for some 13% of the employee pension institutions’ total investments. The majority of real estate investments are domestic real estate holdings. The risk-based solvency position weakened to 1.6 (12/2022: 1.7), due to higher risk taking. Employee pension institutions’ stress resilience against equity shocks is still reasonable.

The employee pension sector's payroll continued to grow in the first half of the year, albeit more slowly than pension contributions. This trend is expected to continue in the coming years. The difference between the insurance premiums based on payroll and pension contributions, in 2023 some EUR 800 million, as well as administration expenses will, even so, probably be covered in the next few years mainly with cash flows from investment assets.  

Life insurance sector solvency strengthened slightly

Life insurance companies’ solvency ratio rose compared to the situation at the end of the year 2022 and was 261.4% (12/2022: 256.9%), i.e. strong. Solvency was bolstered by the slight decrease in the solvency capital requirement, which was explained by a shift towards a lower-risk investment allocation.

The sector’s return on investment was 2.4% in the first half of 2023. Both equity and fixed-income investments generated a profit, but the return on real estate investments was slightly negative. Losses caused by the decline in the value of real estate was smoothened by rental return. Real estate investments account for some 9% of the life insurance sector's total investments.

Premiums written on life insurance declined slightly on the year earlier period, due to a contraction in endowment insurance business. Claims paid did not increase overall but surrenders by private customers rose significantly.

Non-life insurance sector solvency weakened slightly

Non-life insurance companies’ solvency ratio was 278.1% (12/2022: 301.6%). The weakening of solvency was attributable to the increase in the solvency capital requirement, as a result of the rise in the market prices of equities. Solvency nevertheless remained good, as long-term interest rates did not move significantly in the first half of the year and the market value of insurance liabilities remained at the very low level witnessed at the end of 2022. The amount of own funds grew slightly due to return on investment and was at its highest level since the introduction of Solvency II regulation.

The return on investment in January-June was 2.6%. The highest return was generated by equity investments, whereas return on real estate investments weakened markedly. Real estate investments accounted for some 14% of the non-life insurance sector's total investments. Insurance business profitability weakened, which was due to the increase in claims expenditure. The amount of claims paid was largest in motor liability, property and medical expenses insurance.

Contact information

For further information, please contact Samu Kurri, Head of Department, Digitalisation and Analysis.

Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, weekdays 9:00–16:00.




Finanssivalvonta, or the Financial Supervisory Authority (FIN-FSA), is the authority for supervision of Finland’s financial and insurance sectors. The entities supervised by the authority include banks, insurance and pension companies as well as other companies operating in the insurance sector, investment firms, fund management companies and the Helsinki Stock Exchange. We foster financial stability and confidence in the financial markets and enhance protection for customers, investors and the insured.

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