DBRS Assigns Debt Rating to Svenska Handelsbanken, Senior at AA (low)

DBRS has today assigned its AA (low) rating to the Senior Unsecured Debt & Deposits of Svenska Handelsbanken AB (publ) (SHB or the Bank). At the same time, DBRS has assigned a rating of R-1 (middle) to SHB’s Short-Term Debt & Deposits. The trend on both ratings is Stable.

The ratings reflect SHB’s strong franchise in Swedish banking, its strong capital position, and its conservative credit culture. The ratings also consider the Bank’s demonstrated ability to generate solid earnings throughout the most recent difficult operating environment. Finally, the ratings consider the Bank’s funding and liquidity profile.

SHB maintains a solid market position which provides the foundation of the Bank’s overall strong domestic franchise. With 27% market share in lending to Swedish corporates, approximately 25% share of Swedish household mortgages and 18% market share of household deposits, SHB ranks among the leaders in its core markets. The Bank’s growing branch operations in Finland, Norway, Denmark, and the United Kingdom add earnings diversity, growth potential, and a level of geographic diversity to the franchise. The strong position in capital markets and investment banking across the Nordic region further enhances the franchise strength.

Earnings generation is strong. Despite the difficult operating environment, the Bank continues to generate solid earnings, evidencing the resiliently of the franchise. For the nine months ending 30 September 2009, the Bank generated pre-tax operating income of SEK 10.5 billion, a 4% increase from the year-ago period. Solid revenue growth offset higher net loan losses which are the result of the difficult economic environment.

SHB’s conservative approach to credit has led to solid asset quality measures. The very low exposure to the problematic Baltic region clearly differentiates SHB from many of its Nordic peers. Moreover, the conservative risk appetite has resulted in the Bank avoiding large losses associated with illiquid or “toxic” assets. Impaired loans remained low at 0.58% of net receivables at 30 September 2009 and have trended downward in the most recent quarter, indicating a level of stabilisation in the Swedish economy. Although DBRS continues to be cautious and remains concerned about the pro-cyclical impact on loan losses, SHB’s overall very strong earnings and capital position provide a sizable cushion for loss-absorption.

At 23% of the total loan book or SEK 345 billion, the Bank has a sizable exposure to property management companies, which is a keen focus for DBRS. Although the property portfolio has historically shown low loan losses and credit quality in property management remains sound, the large-sized nature of these exposures adds to the Bank’s risk profile. Given the point in the cycle and the large-sized exposures, DBRS continues to closely monitor the performance in the book.

SHB has a well-managed and diverse funding and liquidity profile. Notwithstanding, with 67% of total funding, wholesale funding is considered high; however, excluding covered bonds, which DBRS views as a source of stable funding, wholesale funding reliance is significantly lower at 44%. The funding and liquidity profile is enhanced by the sizable liquidity buffer which SHB prudently increased over the past year. Although SHB has made notable progress, DBRS sees lengthening maturities on short-term wholesale funds as a key challenge.

The ratings consider the Bank’s solid capitalization. At 30 September 2009, the Tier 1 capital ratio was a strong 13. 5% (under Basel II, including period profits) and Tier 1 ratio, excluding hybrids, was a solid 10.9%. In DBRS’s view, the strong capital position combined with the stable recurring earnings generation ability allows the Bank sufficient flexibility to not only successfully manage through the current operating environment, but perhaps take advantage of market events to enhance its franchise strength.

Concurrent with the assignment of the ratings, DBRS has designated SHB as a critically-important banking organisation (CIB) in Sweden. This designation has no rating implications, as the ratings are currently positioned above the floor. For CIBs in Sweden, DBRS maintains a floor rating of A (high) for senior long-term debt and deposits and R-1 (middle) for short-term debt and deposits, at the bank level. The level of the floor ratings reflects DBRS’s expectation that the Swedish government will provide support, if necessary, to prevent its CIBs from weakening below this rating level. DBRS views A (high) / R-1 (middle) as the level of creditworthiness that market participants demand for CIBs to be viewed as essential counterparties in financial markets, as CIBs need to be perceived as reliable partners in undertaking a wide range of financial transactions.

The Stable trend reflects DBRS’s expectation that SHB will continue to effectively navigate through the current cycle. The Bank’s historically sound risk management culture, its ample earnings generation ability, and its solid capitalisation allow for significant flexibility and provide a cushion to manage the stress associated with the current operating environment.

DBRS continues to ascribe implicit systemic support to systematically important banks in Sweden, as reflected in its SA-2 Support Assessment for SHB. The SA-2 reflects DBRS’s expectation that some form of timely systemic support would be provided to SHB, if needed. Consistent with this view, the Swedish government has established debt guarantee and recapitalisation schemes and taken other actions to support banks in the recent financial crisis. While SHB has not applied for participation in these schemes to date, DBRS views these measures as an important source of support that is available to the Bank, if operating conditions worsen. The SA-2 assessment results in a one-notch uplift of DBRS’s intrinsic rating for SHB.

Notes:
All figures are in Swedish Krona (SEK), unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.