DBRS Comments on Handelsbanken’s 4Q09 Results – Senior Unaffected at AA (low), Trend Stable

DBRS has today commented on the 4Q09 results of Svenska Handelsbanken AB (publ) (SHB or the Bank). DBRS’s ratings for the Bank are unaffected by the results, including the AA (low) Senior Unsecured Debt & Deposits ratings. The trend remains Stable.

SHB reported net profit for 4Q09 of SEK 2.5 billion and full-year 2009 net profit of SEK 10.2 billion. Net profit for the full year declined 16% from the prior year, driven by higher net loan losses and rising staff costs. The 23% year-on-year increase in staff costs partly reflected allocations to the Bank’s profit-sharing system (Oktogonen), performance-related compensation and an acquisition. Underlying expenses, excluding non-recurring items, increased only 1% year-on-year. Evidencing the Bank’s solid underlying profitability, profit before loan losses rose by 3% in 2009, helped by strong growth in branch office operations outside Sweden. Higher net interest income and solid growth in fee and commission income were the key earnings drivers in 2009. Given its strong earnings ability, its solid capital, and well-managed liquidity, DBRS believes that SHB is well positioned to take advantage of market opportunities to further strengthen its franchise.

The Bank’s core Swedish operations provide a solid foundation to the ratings. Profit before loan losses from branch office operations in Sweden amounted to SEK 10.6 billion (62% of the total) in 2009. While Swedish segment earnings declined slightly (-2%) year-on-year, the strong domestic franchise underpins the overall Bank’s underlying profitability, in DBRS’s view. Furthermore, SHB’s growing branch operations outside Sweden, particularly in the U.K., are becoming an increasingly important driver for growth. Profit before loan losses from non-Swedish branch operations rose by 34% year-on-year, generating SEK 4.3 billion or a quarter of total pre-provision earnings in 2009. SHB also saw strong earnings growth in Denmark, helped by the acquisition of Lokalbanken in Q4 2008, and continued strong performance in Norway and at Handelsbanken International.

Credit performance continued the positive trends. Net impaired loans and net loan losses declined during the third and fourth quarter, whilst loan losses remain very low at SEK 691 million or 0.18% (annualised) of lending in 4Q09. The level of net impaired loans remains low at 0.21% of total lending at year-end, which was only marginally up from 0.17% at year-end 2008. DBRS continues to monitor the Bank’s sizeable exposure to property management companies, which amounted to 23% of lending at year-end 2009]. While the property management portfolios continues to perform well with only 0.4% of loans impaired at year-end 2009, the large-sized nature of these exposures adds to SHB’s risk profile.

SHB continues to enjoy consistent market access. SHB issued SEK 23 billion in covered bonds and SEK 15 billion in bank bonds during 4Q09 across a range of instruments and maturities. Capitalisation remains strong, as SHB bolstered its capital resources during 2009 through earnings retention and a reduction in risk-weighted assets (RWAs). The core Tier 1 ratio, excluding hybrids, amounted to 11.7% at year-end 2009, while the Tier 1 ratio amounted to a strong 14.2%.

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.