DBRS Confirms Svenska Handelsbanken at AA (low), Trend Remains Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Svenska Handelsbanken AB (SHB or the Bank), including the Bank’s Senior Unsecured Debt & Deposits rating of AA (low) and its Short-Term Debt & Deposits rating of R-1 (middle) and the Intrinsic Assessment (IA) of A (high). The trend on both the long-term and short-term ratings remains Stable. Today’s rating confirmation reflects SHB’s strong franchise in Swedish banking, its solid capital position and its conservative credit culture. The ratings also consider the Bank’s demonstrated ability to generate a high level of resilient earnings throughout various economic cycles including the most recent downturn. Finally, the ratings consider the Bank’s funding and liquidity profile, which, while diversified geographically, remains concentrated in wholesale sourced funding, including more stable covered bonds.

The rating level and stable trend reflect SHB’s very solid financial performance, as well as DBRS’s expectations that the Bank will continue to enjoy the benefits of its sound risk management culture, its ample earnings generation ability, and its solid capitalisation as it continues to successfully navigate through the near-term uncertainties. However, DBRS is concerned about potential contagion effects impacting economies in SHB’s operating footprint as well as the potential for deterioration in SHB’s core Swedish market. As such, upward rating migration is unlikely in the near term. Indeed, any weakness in SHB’s solid performance or further deterioration in the operating environment within the European Union could contribute to negative rating pressure.

SHB maintains a solid market position that provides the foundation of the Bank’s overall strong domestic franchise. With approximately a 23.5% market share in Swedish household lending and circa 24.3% market share of corporate deposits, SHB ranks among the leaders in its core markets. The Bank’s growing branch operations in Finland, Norway, Denmark and Great Britain add earnings diversity, growth potential and a level of geographic diversity to the franchise.

SHB enjoys strong earnings generation ability and has achieved solid earnings throughout the difficult operating environment of the recent past. Indeed, DBRS views this as evidence of the resiliency of the franchise and the effectiveness of how the strong franchise is used to produce solid earnings. Furthermore, unlike many of its European peers, the Bank was successful in generating positive operating results in all periods throughout the crisis.

SHB’s conservative approach to credit has led to solid asset quality measures, both of which are factored into the rating. Historically, SHB’s absence of exposure to the problematic Baltic region differentiated it 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. Further, impaired loans remain very low at 18 basis points for 9M12, evidencing the relative stability of the Swedish economy and the credit aptitude of the bank. Although DBRS remains cautious given the current disruption in European financial markets, SHB’s overall strong earnings and capital position provide a sizeable cushion for loss absorption should the markets in SHB's footprint deteriorate.

While solid credit metrics are the hallmark of SHB, at 26% of the total loan book (SEK 420 billion), the Bank has a sizeable exposure to property management companies, which exposes the Bank to the more volatile commercial real estate (CRE) market. Although the property portfolio has historically evidenced 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.

The ratings consider SHB’s well-managed and diverse funding and liquidity profile. Although 66% of total funding is from wholesale sources and can be considered a weakness, much of this concentration is due to the high level of covered bonds which support SHB’s core residential lending business in Sweden. Excluding covered bonds, which DBRS views as a more stable wholesale source of funding than most, SHB’s wholesale funding reliance is significantly lower at 38%. Nonetheless, should the fundamentals which underpin the resilient covered bond market in Sweden weaken, SHB and other institutions could be challenged. DBRS is also mindful that covered bonds serve to encumber high quality assets. As a result, an increased reliance on covered bond funding weakens the position of unsecured bond holders. Separately, SHB’s funding and liquidity profile is enhanced by the sizeable liquidity buffer, which the Bank has prudently increased through the crisis. Further, SHB has made progress in extending it maturity profile.

The ratings consider SHB’s adequate capitalisation and solid capital generation ability. At 30 September 2012, the Core Tier 1 capital ratio was a solid 17.9% (Basel II), which significantly exceeds current regulatory minimums. DBRS notes that the quality of capital is weakened somewhat by SHB’s hybrids which represented 12.4% of Tier 1 capital at 3Q12. In addition, DBRS views SHB’s ratio of tangible common equity to tangible assets of 3.75% as low and, although the ratio is not adjusted for SHB’s sizeable overnight positions with central banks, it indicates more moderate capital strength than regulatory ratios would suggest.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, Statistics Sweden, the Sveriges Riksbank, and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 7 December 2009
Most Recent Rating Update: 24 January 2012

For additional information on this rating, please refer to the linking document under Related Research.