DBRS Confirms Handelsbank at AA (low); Trend Revised to Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Svenska Handelsbanken AB (SHB or the Bank), including the Bank’s Senior Unsecured Debt & Deposits rating of AA (low), 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 has been revised to Positive from Stable. DBRS maintains a Support Assessment of SA-2 for SHB reflecting DBRS’s expectation that some form of timely systemic support would be provided to the Bank, if needed, and as a result the AA (low) senior ratings are positioned one-notch above the intrinsic assessment.

The confirmation of SHB’s ratings reflect the strong franchise in Swedish banking, its robust capital levels and its conservative credit culture, as well as the resilient earnings generation capacity and the Bank’s consistent track record. The ratings also incorporate the high reliance on wholesale funding, although this is mitigated by the increase in deposit funding in recent years, as well as the stable funding dynamics of the Swedish covered bond market.

The revision of the trend to Positive reflects the Bank’s prudent expansion outside of Sweden which is leading to further profit diversification, the continued improvement in deposit funding, the consistently strong earnings, and the further improvement in capital. Upward pressure on the ratings could be driven by further evidence that the successful expansion in the UK remains well controlled, while maintaining (i) low levels of credit losses, (ii) solid and predictable underlying profitability, and (iii) continued sound capital management. Negative pressure on the ratings could arise from a substantial deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or further encumbering of the balance sheet.

SHB has a strong domestic franchise in Sweden and DBRS views this as a key factor in the ratings. The Bank’s leading position in Swedish banking has been complemented in recent years by the growing presence outside of Sweden where the Bank operates full-service branch networks in Finland, Norway, Denmark, Netherlands and the United Kingdom (UK). While the Bank’s market shares in most of these countries remain modest, non-Swedish branch operations have been an important growth driver in recent periods.

SHB's resilient earnings generation ability is a key factor underpinning the ratings. The Bank reported impressive levels of profitability throughout the financial crisis, and in 2014 reported income before provisions and taxes (IBPT) of SEK 21 billion, up 9% on 2013, and net profit of SEK 15.2 billion, an increase of 6% on 2013. The Bank’s IBPT is driven primarily by the Swedish Branch operations division that in 2014 accounted for 63% of operating profit. This reflects the strong franchise that the Bank has domestically, but also the excellent credit quality that has kept impairment charges low. The Bank’s solid cost culture further supports profitability. SHB’s well-established, deeply entrenched and low-cost Swedish operations continued to report strong efficiency with a reported cost-to-income ratio of 34% in 2014, while the Bank as a whole reported a cost-to-income ratio of 45% (2013: 47%), reflecting the less well established operations outside Sweden.

SHB has a well-managed and diversified funding profile, however the Bank’s funding profile, like its Nordic peers, does rely on capital markets, particularly covered bonds, to a higher degree than many European peers. Positively the Bank’s deposit base has increased in recent years and as a result the reliance on wholesale funding has reduced, however at 59% of total funding, DBRS still considers SHB’s wholesale funding reliance as high. To a certain degree, however, this is mitigated by DBRS’s view that the Swedish covered bond market provides a relatively stable funding source for SHB. Although commercial paper accounts for 27% of the total securities issued by the Bank this is mitigated to a certain degree by the size of the Bank’s liquidity reserve which at end-2014 covered the commercial paper issuance by 1.97 times. As of end-2014 SHB’s Liquidity Coverage Ratio (LCR), according to the Swedish FSA’s definition, stood at 140% in aggregate, and at 137% and 154% in USD and EUR, respectively.

SHB’s conservative risk culture, which is reflected in a loan mix that is weighed towards collateralised real estate lending, along with sound underwriting and risk management procedures and the Bank’s focus on traditional, relationship-based lending have historically led to below-average loan losses. As a result SHB’s overall asset quality remains extremely good with an overall impaired loan ratio of 0.48% in 2014, albeit slightly increased from 0.41% in 2013, and an impaired ratio of only 0.29% in Sweden. SHB’s overall strong credit quality benefits from the large portion of household mortgages that have historically shown very low losses. The largest segment exposure of the Bank, outside of residential mortgages, is to property management. At end-2014 the property management portfolio totalled SEK 485 billion, accounting for 27% of the total loan book. However to date loan impairments have been extremely low as a result of the strong performance of the book; at end-2014 impaired loans in the property management book were only 0.36% of the book. DBRS considers this book well-managed, as demonstrated by the historic low levels of impairments and loan losses but views managing the exposure to this sector as a key challenge facing SHB.

DBRS views SHB as having a strong capital position and notes the improvement in both regulatory capital ratios and capital levels. At end-2014, the Bank’s Common Equity Tier 1 (CET1) ratio stood at 20.4%, up from 18.9% at end-2013 and SHB has also indicated that at end-2014 its leverage ratio under CRD IV would be 3.7%. DBRS also notes the issuance of USD 1.2 billion additional tier 1 instrument during 1Q15, which boosts further the Bank’s capital base. SHB intends to maintain a CET1 ratio of around 1 to 3 percentage points above the minimum requirement of the Swedish Financial Supervisory Authority, currently at 17.7%, suggesting a ratio in the range of 18.7% to 20.7%. Given the Bank’s strong internal earnings generation ability DBRS views SHB as well-placed from a capital perspective.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Ross Abercromby
Rating Committee Chair: Roger Lister
Initial Rating Date: December 7, 2009
Most Recent Rating Update: March 21, 2014

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