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

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Svenska Handelsbanken AB (Handelsbanken or the Bank), including the AA (low) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposits rating. The trend on all ratings is Stable. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the final senior debt rating is positioned in line with the AA (low) Intrinsic Assessment (IA).

The ratings reflect the Bank’s strong franchise in Sweden and the prudent expansion in the UK, along with the strong and resilient earnings generation ability. The ratings also incorporate the Bank’s conservative and low risk credit profile, its robust capital levels, as well as the diversified and well-managed funding profile, despite the reliance on wholesale funding.

Handelsbanken has a strong franchise in Sweden and this is a key factor underpinning the ratings. The leading domestic franchise has been complemented by a growing presence outside Sweden as the Bank operates full-service branches in the UK, Denmark, Finland, Norway and the Netherlands. On top of adding a level of geographical diversification into the franchise the non-Swedish operations have become an increasingly important growth driver over the recent years.

Handelsbanken’s ability to generate strong and resilient earnings is a key rating consideration. The Bank has reported substantial levels of profitability throughout the financial crisis and in 2015 Handelsbanken reported interest income before provisions and taxes (IBPT) of SEK 22,065 million, 5% higher than in 2014. DBRS notes, however, that the 2015 result incorporates a capital gain of SEK 1,207 million due to the sale of shares in SCA (a leading Swedish forest products company). Reflecting the strong domestic franchise the Swedish branch operations accounted for 58% of total IBPT. Handelsbanken’s solid cost structure further supports profitability. The Bank’s well-established and low-cost Swedish operations remain extremely efficient with a reported cost-income ratio of 35% in 2015 while Handelsbanken as a whole reported a cost-income ratio stood at 45.3% (2014: 45.2%), reflecting the expanding and less well-established operations outside Sweden.

Handelsbanken has a conservative credit profile with the majority of the lending book being weighted towards collateralised mortgage loans. Furthermore, the Bank’s traditional, relationship-based lending approach along with the prudent underwriting and risk management procedures have led historically to below-average loan losses. These are reflected in Handelsbanken’s extremely good asset quality, which with very low levels of impaired loans and impairment charges, is a key factor underpinning the ratings. The overall impaired loans ratio was 0.47% at end-2015, down from 0.48% at end-2014 while the net impaired loans ratio in Sweden was only 0.09%. The largest exposure after household mortgages is towards property management, which at end-2015 totalled a sizeable SEK 511 billion. Impairment loans in the property management book were SEK 1.9 billion at end-2015, somewhat increased to SEK 1.7 billion at end-2014 and although DBRS acknowledges that managing this book is a key risk for Handelsbanken, DBRS considers the property management portfolio as well-managed as indicated by the low levels of historical loan losses.

Handelsbanken has a sound and well-managed funding profile, however, like its Nordic peers it does rely heavier than other European peers to wholesale funding and particularly covered bonds. At end-2015 covered bonds accounted for 25% of total funding while deposits and borrowing from the public combined accounted for 34% of total funding. Despite the growing deposit base wholesale funding remains a significant 69%, albeit reduced in absolute terms due to the Bank’s change in funding strategy, including a shift to strategically reduce short-term deposits. DBRS views this level of wholesale funding as high but acknowledges that the Bank has a well-diversified funding structure, with issuance capability in multiple foreign currencies, and that the Swedish covered bond market has been a relatively stable funding source for Handelsbanken.

DBRS views Handelsbanken’s capitalisation as strong and notes both the increased capital levels and regulatory ratios. At end-2015 the Bank reported a Basel III Common Equity Tier (CET1) ratio of 21.2%, up from 20.4% at end-2014. This is above Handelsbanken’s current minimum regulatory requirement of 18.6% and within the targeted range of 1 to 3 percentage above the minimum regulatory requirement. On a leverage ratio basis, Handelsbanken demonstrated further improvement, with a leverage ratio of 4.4% at end-2015, up from 3.7% at end-2014. The increase is also reflected via the reduction in investments held with central banks. DBRS continues to view the Group as well-placed from a capital perspective given its strong earnings generation capacity and the robust capital base.

Given the already very high rating level, any further upward rating pressure is unlikely. However any upside would require a substantial reduction in the level of wholesale funding, 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 would likely be driven by a deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or further encumbrance of the balance sheet.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). 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: Peter Burbank
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 7, 2009
Most Recent Rating Update: September 29, 2015

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