DBRS Morningstar Confirms Svenska Handelsbanken AB’s Long-Term Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Svenska Handelsbanken AB (Handelsbanken or the Bank), including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings remain Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is AA (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects Handelsbanken’s robust franchise in its domestic market (Sweden) and solid footprint in the rest of the Nordic area, as well as meaningful presence in the UK and the Netherlands. The Bank's strong capital position is supported by Handelsbanken’s high and stable earning generation. The rating also take into consideration Handelsbanken's strict credit policies and conservative risk profile which have led to robust asset quality metrics and historically low credit charges. Conversely, uncertainty remains regarding the impact of the COVID-19 pandemic once government support measures are lifted which could likely lead to some credit deterioration and additional provisioning, especially within the Bank’s sizeable property management portfolio. The rating also reflects the Bank's high reliance on wholesale funding which is partially mitigated by stable access to the covered bonds market and ample liquidity.

RATING DRIVERS
DBRS Morningstar views Handelsbanken as well-placed at its current rating level. An upgrade of the Long-Term Issuer rating is unlikely and would require significantly lower reliance on wholesale funding over time while showing no signs of meaningful deterioration in asset quality and profitability.

A downgrade of the Long-Term Issuer rating would be driven by a substantial deterioration in the Bank’s risk profile, potentially within the sizeable exposure in property management and a significant deterioration in the Bank's ability to absorb credit losses.

RATING RATIONALE
Handelsbanken is the largest bank in Sweden and one of the leading banks in the Nordic region. Sweden is Handelsbanken's main reference market together with Denmark, Finland, Netherlands, Norway and the UK which the Bank defines as home markets. Handelsbanken has always advocated decentralisation as a business philosophy where the branch network is fully responsible for the relationship with the customers and the majority of the credit decisions are taken at branch level. DBRS Morningstar believes that, notwithstanding its recently announced digitalisation restructuring, the Bank will be able to carry out the same business philosophy, reaching its clients through different channels and digital meeting places.

Handelsbanken continued to demonstrate strong earnings generation in the current difficult operating environment. The Bank maintained its historically low cost of risk compared to its peers in spite of the economic impact of the COVID-19 pandemic. In 2020, Handelsbanken reported a net profit of SEK 15,558, down 8% compared to 2019. The reduction is mainly attributable to higher operating expenses which included restructuring costs and provisions for the Oktogonen profit-sharing scheme. This led to a Return-on-Equity (ROE) of 10% in 2020, vs. 11.9% in 2019. Excluding items affecting comparability (mainly SEK 1,470 million restructuring costs), the underlying ROE was 11% in 2020. Handelsbanken’s cost of risk was very low at 3 basis points (bps) in 2020, down from 4 bps in 2019 which remains well below the European and Nordic average. DBRS Morningstar will continue to monitor any sign of deterioration of asset quality once the government support measures expire which could require an additional level of provisions in the future.

Handelsbanken's very strict underwriting standards and low risk tolerance approach led to historically low credit risk and credit provisions and very strong asset quality metrics over time. The Bank's NPL ratio was 0.31% at end-2020, compared to 0.38% at end-2019, which is below most European and Nordic peers. Stage 3 loans decreased by 21% YoY mainly due to write-offs in the corporate lending segment. The coverage ratio of Stage 3 loans was 49% at end-2020, vs. 52% at end-2019. Handelsbanken's exposure towards property management loans remains sizeable. While we note that the portfolio maintains overall good asset quality metrics thanks to an NPL ratio of 0.3% at end-2020 and relatively low loan-to-value (LTV) ratios, the high concentration in this sector could represent a vulnerability in the current challenging operating environment.

DBRS Morningstar views Handelsbanken's funding and liquidity as sound and well-managed even if the Bank, in line with other Nordic peers, shows higher reliance on wholesale funding compared to other European peers, mainly in the form of mortgage covered bonds. While DBRS Morningstar considers Handelsbanken’s access to the covered bonds market as very stable despite the challenging operating environment, high exposure towards wholesale funding is considered a potential vulnerability. Nevertheless, customer deposits (excluding borrowing from the public) increased by 10% at end-2020 driven by expansionary monetary policies, consumption restrictions and uncertainty of the operating environment. This led to a loan-to-deposit ratio of 191% at end-2020, improving from 213% at end-2019. At end-2020, Handelsbanken’s Liquidity Coverage Ratio (LCR) was 150% and the Bank’s Net Stable Funding Ratio (NSFR) stood at 117%.

DBRS Morningstar views Handelsbanken capital position as strong, supported by solid internal capital generation capacity. At end-2020, the capital ratios and capital buffer against minimum requirements benefited from a number of capital relief measures taken by governments and regulators following the COVID-19 outbreak. This includes restrictions to dividend distribution and the reduction of the countercyclical buffer requirement. At end-2020, the CET1 ratio was 20.3%, increasing from 18.5% at end-2019. This led to a substantial capital buffer above the minimum requirement of 650 bps at end-2020 and well above the management target of 100-200 bps above the minimum requirement. Nevertheless, we believe that Handelsbanken’s capital buffer will gradually decrease towards the management target following the impact of further regulatory actions and dividend payment.

ESG CONSIDERATION
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Handelsbanken are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation- Strong.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Handelsbanken’s Annual and Sustainability Report 2020, Handelsbanken’s Investor Presentation 2020, Handelsbanken’s Fact Book 2020, Handelsbanken’s Pillar 3 Report, Finansinspektionen (Swedish FSA) and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375963

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG & Global FIG
Initial Rating Date: December 7, 2009
Last Rating Date: March 30, 2020

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