TEXT-S&P cuts Swedbank Sjuharad AB

Mon Jun 25, 2012 11:11am EDT

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Overview
     -- We are assigning our 'BBB+' long-term and 'A-2' short-term 
counterparty credit ratings to Sweden-based retail bank Swedbank Sjuharad AB.
     -- The outlook is stable, reflecting our expectation that the bank will 
be able to maintain its capitalization in excess of 10% according to our 
risk-adjusted capital framework.
 
Rating Action
On June 25, 2012, Standard & Poor's Ratings Services assigned its 'BBB+' 
long-term and 'A-2' short-term counterparty credit ratings to Swedish retail 
bank Swedbank Sjuharad AB. The outlook is stable.

Rationale
The ratings reflect Swedbank Sjuharad's "moderate" business position, "strong" 
capital and earnings, "moderate" risk position, "average" funding, and 
"adequate" liquidity, as our criteria define these terms. We consider Swedbank 
Sjuharad to have "low" systemic importance, which provides no uplift to the 
bank's stand-alone credit profile, which we assess at 'bbb+'.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) 
economic risk and industry risk scores to determine a bank's anchor, the 
starting point in assigning an issuer credit rating. Our anchor for a bank 
operating only in Sweden is 'a-', based on an economic risk score of '2' and 
an industry risk score of '3'.

We view Sweden as a highly competitive and diverse economy, with limited 
economic imbalances and low credit risk. In terms of industry risk, the 
Swedish banking sector benefits from a favorable institutional framework, 
restrained risk appetite, and a high level of industry stability. A relatively 
low degree of deposit funding and a relatively high degree of reliance on 
cross-border funding are mitigated by a deep domestic capital market and the 
authorities' capacity and propensity to provide support.

Swedbank Sjuharad's business position is "moderate" in our opinion, reflecting 
the bank's narrow regional focus on the vicinity of the town of Boras in 
southwestern Sweden, its savings bank business model, and its close 
integration with 47.5% owner Swedbank AB (A+/Stable/A-1). Swedbank AB provides 
all Swedbank Sjuharad's information technology systems and product 
infrastructure. It also provides mortgage loans to Swedbank Sjuharad AB 
customers through subsidiary Swedbank Mortgage AB. Swedbank AB controls 
Swedbank Sjuharad's internal capital adequacy assessment process, while 
Swedbank Sjuharad employs the same scoring models and capital allocation tools 
as Swedbank AB. Swedbank Sjuharad's total assets amounted to Swedish krona 
(SEK) 13 billion on March 31, 2012 (EUR1.44 billion at SEK8.97 to EUR1). Because
of the operational integration between the two banks we incorporate support 
from Swedbank AB into our assessment of Swedbank Sjuharad's business position. 
However, we do not use our group rating methodology as Swedbank AB is a 
minority owner.

We assess Swedbank Sjuharad's capital and earnings as "strong", reflecting our 
expectation that the bank's risk-adjusted capital (RAC) ratio will remain well 
in excess of the 10% "strong" threshold as defined by our criteria. The RAC 
ratio reflects the bank's pricing policy, which targets a higher return than 
those of its peers, a limited requirement to upstream dividends to Swedbank 
AB, and a risk appetite that focuses on long-term survival. The bank's net 
loans have grown at an annual average of 2.87% over the past four years, which 
is below the Swedish average.

We assess Swedbank Sjuharad's risk position as "moderate", balancing the 
bank's narrow geographic focus against its limited and well entrenched 
business model, which frees it from pressure to expand or add new lines of 
business. The bank is unlikely to escape any downturn in the Swedish economy 
but has been able to perform in line with the wider industry during the 
financial turbulence of recent years. Losses have been limited and at no point 
have exceeded our normalized loss assumption of SEK69 million annually, or 46 
basis points of net loans. The most recent peak impairment cost was 27 basis 
points of average net loans in 2009.

We assess Swedbank Sjuharad's funding as "average" and its liquidity as 
"adequate", compared with the "intermediate" score we assign to Swedish 
system-wide funding as part of our BICRA assessment. This reflects a ratio of 
loans to deposits that compares favorably with the Swedish banking industry 
average, having improved to 99% as at March 31, 2012 from 113% at year-end 
2008. In addition, the bank has established a Swedish medium term note 
program, which has been used to extend its funding maturity profile. The 
long-term funding ratio consequently rose to 80% as at March 31, 2012 from 78% 
at year-end 2008.

Outlook
The stable outlook reflects our expectation that the bank will be able to 
maintain its capitalization in excess of 10% according to our RAC framework. 
We also expect the bank to maintain its solid earnings record over the next 
three years, with a robust three-year average earnings buffer of about 200 
basis points. In addition, we expect impairment losses to remain well below 
our normalized loss level of SEK69 million annually, or about 46 basis points 
of net loans. We further expect continued operational integration with 
Swedbank AB and that Swedbank AB will maintain its ownership position.

We could raise the ratings or revise the outlook to positive if we see a 
sustained improvement in capitalization above the 15% threshold as defined by 
our RAC framework.

We could lower the ratings or revise the outlook to negative if we see 
deterioration in asset quality that would lead to impairment losses above our 
normalized loss ratio. Strategic changes that increase risk, such as expansion 
into new regions or lines of business, could also trigger negative rating 
actions.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal.
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- BICRA On Sweden Revised To Group '2' From Group '1', Nov 9, 2011
     -- Group Rating Methodology And Assumptions, Nov. 9, 2011 
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List
New Rating; Outlook Action

Swedbank Sjuharad AB
 Counterparty Credit Rating             BBB+/Stable/A-2 

 (Caryn Trokie, New York Ratings Unit)
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