TEXT-S&P cuts Swedbank Sjuharad AB
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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