TEXT-S&P rates Finland's Aktia Bank 'A-/A-2'

Wed Dec 12, 2012 12:17pm EST

Overview
     -- In our view, Aktia Bank, a midsize retail bank focusing on residential 
mortgage lending in Finland, has a moderate business position, strong capital 
and earnings, a moderate risk position, average funding, and adequate 
liquidity, underpinning our assessment of the bank's stand-alone credit 
profile at 'bbb+'.
     -- We consider that Aktia Bank has moderate systemic importance in 
Finland and consequently factor one notch of extraordinary government support 
into the ratings on the bank.
     -- We are consequently assigning our 'A-/A-2' long- and short-term 
ratings to Aktia Bank. 
     -- The outlook is negative, reflecting our view of growing economic risks 
in the export-oriented Finnish economy, which could adversely affect the 
Finnish banking sector's performance. 

Rating Action
On Dec. 12, 2012, Standard & Poor's Ratings Services assigned its 'A-/A-2' 
long- and short-term counterparty ratings to Finland-based Aktia Bank PLC. The 
outlook is negative.

Rationale
The ratings reflect Aktia Bank's "moderate" business position, "strong" 
capital and earnings, "moderate" risk position, "average" funding and 
"adequate" liquidity, as our criteria define these terms. 

We assess Aktia Bank's stand-alone credit profile (SACP) at 'bbb+'. 

Under our banking criteria we use our Banking Industry Country Risk Assessment 
to determine a bank's anchor, the starting point in assigning a long-term 
rating to a bank. Our anchor for a commercial bank operating only in Finland, 
such as Aktia Bank, is 'a-', based on an economic risk score of '2' (low risk) 
and an industry risk score of '3' (intermediate risk).

We consider Aktia Bank's business position to be "moderate," reflecting its 
well-established local retail franchise in the coastal areas and in the larger 
cities in Finland and its stable market share of 4% in customer lending and 
deposits. However, we view the bank's business model as concentrated, given 
that it focuses primarily on residential mortgage lending, while its limited 
corporate banking activities are chiefly targeted at small businesses and 
entrepreneurs. The bank's asset management activities, amounting to a 7% 
market share in Finland, complement those businesses and their contribution to 
revenues will in our view increase. Furthermore, sister company Aktia Life 
Insurance (not rated) provides the Aktia group with insurance and investment 
products. Due to their limited size, the insurance operations bring only 
moderate diversification benefits to the group in our opinion.

Aktia Bank also acts as the central funding institution for 30 independent 
local savings banks and 34 local co-operative banks in Finland. Although the 
revenue contribution from this activity is minor relative to Aktia Bank's 
total revenues, it should continue providing the bank with some benefit in 
terms of funding stability in our opinion. 

We assess Aktia Bank's capital and earnings as "strong". We expect our 
risk-adjusted capital (RAC) ratio for Aktia group to increase to about 11% 
over the next 18-24 months, compared with 9.8% on Dec. 31, 2011. We forecast 
the RAC ratio at group level due to the planned merger of Aktia Bank with its 
parent company Aktia PLC by midyear 2013, which in turn has also led us to 
incorporate Aktia PLC's insurance operations. The loan book of Aktia Bank's 
subsidiary, Aktia Real Estate Mortgage Bank (AREMB), which includes mortgage 
loans through the partner local savings and cooperative banks, is currently 
fully consolidated on Aktia Bank's balance sheet. As a result of the planned 
run off of AREMB's activities, we expect the share of partner banks' loans to 
decline, leading to a decrease in Aktia Bank's loan book and risk-weighted 
assets. We consider Aktia Bank's quality of capital, consisting mainly of 
paid-in capital, and its earnings to be adequate. We believe that the bank's 
earnings capacity will improve over time owing to stable operating revenues, 
planned cost cuts, and our expectation for low losses. This is reflected in 
our three-year average earnings buffer of about 110 basis points for the group.

We view Aktia Bank's risk position as "moderate" due to the concentration risk 
resulting from a focus on retail lending (85% of the loan portfolio). This is 
partly mitigated by the retail loan book's high granularity. Mortgage loans 
are principally granted in the larger cities, and less than 5% of the loan 
stock has loan-to-value ratios above 70%. Furthermore, the small corporate 
lending book does not show any significant single-name or sector 
concentration. We recognize that the bank has tightened underwriting standards 
during the past two years, which we believe will continue to result in 
relatively low loan losses (the ratio of nonperforming loans to total loans 
was 0.73% at end-September 2012). Single exposures burden the quality of the 
corporate portfolio, which however we understand is well collateralized. In 
addition, the bank is actively managing down the risks in its run-off 
portfolio (where loan volumes totaled EUR250 million at end-September 2012). We 
believe that the potential increase in impairment costs will result from 
corporate exposures rather than from household mortgage lending. Aktia Bank's 
market risk is minor since it has no trading book.

Aktia Bank's funding is "average" in our opinion, reflecting a stable retail 
deposit base (41% of funding) but also its continuous access to capital 
markets through AREMB's issuance of covered bonds. This funding mix allows 
Aktia Bank to achieve a relatively balanced asset-liability structure with a 
long-term funding ratio of 76%, which is in line with ratios of its domestic 
competitors. Furthermore, if we adjust Aktia Bank's loan book for mortgage 
loans sold by the partner banks, its loan-to-deposits ratio stands at about 
140%, broadly in line with domestic peers'. We understand that Aktia Bank aims 
to apply for a covered bond license from the Finnish Supervisory Authority in 
2013 to issue covered bonds directly while AREMB is to focus on the management 
and refinancing of the current stock. We believe that Aktia Bank will continue 
to benefit from the placement by independent local savings and cooperative 
banks of their excess liquidity with Aktia Bank.

We assess the bank's liquidity as "adequate". On Sept. 30, 2012, Aktia Bank 
had a liquidity position of about EUR2 billion consisting of cash and 
securities, mainly covered bonds, which are all eligible for repurchase (repo) 
agreement transactions at the Finnish central bank. The bank runs various 
stress tests. In a severe liquidity crisis involving closure of access to 
capital market funding and a significant deposit outflow, we think Aktia Bank 
could survive for more than 12 months with access to the central bank through 
the repo activity in its liquidity book. 

As the fourth-largest retail bank in Finland, where Pan-Nordic groups have 
sizable operations, and with a significant share of retail deposits, we 
consider Aktia Bank to have "moderate" systemic importance in Finland's 
banking sector and consequently factor one notch of extraordinary government 
support into the ratings.

Outlook
The negative outlook on Aktia Bank reflects our view that the growing economic 
risks in the export-oriented Finnish economy could adversely affect the 
Finnish banking sector's performance. This could lead us to lower our baseline 
assessment (the anchor) on Finnish banks, including Aktia Bank, to 'bbb+' from 
'a-'. 

We believe that the planned merger of Aktia Bank with its parent company Aktia 
PLC in 2013 won't markedly change the group's business model or strategy, 
including its cooperation with independent savings and cooperative banks. We 
expect Aktia Bank's organizational streamlining to improve its cost efficiency 
and capital management, which we incorporate into our RAC ratio for the Aktia 
group. We anticipate that Aktia Bank will report increased earnings in 2013 
and 2014, which would gradually strengthen its capital base and enable it to 
reach a RAC ratio of about 11% by year-end 2014. We also expect the bank to 
maintain its prudent underwriting standards in lending and grow at most in 
line with the market. 

We could take a negative rating action if Aktia Bank's funding position were 
to deteriorate due to discontinued cooperation with the independent local 
banks or if access to the wholesale market were to be hindered. Furthermore, 
we could revise our assessment of Aktia Bank's capital and earnings position 
if its operations were to deteriorate substantially due to a downturn in the 
Finnish economy, in turn resulting in higher loan losses than in our current 
base-case scenario and leading to a decline in our projected RAC ratio to 
below 10%.

Ratings Score Snapshot
Issuer Credit Rating          A-/Negative/A-2 

SACP                          bbb+ 
 Anchor                       a- 
 Business Position            Moderate (-1) 
 Capital and Earnings         Strong (+1) 
 Risk Position                Moderate (-1) 
Funding and Liquidity         Adequate (0)

Support                       0
 GRE Support                  0
 Group Support                0
 Sovereign Support            +1
Additional Factors            0

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Outlooks on Two Finnish Banks Revised to Negative Due To Rising 
Economic Risks, Nov. 20, 2012
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- Group Rating Methodology and Assumptions, Nov. 9, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- BICRA On Finland Revised To Group '2' From Group '1', Nov. 9, 2011 
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List 

New Rating

Aktia Bank PLC 
 Counterparty Credit Rating            A-/Negative/A-2


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