Fitch Affirms Svenska Handelsbanken at 'AA-', Outlook Stable

Thu Apr 4, 2013 9:42am EDT

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(The following statement was released by the rating agency) LONDON/PARIS, April 04 (Fitch) Fitch Ratings has affirmed Svenska Handelsbanken AB's (Handelsbanken) Long-term Issuer Default Rating (IDR) at 'AA-', Short-term IDR at 'F1+', and Viability Rating (VR) at 'aa-'. The Outlook on the Long-term IDR is Stable. Fitch has also affirmed the ratings of Handelsbanken's wholly-owned subsidiary Stadshypotek. A full list of rating actions is at the end of this release. RATING ACTION RATIONALE The affirmation of Handelsbanken's VR and IDRs reflects the bank's strong Swedish franchise, solid capitalisation and strong track record in terms of resilient asset quality and stable earnings. Its ratings also take into account the bank's reliance on confidence-sensitive capital markets for its funding needs, a structural feature of the Nordic banks, as well as the large liquidity buffer, diversified funding sources and further lengthening maturity profile to mitigate this. KEY RATING DRIVERS AND SENSITIVITIES - VR, IDRS AND SENIOR DEBT Handelsbanken's IDRs (and senior debt rating) are driven by the group's intrinsic creditworthiness. The Stable Outlook reflects Fitch's view that Handelsbanken's historical focus on risk-return and its strong risk culture, including conservative underwriting policies, will enable it to maintain healthy internal earnings generation. While Handelsbanken has been continuously expanding outside Sweden, not only in the other Nordic countries but also in the UK, over 70% of operating profit remains generated in Sweden. Like its Nordic peers, Handelsbanken has benefited from the relatively stronger performance of the Nordic countries compared with many eurozone countries. Fitch expects the economic outlook in the region to remain relatively solid. However, the corporate sector is not immune to the rest of the world in these export-orientated countries, and continuation of problems in the eurozone may affect the Nordic banks' corporate exposure. While not Fitch's base case, the agency expects any deterioration in corporate asset quality to be easily manageable for the bank, underpinned by its strong and pro-active risk management. Yearly increases in earnings have been essentially driven by organic growth, combined with tight cost management. Handelsbanken has been reporting healthy lending growth rates, in particular in the UK, where the rate of branch openings remained high in 2012. Handelsbanken's focus on the affluent market is more pronounced in the UK than in its other home countries. In Fitch's view, the bank's ratings are sensitive to the seasoning of its relatively younger UK lending book. However, the agency takes comfort from the bank's strong historical credit risk management and focus on returns. Overall, Fitch expects problem loans to remain at a low level for Handelsbanken. Funding and liquidity management are important rating drivers for Handelsbanken. Like its Nordic peers, the bank relies on the wholesale funding markets for a high proportion of its structural funding. Fitch expects domestic demand for Handelsbanken's securities, in particular covered bonds, to remain stable, based on the need for domestic pension funds and insurance companies as well as domestic financial institutions, to invest in local-currency assets to match their liabilities. However, a material proportion of wholesale funding is gathered from international investors, making the bank's ratings sensitive to investor sentiments turning against it or the Nordic region. Handelsbanken's market access has remained very strong over the past few years, meaning that at end-2012 the bank had pre-funded maturing debt up until February 2014. The level of issuance is likely to be lower in 2013. Nevertheless, Fitch expects Handelsbanken to maintain a large liquidity buffer to mitigate wholesale funding risk, particularly from overseas issuance. The bank's ratings are sensitive to any reduced focus on holding high quality liquid assets. Handelsbanken's ratings are also sensitive to material reductions in the bank's capitalisation or weakening of its leverage ratio (equity to assets ratio). The bank's risk-weighted capital ratios compare well with those of both Nordic and international peers, with a Fitch core capital of almost 20% at end-2012 (based on risk-weighted assets excluding transitional floors). This reflects the low risk-weightings of its assets, driven not only by a large proportion of well-performing low risk mortgage lending but also by its strong track record of low credit losses. Leverage is relatively solid in a European context with a tangible common equity/tangible assets ratio of around 4.19% at end-2012. Internal capital generation has supported the improvement in Handelsbanken's capital ratios, offsetting constant business growth. Fitch expects Handelsbanken to further build up its capital base and maintain its leverage ratio. Handelsbanken's ratings have limited upside potential given their high level, the absolute size of its capital and its wholesale funding reliance. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's expectation that there is an extremely high probability that the Swedish state ('AAA'/Stable) would support Handelsbanken, if required. This opinion derives from Handelsbanken's systemic importance in Sweden, with market share of around one-fifth of household deposits. The Support Rating and Support Rating Floor are potentially sensitive to any change in Fitch's assumptions about the ability (as reflected in its ratings) or willingness of the Swedish state to provide timely support to the bank, if required. They are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for banks more generally. In this context, Fitch is paying close attention to on-going policy discussions around bank support and 'bail in', especially in Europe. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and hybrid securities issued by Handelsbanken are notched off the bank's VR. Therefore, their respective ratings have been affirmed and are sensitive to any change in Handelsbanken's VR. In accordance with Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities', subordinated (lower Tier 2) debt is rated one notch below Handelsbanken's VR to reflect below average loss severity of this type of debt when compared to average recoveries. Upper Tier 2 debt and hybrid Tier 1 securities are rated three and four notches below Handelsbanken's VR, respectively, to reflect higher loss severity risk of these securities when compared with average recoveries (one and two notches from the VR, respectively) as well as high risk of non-performance (an additional two notches). SUSBIDIARY KEY RATING DRIVERS AND SENSITIVITIES Stadshypotek is the group's specialised mortgage lender. Its IDRs are aligned with Handelsbanken's because of its close integration within the group. The ratings are sensitive to the same factors that might drive a change in Handelsbanken's IDRs. Fitch does not assign a VR to Stadshypotek. The rating actions are as follows. Svenska Handelsbanken: Long-term IDR: affirmed at 'AA-'; Stable Outlook Short-term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'aa-' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Senior unsecured debt: affirmed at 'AA-' Subordinated debt: affirmed at 'A+' Upper tier 2 debt: affirmed at 'A-' Hybrid debt: affirmed at 'BBB+' Stadshypotek: Long-term IDR: affirmed at 'AA-'; Stable Outlook Short-term IDR: affirmed at 'F1+' Support Rating: affirmed at '1' Svenska Handelsbanken Inc.: US commercial paper: affirmed at 'F1+' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1326 Committee Chairperson Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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