RPT-Fitch Affirms Landshypotek at 'A+'; Outlook Stable
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Nov 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Landshypotek AB's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1' and Viability Rating (VR) of 'a+'. The Outlook for the Long-term IDR is Stable. A full list of rating actions is provided at the end of this rating action commentary.
KEY RATING DRIVERS - VR, IDRS AND SENIOR DEBT
The affirmation of Landshypotek's IDRs and VR reflects Fitch's view that Landshypotek will maintain its strong asset quality while generating adequate profitability to absorb unexpected shocks.
The ratings are based on Landshypotek's entrenched niche franchise in the Swedish forestry and agriculture sector, strong asset quality, and solid risk-weighted capital ratios. The ratings also factor in the bank's monoline business model, small absolute size of capital, and reliance on wholesale funding markets. Risks related to the latter are mitigated by a large, deep and liquid domestic funding market.
Fitch expects Landshypotek to maintain modest profitability in line with its main objective, as a mutual organisation, of providing low-cost, low-risk loans to its members rather than to maximise profit. The bank's revenue is largely driven by net interest income, making it sensitive to increased competition and higher funding costs. Nonetheless, Fitch expects margins to remain stable and for loan impairment charges to remain low.
Landshypotek's asset quality is a key rating strength. The volume of impaired and non-performing loans has increased in recent years, but still remains at a low level. Fitch believes that this deterioration has been driven by individual cases rather than by a general worsening of client repayment capacity. Lending consists exclusively of collateralised loans to the domestic agriculture and forestry sector. The bank's underwriting policy is conservative and loan/value ratios are low in absolute terms and compared with peers.
The bank's risk-weighted capital ratios are strong and compare well with those of domestic and international peers, although they are boosted by low risk weights. The absolute amount of capital, however, is small for its ratings, which may limit its ability to absorb shocks. Leverage, defined as tangible equity/tangible assets, is modest in a European context at around 5%.
Landshypotek is predominantly funded through issuance of covered bonds, having only obtained a full banking licence in 2012 that enabled it to start taking deposits. Fitch expects Landshypotek to maintain strong access to debt capital markets, in particular for domestic covered bonds. Nonetheless, this funding structure exposes Landshypotek to prolonged dislocations in debt capital markets, and Fitch expects the bank to maintain a high liquidity buffer to mitigate this risk. Deposits are likely to represent a growing share of funding and the bank aims to be 20% deposit-funded by end-2017.
The ratings of Landshypotek's senior unsecured debt are aligned with those of its Long-term IDRs. Despite the bank's high usage of covered bonds and, consequently, high balance sheet encumbrance, Fitch has not notched down for structural subordination. This is because of Fitch's expectations of average recoveries (at least 30%-50%), largely driven by the agency's view that, in a hypothetical default scenario, high quality collateral would lead to part of over-collateralisation remaining available to senior unsecured creditors.
RATING SENSITIVITIES - VR, IDRS AND SENIOR DEBT
The Stable Outlook on Landshypotek's Long-term IDR reflects Fitch's view that a rating change is currently unexpected.
A rating downgrade is most likely to result from a prolonged dislocation in wholesale funding markets affecting the bank's ability to access competitively priced funding. A significant worsening of asset quality, although unexpected, would also be a negative ratings driver.
A rating upgrade is unlikely, given the small size of Landshypotek's capital for its rating level and its significant reliance on debt capital markets for structural funding.
The senior unsecured debt ratings are sensitive to a change in Fitch's assessment of structural subordination of senior unsecured creditors of highly encumbered banks.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating and Support Rating Floor reflect Fitch's expectation of a moderate probability of support from the Swedish authorities if required. This is driven by the systemic importance of the covered bond market and the agricultural and forestry sectors in Sweden.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
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 (AAA/Stable) 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 Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. On 11 September 2013, Fitch outlined its approach to incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see "Fitch Outlines Approach for Addressing Support in Bank Ratings" and "Bank Support: Likely Rating Paths", at www.fitchratings.com).
The Support Rating would be downgraded and the Support Rating Floor revised down if Fitch concludes that potential sovereign support has weakened relative to its previous assessment.
The rating actions are as follows:
Long-term IDR: affirmed at 'A+'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'a+'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt: affirmed at 'A+' / 'F1'
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