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

Tue Jun 24, 2014 10:55am EDT

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(The following statement was released by the rating agency) PARIS/LONDON, June 24 (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 commentary. The rating actions have been taken as part of a periodic review of the large Swedish and Finnish banks. Fitch will issue a peer report shortly. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT The ratings reflect Handelsbanken's very strong management, conservative risk appetite, an excellent financial track record and strong balance sheet metrics. They also consider the bank's wholesale funding reliance. Handelsbanken's management and unique corporate culture is a key rating strength. It has successfully employed the same decentralised underwriting model for many years. The bank has a very low appetite for risk with a long-term perspective. There are no budgets or sales targets. Bonuses are not available to the vast majority of staff, including senior management, but profit sharing is available on retirement through Oktogonen, Handelsbanken's largest shareholder. Employee loyalty is high. The bank is reliant on wholesale funding, like most Nordic peers. The domestic loan book is funded by local deposits and Swedish covered bonds. The domestic covered bond market is viewed as a stable source of funding and benefits from a captive investor base. Handelsbanken also uses international bond markets for its non-domestic lending. Swaps are used to mitigate currency risk. Fitch expects continued strong market access as a result of sound liquidity and a diversified funding franchise. The bank has a sophisticated approach to the debt market and intends to be a predictable and transparent issuer. Short-term debt is generally not used for lending purposes. Fitch expects continued healthy profitability driven by resilient income generation, efficient cost management and low loan impairment charges (LICs). The Swedish branches are the largest earnings contributor but growth is coming from other home markets, in particular the UK. The bank's financial track record stands out compared with regional peers, in particular its ability to maintain low and stable LICs through the cycle. Asset quality remains strong. All branches are responsible for their individual loan books but this is supported by regular and thorough reviews at both regional and central levels. Property management represents a significant share of Handelsbanken's loan book, but Fitch believes it is of good quality. It is focused predominantly on large companies with strong balance sheets and cash flows. The bank is sensitive to the seasoning of its relatively young UK loan book, although Fitch expects this portfolio to remain sound. Handelsbanken has solid capitalisation. Its risk-weighted capital ratios compare strongly with peers as a result of its low risk-weights. At end-March 2014, Handelsbanken's common equity Tier 1 ratio was 19.5% and its Fitch adjusted leverage ratio (excluding unfunded assets) was 4.1%, which is in line with similarly rated peers. RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT The Stable Outlook reflects Fitch's expectation that the bank will continue to operate a conservative business model and maintain strong financial metrics. The ratings are sensitive to a worsening of investor sentiment or reduced focus on holding high quality liquid assets, although this is not expected. Significantly higher leverage or asset quality deterioration would also be viewed negatively. An upgrade is unlikely in light of high wholesale funding reliance and the bank's already high ratings. KEY RATING DRIVERS - 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 support would be forthcoming from the Swedish authorities if required. This is driven by Handelsbanken's importance within the Swedish financial sector. 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. As an EU member country, Sweden is subject to the requirements of Bank Recovery and Resolution Directive (BRRD). However, the country was notable in its desire for flexibility in the application of BRRD, in part because of its experience of cleaning up banks in its 1990s crisis, but also because it has a concentrated, largely homogenous banking sector that relies on attracting international and foreign currency funding. For this reason, prudential requirements for its banks are high. In maintaining control over supervision and resolution decisions, Sweden has more flexibility to interpret and apply BRRD than Banking Union member countries, for example. However, Sweden is bound by EU State Aid rules, meaning it does not have full control over support decisions. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are primarily sensitive to the progress made in implementing a resolution regime in Sweden. As outlined in its report 'Sovereign Support for Banks: Rating Path Expectations' dated 27 March 2014, Fitch believes that support for systemically important Swedish banks, while likely to be less certain within the next one to two years, is still likely to be highly probable, meaning that Handelsbanken's Support Rating is likely to be downgraded to '2' from '1' and the Support Rating Floor revised down to 'BBB-' from 'A-'. The Support Rating and Support Rating Floor are also sensitive to any change in Fitch's assumptions about the ability of the Swedish state (AAA/Stable), as reflected in its ratings, to provide timely support to the bank, if required. KEY RATING DRIVERS AND SENSITIVITIES - 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 changes in the 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 above 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 higher risk of non-performance (an additional two notches). SUBSIDIARY KEY DRIVERS AND RATING 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 AB: 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 1330 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9 131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, is available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status 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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