DBRS Confirms Svenska Handelsbanken AB at AA (low), Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Svenska Handelsbanken AB (Handelsbanken or the Bank), including the Bank’s Long-Term Issuer Rating, Senior Unsecured Debt & Deposits rating of AA (low), and the R-1 (middle) Short-Term Debt & Deposits rating. The trend on all ratings is Stable. The support assessment remains SA3 and, as a result, the final senior debt rating is positioned in line with the AA (low) Intrinsic Assessment (IA).

KEY RATING CONSIDERATIONS

The ratings reflect the Bank’s very strong franchise in Sweden, the solid operations in the other Nordic countries, the prudent expansion in the UK and the Netherlands, along with the strong and resilient earnings generation ability. The ratings also incorporate the Bank’s conservative and low credit risk profile as well as its strong capital levels. Whilst wholesale funding accounts for a higher proportion of total funding than most EU peers, DBRS views Handelsbanken to have a sound and well managed funding profile.

RATING DRIVERS

Given the already very high rating level, any further upward rating pressure is unlikely. However, any upside would require (i) a substantial reduction on the reliance on wholesale funding, while maintaining (ii) low levels of credit losses, and (iii) solid and predictable underlying profitability.

Negative pressure on the ratings could be driven (i) by a sudden substantial deterioration in asset quality measures prompted by a severe fall in price in the Swedish residential and commercial property markets, and (ii)
a weakening of investors’ confidence given the high level of wholesale funding.

RATING RATIONALE

Handelsbanken has a strong franchise in Sweden and this is a key factor underpinning the ratings. The leading domestic franchise has been complemented by a growing presence outside Sweden as the Bank operates full-service branches in the UK, Denmark, Finland, Norway and the Netherlands. On top of adding a level of geographical diversification into the franchise the non-Swedish operations have become an increasingly important growth driver over the recent years.

Handelsbanken’s ability to generate strong and resilient earnings is a key rating consideration and DBRS notes that the Bank has reported substantial levels of profitability throughout the financial crisis. In 2017, Handelsbanken reported IBPT of SEK 22.7 billion, up 2% on 2016. Net interest income increased by 6% on 2016, as a result of higher lending volumes and lower funding costs, while net fee and commission income was up 7% year-on-year due to higher fund management and asset management commissions. At the same time, the Bank reported reduced contribution of net gains on financial transactions reflecting a sizeable one off gain of SEK 1.7 billion from the sale of shares in 2016. As a result, net profit was marginally down to SEK 16.1 billion in 2017. Reflecting the strong domestic franchise the Swedish branch operations accounted for 61% of total IBPT. Handelsbanken’s solid cost structure further supports profitability as illustrated by Handelsbanken’s reported cost-income ratio of 45.5% in 2017 (2016: 45.2%).

In DBRS view, the Bank’s traditional, relationship-based lending approach along with the prudent underwriting and risk management procedures have led to historically below-average loan losses. These are reflected in Handelsbanken’s extremely good asset quality, which with very low levels of impaired loans and impairment charges, is a key factor underpinning the ratings. The overall impaired loans ratio was 0.38% at end-2017, down from 0.41% at end-2016 and 0.47% at end-2015. At the same time, DBRS notes that Handelsbanken book is concentrated with the majority of the lending book being weighted towards collateralised mortgage loans. The largest exposure after household mortgages is towards property management, which at end-2017 totalled a sizeable SEK 565 billion. Impairment loans in the property management book were up to SEK 2.0 billion compared to SEK 1.8 billion at end-2016 and SEK 1.9 billion at end-2015. Although DBRS acknowledges that managing this book is a key risk for Handelsbanken, DBRS considers the book as well-managed as indicated by the low levels of historical loan losses.

Despite the solid deposit base, wholesale funding remains significant at 61% of total funding (64% in 2016). DBRS views this level of wholesale funding as high but acknowledges that the Bank has a well-diversified funding structure, with issuance capability in multiple foreign currencies. Like its Nordic peers, it does rely heavier than other European peers to wholesale funding and particularly covered bonds. At end-2017, covered bonds stood at SEK 622 billion, accounting for 26% of the Bank’s SEK 2,426 billion funding base. In DBRS view, the Swedish covered bond market has been a stable funding source for Handelsbanken. However, similar to most of its Nordic peers, Handelsbanken would be sensitive to any changes in investors’ sentiment given the higher proportion of wholesale funding to total funding compared to most European peers. At the same time, DBRS notes that liquidity remains solid with a Liquidity Coverage Ratio (LCR) of 139%, as per the EU Delegated Act, at end-2017, while Handelsbanken reported a liquidity buffer of SEK 444 billion covering the short-term funding of SEK 414 billion at end-2017.

DBRS views Handelsbanken’s capitalisation as strong. At end-2017, the Bank reported a Basel III Common Equity Tier 1 (CET1) ratio of 22.7% at end-2017, down from 25.1% at end-2016. However, DBRS notes that the reduction resulted from the introduction of new models for the calculation of capital requirements for corporate and sovereign exposures and that in absolute terms the Bank’s CET1 capital increased from SEK 115.2 billion at end-2016 to SEK 115.8 billion at end-2017. Handelsbanken’s leverage ratio was also down to 4.6% at end-2017 from 4.8% at end-2016. However, DBRS continues to view the Group as well-placed from a capital perspective given its strong earnings generation capacity, and the strong capital base well above minimum requirements.

Notes:
All figures are in Swedish krona (SEK) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Finansinspektionen and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: December 7, 2009
Last Rating Date: July 14, 2017

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