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 Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is AA (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects Handelsbanken’s strong universal franchise in its domestic Swedish market, along with the Bank’s solid footprint in the rest of the Nordic countries as well as its growing presence in the UK and the Netherlands. The ratings also consider the robust and resilient earnings generation and sound asset quality, which supports the Bank’s strong capital position. Conversely, the ratings also incorporate Handelsbanken’s relatively high reliance on wholesale funding, when compared to European peers.

RATING DRIVERS
Positive rating pressure to the Long-Term Issuer Rating would require significantly lower reliance on wholesale funding while maintaining sound capital cushions and strong underlying profitability.

Negative pressure to the Long-Term Issuer Rating could be driven by a substantial deterioration in the Bank’s risk profile, potentially prompted by a severe price decline of the residential and commercial property markets in Sweden or the UK. Alternatively, it could also arise if the Bank were to face any major challenges accessing wholesale funding markets due to a reduction in investor confidence.

RATING RATIONALE
Handelsbanken is a leading Swedish bank with a particularly strong retail banking presence in its domestic market. The Bank also has a universal footprint in the rest of the Nordic countries and a growing presence in the UK and the Netherlands. In recent years, the Bank has focused on expanding its franchise in the Netherlands and the UK. Outside Sweden, Norway and the UK are the major contributors to the Bank’s income before provisions and taxes (IBPT), contributing 12% each on the Bank’s IBPT in 2018.

In 2018, Handelsbanken continued to demonstrate its strong underlying earnings ability. Net attributable income was up 8% in 2018 year-on-year supported by revenue growth, despite a 10% increase in statutory operating expenses, which was largely associated with ongoing business expansion in the UK and Netherlands as well as with the conversion of the UK branch into a subsidiary. Results also benefitted from significantly lower loan loss provisions year-on-year (yoy) and from a one-off capital gain related to the sale of an equity stake. Despite the negative interest rate environment in Sweden, Handelsbanken’s net interest margin (NIM) has remained relatively stable at around 1.1% (as calculated by DBRS) in recent years, helped by new lending volume growth in Sweden and the UK. The Bank’s statutory cost/income remains strong at 47.7% in 2018.

Handelsbanken’s traditional, relationship-based lending approach, combined with prudent underwriting and risk management, has historically led to below-average loan losses. In addition, sound economic conditions in core markets have supported Handelsbanken’s strong asset quality, with a gross impaired loans ratio of 0.35% (as calculated by DBRS) at end-2018. DBRS notes, however, that Handelsbanken’s book is largely concentrated in collateralised property lending. Mortgage loans (including housing co-operative associations) represented 51% of the gross loan book at end-2018 while exposure to property management stood at 27% of gross loans and were primarily concentrated in Sweden, the UK and Norway. In DBRS’ opinion, these combined sizeable exposures add a level of risk to the overall loan book and make the Bank vulnerable to a sudden decline in house prices, particularly in Sweden.

DBRS views the Bank as having a sound and well-managed funding profile and solid liquidity position. Similar to its Nordic peers, however, the Bank’s reliance on wholesale funding, particularly covered bonds, is significantly higher than for most European banks. Wholesale funding accounted for a 62% of total funding at end-2018. Covered bonds represented 23% of total funding at end-2018. Short-term funding through certificates of deposits and commercial paper is also sizeable, representing 35% of the total securities outstanding at end-2018. Whilst the Nordic covered bond markets have proven to be very stable, DBRS considers the Bank’s sizeable usage of wholesale funding and foreign currency funding a potential vulnerability, if there were to be a sudden change in investor sentiment. The Bank’s liquidity position remains solid with a Liquidity Coverage Ratio (LCR) of 146%, at end-2018.

DBRS views Handelsbanken’s capital position as strong, supported by a strong ability to generate capital through retained earnings. At end-2018, the Bank had a Common Equity Tier 1 (CET1) ratio of 16.8%, which compares to a minimum regulatory requirement of 15.1% at end-2018. However, the CET1 ratio was down from 21.7% at end-September 2018 and 22.7% at end-2017 due to a nearly 30% increase in Handelsbanken’s risk weighted assets, predominantly reflecting the Swedish FSA moving the risk weight floor for Swedish mortgages from Pillar 2 to Pillar 1 on December 31, 2018. As a result of the change of mortgage floor, Handelsbanken’s cushion over minimum requirement was 1.7% at end-2018 from 2.5% at end-2017. Handelsbanken’s leverage ratio was 4.37% at end-2018, which is at the lower end of its Nordic peers.

Concurrently, DBRS has discontinued the rating on Handelsbanken’s Undated Subordinated Debt, Capital Contribution Securities and Enhanced Capital Contribution Securities to reflect that all of these instruments have been repaid.

The Grid Summary Grades for Handelsbanken are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Strong.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). 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 (Swedish FSA), Riksgalden (Swedish National Debt Office) 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: Maria Rivas, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 7, 2009
Last Rating Date: April 10, 2018

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