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

DBRS Ratings Limited (DBRS Morningstar) 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 meaningful presence in the UK and the Netherlands. The ratings also consider the Bank’s sound profitability, the robust and the conservative risk profile of its balance sheet, which have supported the Bank’s strong capital position and the Bank’s sound level of liquid assets.

Conversely, the ratings also incorporate Handelsbanken’s relatively high reliance on wholesale funding, when compared to European peers, largely in the form of Nordic covered bonds and short-term commercial paper and certificates of deposits.

DBRS Morningstar notes that a deterioration of the Swedish and UK economies and disruption in the financial markets as a result of the coronavirus (COVID-19) outbreak could have a negative impact on Handelsbanken’s asset quality and funding position. In particular, Handelsbanken could be negatively impacted if access to commercial paper market becomes challenging, given that it represented more than a third of total debt securities outstanding at end-2019. Likewise, any disruption in the Nordic covered bond market could also impact the Bank’s funding position, similar to its Nordic peers. However, DBRS Morningstar notes that the Bank currently has very low levels of non-performing loans and a long track record of low credit losses. DBRS Morningstar will continue to monitor the developing situation and potential impact of the COVID-19 outbreak on revenues, profits, asset quality, as well as potential funding implications, whilst taking into account the significant relief measures being taken by governments and regulators.

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 or profitability. Alternatively, it could also arise if the Bank were to face any major challenges accessing wholesale funding markets.

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 meaningful presence in the UK and the Netherlands, both considered among the Bank’s home markets. Outside Sweden, Norway and the UK are the major contributors to the Bank’s income before provisions and taxes (IBPT), contributing 12% each to the Bank’s IBPT in 2019.

In 2019, Handelsbanken continued to demonstrate its robust underlying earnings ability. Net attributable income was down 2% compared to 2018. However, excluding one-off items in each year, it remained broadly stable. 2019 was characterized by sound revenue generation, as reflected by total income increasing by 2% yoy, primarily underpinned by higher business volumes, especially in Sweden. The Bank’s cost-to-income ratio remained strong at 48.8% in 2019 in spite of the sizable restructuring costs and expenses related to the Bank’s aim to strengthen its internal control measures against Anti Money Laundering (AML) issues.

Handelsbanken’s traditional, relationship-based lending approach, combined with prudent underwriting and risk management, has historically led to below-average loan losses. Moreover, sound economic conditions in core markets have also been supporting the Bank’s strong asset quality, with a gross impaired loans ratio of 0.38% (as calculated by DBRS Morningstar) at end-2019. In terms of geographic diversification, Sweden accounts for 62% of gross loans at end-2019. DBRS Morningstar notes, however, that Handelsbanken’s book is largely concentrated in collateralised property lending. Mortgage loans (including housing co-operative associations) represented 52% of the gross loan book at end-2019 while exposure to property management stood at 28% of gross loans and were primarily concentrated in Sweden, the UK and Norway. In DBRS Morningstar’s 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. Overall, in 2019, the Bank’s cost of risk remained flat yoy at 4 bps. We note operations outside of Sweden accounted for 33% of the Bank’s IBPT including Norway, UK, Denmark, Finland, and the Netherlands at end-2019, which could also be negatively impacted by the extension of lockdowns. Although it is still early stage, as the Covid-19 pandemic outbreak develops, we will continue to closely monitor the potential negative impact on the Bank’s asset quality.

DBRS Morningstar views the Bank as having a sound and well-managed funding profile as well as a solid liquidity position. Similar to its Nordic peers, however, the Bank’s usage of wholesale funding, particularly covered bonds, is significantly higher than for most European banks. Wholesale funding accounted for a sizable 58% of total funding at end-2019 with covered bonds representing 24% of total funding. Somewhat mitigating this, we view Nordic covered bond markets as very stable. Short-term funding through certificates of deposits and commercial paper account for 36% of the total debt securities outstanding at end-2019. Whilst the Nordic covered bond markets have historically proven to be very stable, we also view the Bank’s ample usage of wholesale and foreign currency funding markets as 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) and Net Stable Funding Ratio (NSFR) of 147% and 113% respectively, at end-2019. As a result of the uncertainty prompted by the Covid-19 outbreak, we note the Swedish FSA has loosened requirements on the LCR in essential currencies which should give Swedbank, similar to its Nordic peers, more flexibility to manage liquidity. In addition, Swedish banks can borrow an unlimited amount of money on a weekly basis against collateral.

DBRS Morningstar considers Handelsbanken’s capital position as strong, supported by its strong and recurrent ability to build up capital through retained earnings generation. At end-2019, the Bank had a Common Equity Tier 1 (CET1) ratio of 18.5%, which compares to a minimum regulatory requirement of 15.8%. Handelsbanken’s leverage ratio was 4.9% at end-2019, up from 4.4% at end-2018. We also note countercyclical buffer requirements were recently reduced to 0% in Sweden (from 2.5%) and Denmark (from 1%), and would be reduced to 1% in Norway (from 2.5%), thus providing additional room to manoeuvre the challenging environment in 2020, caused by the COVID-19 outbreak.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792/dbrs-morningstars-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019). https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

The sources of information used for this rating include Company Documents, Finansinspektionen (Swedish FSA), Riksgalden (Swedish National Debt Office), Handelsbanken 2019 Annual Report, Handelsbanken 2019 Annual Results Presentation, Handelsbanken 2019 Factbook, Handelsbanken 2019 Highlights of Annual Report January-December, Handelsbanken Debt Investor Presentation (February 2020), Handelsbanken 2019 Pillar 3 Risk and Capital Report, Handelsbanken 2019 Sustainability Report, and S&P Global Market Intelligence. DBRS Morningstar 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.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359040

Ratings assigned by DBRS Rating Limited are subject to EU and U.S. regulations only.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings
Rating Committee Chair: Ross Abercromby, Managing Director, Credit Ratings
Initial Rating Date: December 7, 2009
Last Rating Date: April 9, 2019

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