DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Svenska Handelsbanken (Handelsbanken or the Bank), including the Long-Term Issuer Rating at AA (low) and the Short-Term Issuer Rating at R-1 (middle). The trend on all ratings remain Stable. The Bank’s Intrinsic Assessment was confirmed at AA (low) and the Support Assessment remains SA3. See full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The Long-Term Issuer rating of AA (low) reflects Handelsbanken’s strong and conservative retail franchise in the domestic market of Sweden, as well as its meaningful presence in the rest of its “home markets” (the UK, the Netherlands, and Norway). The Bank’s high and stable profitability, underpinned by historically low cost of risk, supports its robust capitalisation and internal capital generation capacity. The rating also takes into account Handelsbanken’s strong asset quality metrics, supported by strict underwriting standards and high aversion for credit losses, however, some vulnerabilities remain, especially in its sizeable property management portfolio. Russia’s invasion of Ukraine adds uncertainty in the operating environment with implications for supply chains, energy prices, and inflation, however, Handelsbanken’s decentralised business model has historically showed less sensitivity to the business cycle compared to its peers. The rating also incorporates the Bank's high reliance on wholesale funding which is partially mitigated by access to the stable Swedish covered bonds market and ample liquidity.
An upgrade of the Long-Term Issuer Rating is unlikely in the short term and would require a sustained lower reliance on wholesale funding while maintaining strong profitability and no deterioration in asset quality.
A downgrade of the Long-Term Issuer Rating would be driven by a meaningful deterioration of asset quality as well as a substantial reduction in the Bank's earnings generation.
Franchise Combined Building Block (BB) Assessment: Strong
Handelsbanken is the largest bank in Sweden and one of the leading banks in the Nordic region. Sweden is Handelsbanken's main reference market together with the Netherlands, Norway and the UK which the Bank defines as its home markets. In October 2021, Handelsbanken announced its intention to exit Denmark and Finland, notwithstanding a long term presence in both markets, due to limited growth potential. Handelsbanken has always advocated decentralisation as a business philosophy where the branch network is fully responsible for the relationship with the customers and the majority of the credit decisions are taken at branch level. Nevertheless, the Bank has significantly reduced its branch network in 2021, especially in Sweden, in line with a strategy that involved significant investments in digitalisation with the aim to further reduce costs.
Earnings Combined Building Block (BB) Assessment: Strong / Good
In DBRS Morningstar view, Handelsbanken’s earnings profile remains sound, with the Bank maintaining its historically low cost of risk in 2021. In 2021 Handelsbanken reported a net profit of SEK 19,543 million, 25% higher than 2020. The increase was attributable to higher operating profit as well as lower credit impairments. This led to a Return-on-Equity (ROE) of 11.8% in 2021, compared to 10% in 2020. The Bank’s operating efficiency improved in 2021 thanks to additional cost-cutting measures which brought the cost-income ratio down to 46% in 2021, from 52% in 2020. Handelsbanken’s loan loss provisions decreased to SEK 43 million in 2021 from SEK 649 million in 2020 which remains well below the European and Nordic average.
Russia’s invasion of Ukraine adds uncertainty in the operating environment with implications for supply chains, energy prices, and inflation, however, we also note Handelsbanken’s decentralised business model has historically showed less sensitivity to the business cycle compared to its peers, including during the COVID-19 pandemic.
Risk Combined Building Block (BB) Assessment: Very Strong / Strong
DBRS Morningstar considers Handelsbanken's risk appetite as low, supported by its relationship-based lending approach and low risk tolerance. The Bank has very strict underwriting standards focusing on long-term relationships with customers that have a good repayment capacity and strong financial position. In doing so, Handelsbanken aims for a business model which is less affected by the business cycle. Handelsbanken's approach has led to very strong asset quality metrics over time. The Bank's NPL ratio was 0.31% at end-2021, stable compared to end-2020, which is below most European and Nordic peers. Stage 3 loans increased by 6% YoY mainly within the mortgage loan portfolio in the UK. Household mortgages were 42% of the total lending at end-2021. Potential vulnerabilities remain given the large property management portfolio which is sizeable accounting for 28% of total lending at end-2021, but which has continued to perform well.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar views Handelsbanken’s funding and liquidity profile as well-managed. At the same time, in line with other Nordic peers, reliance on wholesale funding is very high compared to other European markets. Wholesale funding is mostly accessed through the Swedish covered bonds market which we consider to be very stable, albeit increasing the overall level of encumbered assets. Due to the effect of the pandemic, customer deposits increased by 4% YoY at end-2021 leading to an improvement in the loan-to-deposits ratio to 175% at end-2021, from 191% at end-2020. However, this remains at a much higher level compared to its European and also compared to its Nordic peers.
Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views Handelsbanken’s capital position as strong, supported by solid internal capital generation capacity. At end-2021, Handelsbanken's CET1 ratio was 19.4% down from 20.3% at end-2020. The CET1 ratio reduction was mainly attributable to the extra-dividend in 2021 as well as an increase of RWAs related to higher volumes and regulatory changes in Norway. Taking into account a minimum CET1 ratio requirement of 13.9% in 2021, the capital cushion above minimum requirements remained substantial at 550 bps, well above the management target of 100-300 bps. Nevertheless, we believe that Handelsbanken’s capital buffer will gradually decrease towards the management target over time, mainly due to further regulatory actions which will impact both the minimum requirement and the capital ratios. These include the internal rating based (IRB) models overhaul as well as the reintroduction of the countercyclical buffer in Sweden and Norway.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/394240
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in SEK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The sources of information used for this rating include Morningstar Inc. and Company Documents, Handelsbanken 2021 Annual and Sustainability Report, Handelsbanken Debt Investor Presentation 2021, Handelsbanken FY21 Presentation, Handelsbanken Q4-FY21 Factbook, Handelsbanken Q4 and FY21 Interim Report and Svenska Finansinspektionen (Swedish FSA). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/394238
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director - European Financial Institutions
Initial Rating Date: 12/07/2009
Last Rating Date: 03/26/2021
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