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 remains Stable. The Bank’s Intrinsic Assessment was maintained 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 confirmation of the ratings takes into account Handelsbanken’s strong retail franchise in its home markets of Sweden, the UK, the Netherlands and Norway as well as the Bank's long track record of robust profitability, solid operating efficiency and consistently low cost of risk through various macroeconomic and business cycles. The ratings also incorporate Handelsbanken’s very conservative risk profile, based on strict underwriting standards and robust asset quality metrics as well as the Bank’s solid capitalization and ample liquidity. The ratings also incorporate the Bank's high reliance on wholesale funding, largely through Swedish covered bonds, although DBRS Morningstar considers this funding source as resilient and stable.
An upgrade of the Long-Term Issuer Rating would require lower reliance on wholesale funding as well as a more diversified business franchise while maintaining robust profitability, asset quality and capitalization.
A downgrade of the Long-Term Issuer Rating would be driven by a substantial deterioration in the Bank's asset quality and/or profitability materially weakening its capital position.
Franchise Combined Building Block (BB) Assessment: Strong
Handelsbanken is one of the largest banks in Sweden with total assets of SEK 3,453 billion at end-2022 (EUR 325 billion or USD 341 billion). It provides universal banking services as well as asset management services and insurance products to retail and corporate customers in Sweden, the UK, Norway and the Netherlands, its home markets. In Sweden, the Bank has a dominant position both in households and corporates, with market shares over 15% and 20% respectively, as well as in mutual funds, where it reported a market share of 53% in 2022. As part of its strategy to improve profitability, the Bank completed the divesture of its Danish operations in Q4 2022, which positively impacted its Common Equity Tier 1 (CET1) ratio by 90 basis points (bps). The Finnish business remains pending to be sold and it is treated as part of the discontinued operations.
Earnings Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Handelsbanken’s earnings profile as robust supported by its consistently strong track record of earnings revenue generation, solid operating efficiency and low cost of risk through various economic and business cycles. In 2022, the Bank reported net profit from continued operations of SEK 21,189 million, up 12.4% year-on-year (YoY), largely driven by a 21% growth YoY of net interest income (NII) that benefited from the several interest rate hikes in 2022 and higher lending volumes. As a result, Handelsbanken reported a return on equity (ROE) of 12.5% in 2022, up from 11.8% in 2021. Operating costs increased by 7% YoY largely as a result of higher development expenses. The Bank’s cost to income ratio was 43% in 2022, down from 45% in 2021. Cost of risk remained null at 0.2 bps as compared to an average of 4.7 bps for Nordic peers at end-2022 and 47 bps for European peers at end-September 2022.
Risk Combined Building Block (BB) Assessment: Very Strong/Strong
DBRS Morningstar views Handelsbanken's risk profile as very strong supported by its relationship-based lending approach, low risk tolerance and outperforming track record of asset quality metrics in any macroeconomic environment. The Bank’s loan book consisted of 49% household lending, 30% real-estate companies, 12% housing co-operative associations and 10% other corporates at end-2022. Handelsbanken’s already high concentration of real estate companies continued to increase by 8.3% YoY in 2022. However, DBRS Morningstar notes that this portfolio has an average LTV ratio of c. 49% and an NPL ratio of 0.20% in 2022. At end-2022, Handelsbanken asset quality metrics remained robust. Stage 2 loans increased by 42% YoY to SEK 91,349 billion reflecting the weaker macroeconomic environment. However, they remained very low as a proportion of the Bank’s total gross loan book at 3.7%. In addition, Stage 3 loans decreased by 23% YoY because of write-offs and recoveries in real-estate, retail and transport by sea sectors. As a result, the Bank reported a Non-Performing Loans (NPL) ratio of 0.23% at end-2022, down from 0.31% at end-2021.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Handelsbanken’s funding and liquidity profile as adequate and well-managed underpinned by a stable customer deposit base. At end-2022, total customer deposits stood at SEK 1,379 billion, which represented 48% of total non-equity funding. Household deposits represented 46% of total customer deposits, while corporate deposits accounted for 54% of the total customer deposits. This led to Handelsbanken’s net loan-to-deposit ratio to 175% at end-2022, up from 168% at end-2021 and down from 185% at end-2020. However, the Bank’s reliance on wholesale funding is very high compared to other European peers as well as the highest among Nordic peers, which could be a potential vulnerability in the current environment of quantitative tightening. However, at end-2022, the Bank's liquidity position remained ample with total high-quality liquid asset of SEK 885 billion, representing 1.2x its corporate deposits, and the bank had a Liquidity Coverage Ratio (LCR) of 159% and Net stable funding ratio (NFSR) of 114%.
Capitalisation Combined Building Block (BB) Assessment: Strong
Handelsbanken’s capital position is solid, supported by its strong and resilient internal capital generation capacity and ample capital cushions against minimum requirements. The Bank’s CET1 ratio is one of the strongest among Nordic and European peers. The Bank reported a CET1 ratio of 19.6% at end-2022, up from 19.4% at end-2021. This corresponded to a capital cushion of 510 bps over the minimum regulatory requirement at end-2022. However, DBRS Morningstar expects the Bank’s current capital buffer to gradually converge towards the management target of 100-300 bps above regulatory requirements over the medium-term, driven by additional capital distribution as well as regulatory changes, including the expected increases in most of the countercyclical buffers throughout 2023.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/411644
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)
All figures are in SEK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, Handelsbanken Annual and Sustainability Report 2022, Handelsbanken Risk and Capital – Information According to Pillar 3 2022, Handelsbanken Results Presentation January – December 2022, Handelsbanken Fact Book Q4 2022. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/411643
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Maria Jesus Parra, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 7 December 2009
Last Rating Date: 28 March 2022
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