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Related Issuers
Rating Action:

Moody's affirms SBAB Bank's A2 long-term deposit and debt ratings; outlook changed to positive

21 Oct 2016

London, 21 October 2016 -- Moody's Investors Service, ("Moody's") has today affirmed SBAB Bank AB (publ)'s (SBAB) A2 long-term debt and deposit rating, following the affirmation of the bank's baa2 Baseline Credit Assessment (BCA). The ratings outlook was changed to positive from stable.

The change in outlook to positive reflects Moody's expectations that the bank's historically volatile earnings will stabilize at current levels or even increase slightly, while its funding profile will continue to improve, which would bring SBAB's credit profile more in line with baa1-BCA peers.

The affirmation of SBAB's ratings reflects the bank's maintenance of strong credit quality over time, with a history of low levels of problem loans and high capital ratios, counterbalanced by limited profitability and a relatively high dependence on market funding.

The full list of affected ratings is provided at the end of the press release.

RATINGS RATIONALE

--- CHANGE IN OUTLOOK TO POSITIVE REFLECTS PROFITABILITY AND FUNDING IMPROVEMENTS

The positive outlook on SBAB's long-term ratings primarily reflects Moody's expectations that SBAB will be able to maintain its current profitability level, which has increased in recent years, underpinned by resilience in net interest margins (NIM) despite the prolonged low interest rate environment. SBAB recorded net income over tangible assets of 0.38% at H1 2016 and NIM of 0.70%.

The other key driver for the change in outlook is the expectation that SBAB will continue to reduce reliance on market funding through further diversification into deposits, thereby reducing its gross loans/deposits ratio of 344% at end-June 2016, as well as extending the bank's average maturity profile of its market debt, which we estimate a duration of around 2.8 years.

--- AFFIRMATION OF THE baa2 BCA REFLECTS STRONG CREDIT QUALITY

The affirmation of SBAB's standalone BCA of baa2 reflects the strong credit quality track record of the bank, despite the tail risks posed by rapid Swedish property market appreciation, as well as robust capital buffers despite modest -- albeit improving -- profitability.

SBAB's loan book is predominantly focused on retail mortgages, in the strong and relatively stable Swedish economic environment. Nevertheless, the relatively high level of household indebtedness (179% at end-2015) in Sweden, in the context of a prolonged period of rapid loan growth, has raised the risks of a price correction and related credit quality deterioration.

Although tail risks remain in the Swedish property market, Moody's notes a number of mitigating factors, including recently introduced measures to contain the proliferation of high loan-to-value (LTV) mortgages (e.g. minimum amortisation requirements, increased countercyclical buffers, etc.) and a very limited amount of speculative buy-to-let lending. Moody's also notes that the pace of property price appreciation has eased in recent months, which should contribute to a gradual convergence of property price appreciation with real wage growth (2.9% in 2015).

SBAB's retail mortgage book has a weighted average loan-to-value (LTV) of 64% for the total portfolio, and 68% on new lending. Problem loans over gross loans ratio has been stable over the years, standing at 0.10% at end-June 2016.

The BCA also takes account of SBAB's historically low and volatile profitability, as well as high market-funding reliance, which renders the bank more susceptible to shifts in investor sentiment. Nevertheless, Moody's acknowledges that the bank has increased its deposit funding and improved its maturity profile in recent years, and views the bank's low profitability and limited capital generating ability in the context of its limited credit risk as a mortgage lender.

--- RATIONALE FOR DEPOSIT RATING AND SENIOR UNSECURED DEBT RATINGS

The bank's deposit and senior unsecured debt ratings are positioned at A2/Prime-1, taking into account the bank's baa2 BCA and Moody's view of a very low probability of losses for these debt classes in case of bail-in, which results in two notches of rating uplift under the rating agency's advanced loss given failure (LGF) approach.

The LGF analysis assesses the potential cushion to creditors provided by the banking group's own volume of deposits and debt, and the volume of securities subordinated to them in the creditor hierarchy.

Additionally, a moderate level of government support from Sweden (Aaa stable) is incorporated in SBAB's unsecured ratings, providing one further notch of rating uplift. Moody's support assumptions are derived from the fact that SBAB is fully owned by the Swedish government and has a meaningful market share in the Swedish residential mortgage market (7.9% at end-December 2015).

WHAT COULD CHANGE THE RATING -- UP/DOWN

As implied by the rationale supporting the positive outlook on SBAB's ratings, could be upgraded if: (1) the recent improvement in SBAB Bank's funding profile proves sustainable and deposits exhibit stability if their price level reduces; and/or (2) profitability is sustained without a corresponding increase in risk profile.

Although a low-probability scenario given the positive outlook currently assigned to SBAB's ratings, SBAB Bank's senior unsecured ratings could be downgraded if its cushion of bail-in eligible liabilities shrinks considerably. Moody's would also consider downgrading SBAB Bank's long-term and subordinated ratings should: (1) the bank's profitability significantly deteriorates, and/ or (2) the bank's risk profile increases due to increased exposure to more volatile sectors (e.g. unsecured lending).

LIST OF AFFECTED RATINGS

Issuer: SBAB Bank AB (publ)

Affirmations:

....LT Issuer Rating, Affirmed A2, Outlook Changed To Positive From Stable

....LT Bank Deposits (Local & Foreign Currency), Affirmed A2, Outlook Changed To Positive From Stable

....ST Bank Deposits (Local & Foreign Currency), Affirmed P-1

....Senior Unsecured Regular Bond/Debenture (Local & Foreign Currency), Affirmed A2, Outlook Changed To Positive From Stable

....Subordinate (Local Currency), Affirmed Baa3

....Senior Unsecured MTN (Foreign Currency), Affirmed (P)A2

....Other Short Term (Foreign Currency), Affirmed (P)P-1

....Subordinate MTN (Foreign Currency), Affirmed (P)Baa3

....Commercial Paper (Foreign Currency), Affirmed P-1

....Pref. Stock Non-cumulative (Local Currency), Affirmed Ba2 (hyb)

....Adjusted Baseline Credit Assessment, Affirmed baa2

....Baseline Credit Assessment, Affirmed baa2

....LT Counterparty Risk Assessment, Affirmed A1(cr)

....ST Counterparty Risk Assessment, Affirmed P-1(cr)

Outlook Actions:

....Outlook, Changed To Positive From Stable

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was "Banks" published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a participating entity. The rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Niclas Boheman
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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