Baseline credit assessment upgraded to baa1
Frankfurt am Main, September 29, 2017 -- Moody's Investors Service (Moody's) has today affirmed Sydbank A/S's
(Sydbank) long- and short-term deposit ratings at A3/P-2,
its long-term senior unsecured debt ratings at Baa1 and its short-term
program ratings at (P)P-2. Moody's also changed the
outlook on Sydbank's long-term ratings to positive from stable.
The affirmation is the result of two components of the bank's credit
profile that Moody's says have evolved in opposite directions,
specifically 1) an improvement in the bank's standalone credit profile,
owing to a strengthening in asset quality and profitability, which
has resulted in an upgrade of the bank's baseline credit assessment
(BCA) to baa1 from baa2, combined with 2) a reduction in the rating
uplift that the bank's long-term ratings have been benefitting
from under Moody's Advanced Loss Given Failure (LGF) framework following
a recent decline in the amount of outstanding "bail-inable"
debt issued by the bank as well as changed assumptions surrounding the
amount of junior depositors.
The positive outlook assigned to the bank's long-term deposits
and senior unsecured debt ratings reflects the agency's expectations
of a high likelihood that the volume of senior unsecured debt will increase
again towards the later part of the 12-18 month rating outlook
horizon, while continued economic growth in Denmark will further
support Sydbank's solvency and liquidity profiles.
Along with the BCA upgrade, Moody's has also upgraded Sydbank's
subordinated debt ratings to Baa2 from Baa3, its junior subordinated
MTN ratings to (P)Baa3 from (P)Ba1, its non-cumulative preferred
stock rating to Ba1(hyb) from Ba2(hyb) as well as the bank's long-term
CR Assessment to A1(cr) from A2(cr). Sydbank's short-term
CR Assessment was affirmed at P-1(cr).
A full list of affected ratings and rating inputs can be found at the
end of this press release.
RATINGS RATIONALE
-- UPGRADE OF SYDBANK'S BASELINE CREDIT ASSESSMENT
The upgrade of Sydbank's BCA reflects the bank's improved
asset quality and sustained profitability despite the low interest rate
environment and a reduction in the bank's capitalization.
Sydbank's problem loans as a percentage of gross loans have already decreased
to 6.1% at end-2016, from 8.0%
at the end of 2015 (based on Moody's calculations) and the agency expects
the improving trend to continue into 2018 given the ongoing economic recovery
in Denmark, including in some sectors that have posed challenges
in the recent past, such as agriculture and commercial real estate.
Sydbank stands to benefit more than other Danish banks from this trend
given that 63% of its credit exposure relates to corporates and
small and medium sized entities.
Sydbank's profitability has proven resilient over the last few years,
and even showed signs of strengthening despite the low interest rate environment.
During 2016, Sydbank reported a return on assets (ROA) of 1.0%,
compared with 0.80% in 2015. During 1H17, the
improving trend continued, as underpinned by an annualized ROA of
around 1.2%. Going forward, Moody's expect
the bank to continue to report healthy profits, sustained by lower
credit costs, tighter cost control and greater business diversification,
as per its so-called "blue growth" strategy announced
in October 2015.
Moody's assessment also takes into account the expected reduction in the
bank's common equity tier 1 (CET1) ratio to around 13.5%,
which will lead to lower excess capital cushion against the bank's
regulatory minimum capital requirements. During 1H2017, Sydbank's
CET1 ratio declined by around 50 basis points to 15.6% at
end-June 2017, compared with 16.1% in 2016,
reflecting the effects from a new share buyback programme as well as the
repayment of hybrid capital instruments.
REDUCTION IN CUSHION OF DEBT THAT CAN BE BAILED IN IF NEEDED IN TIMES
OF STRESS
The other driver for the affirmation of Sydbank's long-term
senior unsecured and deposit ratings relates to a recent decline in the
amount of debt that could be bailed in by regulators in the unlikely event
of the bank's failure, which in turn reduces the amount of
protection that senior debt holders would benefit from under a bail in
scenario, as calculated under Moody's Advanced Loss Given Failure
(LGF) analysis.
The reduced volume of debt calculated by Moody's is attributable
to the recent repayment of subordinated debt by the bank as well as changed
assumptions regarding the volume of junior depositors that could be bailed
in. The change in assumption reflects Moody's view that only
around 10% of Sydbank's deposits can actually be considered
junior and qualify as bail-in-able under BRRD, as
opposed to the previous assumption of 26%.
For deposits, Moody's LGF analysis indicates a low loss-given-failure,
leading to a one notch rating uplift from the bank's baa1 Adjusted BCA,
from two notches of uplift previously.
For senior unsecured debt, Moody's LGF analysis indicates
a moderate loss-given-failure, leading to a positioning
of the rating in line with the bank's baa1 Adjusted BCA, compared
to one notch of uplift previously.
-- RATIONALE FOR THE POSITIVE OUTLOOK ON DEPOSITS,
SENIOR UNSECURED DEBT RATINGS
The rating agency also changed the outlook to positive from stable on
Sydbank's long-term ratings, due to the expectation
of an increase in the volume of senior unsecured debt towards the end
of the outlook period. In addition, Moody's expects
that the bank's key credit characteristics will remain supported
by the benign domestic operating environment over the next 12 to 18 months.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Sydbank's ratings could develop from (1) further improvement
in asset-quality metrics, especially in relation to more
volatile segments such as agriculture and commercial real estate;
(2) a further sustained and material improvement in the group's profitability,
without a material increase in its risk profile; and (3) a strengthening
of its capitalization beyond the rating agency's current expectations.
Downward pressure on Sydbank's ratings could emerge if (1) asset quality
deteriorates from current levels; (2) its risk profile increases
(e.g., as a result of increased exposures to more
volatile assets); and/or (3) the bank's capital ratio or profitability
weakens.
Upward rating momentum for the long-term ratings of Sydbank could
develop as a result of a change in the group's funding structure,
such as the issuance of higher volumes of senior unsecured debt or subordinated
debt that would result in notching uplift under Moody's LGF framework.
Also, a lower-than-expected loss for junior depositors
could result if the percentage of junior deposits is significantly higher
than our assumption of 10% of total deposits.
Sydbank's long-term ratings could be downgraded following (1) a
downgrade of the bank's BCA; or (2) a significant decrease in the
bank's bail-inable debt cushions, leading to fewer notches
of rating uplift under Moody's Advanced LGF analysis.
LIST OF AFFECTED RATINGS
Issuer: Sydbank A/S
The following ratings of Sydbank were affirmed:
- Long-term bank deposit ratings at A3, outlook changed
to positive from stable
- Short-term bank deposit ratings at P-2
- Long-term senior unsecured debt rating at Baa1,
outlook changed to positive from stable
- Senior Unsecured MTN, at (P)Baa1
- Other Short Term at (P)P-2
- Short-term Counterparty Risk Assessment at P-1(cr)
The following ratings and rating inputs of Sydbank were upgraded:
- Long-term Counterparty Risk Assessment to A1(cr) from
A2(cr)
- Baseline Credit Assessment to baa1 from baa2
- Adjusted Baseline Credit Assessment to baa1 from baa2
- Subordinated debt to Baa2 from Baa3
- Subordinate MTN to (P)Baa2 from (P)Baa3
- Junior subordinated MTN ratings to (P)Baa3 from (P)Ba1
- Preferred Stock Non-cumulative to Ba1(hyb) from Ba2(hyb)
Outlook Action:
- Outlook changed to positive from stable
The principal methodology used in these ratings was Banks published in
September 2017. 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.
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.
Swen Metzler
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
