Stockholm, December 19, 2018 -- Moody's Investors Service ("Moody's") has today
assigned first time foreign and local currency, long- and
short-term deposit ratings to AS LHV Pank (LHV Bank) of Baa1/Prime-2.
A baseline credit assessment (BCA) of baa3 was also assigned. Furthermore,
counterparty risk ratings of A3/Prime-2 and a counterparty risk
assessment of A3(cr)/Prime-2(cr) were assigned. The outlook
on the long-term deposit ratings is stable.
The deposit ratings of Baa1/Prime-2 reflect 1) the combination
of supportive operating conditions prevailing in Estonia and the strong
standalone credit characteristics of LHV Bank, which translate into
a BCA of baa3, and 2) the very low level of expected loss faced
by junior depositors in the event of a bail-in given the volumes
of loss absorbing obligations cushioning their exposure, which results
in two notches of rating uplift under Moody's advanced loss given
failure (LGF) analysis.
The counterparty risk ratings (CRR) of A3/Prime-2 and the counterparty
risk assessment (CRA) of A3(cr)/Prime-2(cr) both incorporate the
adjusted BCA and three notches of uplift as indicated by the LGF analysis.
The long-term bank deposit ratings carry a stable outlook,
reflecting Moody's view that over the next 12-18 months the
bank will maintain a steady performance and credit profile in the context
of a benign operating environment.
AS LHV Pank is the fourth largest bank in Estonia and the core operation
of the AS LHV Group (LHV Group). LHV Group was established in 1999
as an investment union offering brokerage and portfolio management services,
while a banking license was obtained in 2009, when LHV Bank started
offering universal banking products. LHV Group's assets totaled
EUR 1,857 million at end-September 2018 and LHV Bank totaled
EUR 1,829 million.
The full list of assigned ratings is provided at the end of the press
release.
RATINGS RATIONALE
The deposit ratings of Baa1/Prime-2 reflect the combination of
supportive operating conditions prevailing in Estonia and the strong idiosyncratic
standalone credit characteristics of LHV Bank, which translate into
a BCA of baa3, and a two-notch rating uplift from the BCA
level capturing the very low loss level faced by junior depositors under
Moody's LGF analysis.
-- Supportive environment --
A key factor underpinning the bank's BCA is the Estonian macro profile
of Strong (-). The operating environment in Estonia is supportive
of banks' performance, with a dynamic economy and higher than
the EU average GDP growth, continued monetary stimulus and rising
household income. While over a longer period, these conditions
could lead to overheating, there are limited signs that this has
been the case so far, with inflation easing in recent periods.
Estonia also has a large and competitive electronic sector and has positioned
itself as a hub for technology start-ups in Europe.
At the same time, the macro profile captures risks associated with
money laundering and the presence of a substantial amount of non-resident
deposits in the Baltics as a whole. While LHV Bank takes minimal
direct exposure to clients posing money laundering risks, the situation
creates reputational and counterparty risks for all Baltic banks,
which could undermine investor confidence and affect funding cost or access.
-- Strong standalone credit fundamentals, balanced
against rapid growth --
Within the context of this supportive environment, the strong standalone
credit profile of LHV Bank is the other key driver of the bank's
BCA of baa3. Among key strengths, capitalisation and internal
capital generation are high, supporting the bank's strategy
to scale up its platform. Moody's nevertheless expects total
capital to continue to decline slightly as the balance sheet continues
to grow at above-average rates. The bank's tangible
common equity-to-risk-weighted assets (TCE %
RWA) ratio stood at 15.9% as of end-September 2018,
down from 17.0% at year-end 2016, partly driven
by a one-off impact of IFRS 9. Although on a declining trend,
the ratio still compares well with its Baltic peers and it is not expected
to decline below 14% over the next two years despite the aggressive
growth strategy of the bank given the bank's strong profitability
and internal capital generation capacity.
Reflecting the aggressive loan growth recorded in recent years,
asset risk is the main downside risk, as the loan portfolio is geared
toward corporate and small and medium-sized enterprises (SMEs),
and a smaller but growing segment of retail loans. The problem
loans ratio was lower than peers at 3.1% at year-end
2017 and the net-charge offs-to-gross loans ratio
was a low 0.24%. However, the bank has been
growing very fast over a number of years, doubling its loan portfolio
in just three years. A high and above market average loan growth
(system wide Estonian loan growth is in the single digits) indicates a
high portion of unseasoned loans, where we would expect higher losses
in a downturn.
LHV Group is profitable within all its segments, corporate,
retail, asset management and financial intermediaries with a net
income-to-tangible assets ratio of 1.26% in
2017 and 1.29% in the first nine months 2018. The
group's strategy is geared towards leveraging its digital banking
platform while keeping infrastructure costs low, with only two physical
branches in Estonia. It has successfully grown from 13,000
bank customers in 2009 to more than 150,000 in 2018, with
the potential to scale up significantly more. Also, efficiency
has improved with the increased volumes of lending, with cost to
income improving from 63% in 2015 to 49% for the first nine
months 2018. The bank is closely engaged in the fintech industry
and continues investing in digital solutions and launching new products,
which will allow it to keep an edge over domestic competitors from an
efficiency -- and potentially competitiveness --
point of view.
LHV Group's assets are funded at 89% from deposits as of
end-September 2018, out of which 44% and 25%
are corporate and retail deposits. The remaining 31% are
deposits due to financial intermediaries, which Moody's considers
less sticky, as they are typically subordinate to retail deposits
and potentially more volatile. LHV Group has very limited exposure
to non-resident deposits, due to the higher money laundering
risks associated with those customers. Also, with a liquid
assets-to-total tangible assets ratio at 52.5%
at end-September 2018, the group has large volumes of liquid
assets to cover the volatile deposits from financial intermediaries and
larger withdrawals by its ordinary deposit base.
LOSS GIVEN FAILURE
We apply our advanced LGF analysis to LHV Group as the bank is subject
to the European Union Bank Resolution and Recovery Directive (BRRD),
which we consider to be an operational resolution regime. For this
analysis, we assume that equity and losses stand at 3% and
8%, respectively, of tangible banking assets in a failure
scenario. We also assume a 25% run-off of junior
wholesale deposits and a 5% run-off in preferred deposits
and a 26% proportion of junior deposits. These are in line
with our standard assumptions.
In a bail-in scenario, the bank's deposits are likely
to face moderate loss given failure, owing to the loss absorption
provided by the lower volume of junior deposits. As a result,
LHV Bank's deposits are rated two notches above the baa3 adjusted
BCA, owing to a significant buffer of liabilities eligible for bail-in.
Counterparty Risk (CR) Assessment
CR Assessments are opinions of how counterparty obligations are likely
to be treated if a bank fails, and are distinct from debt and deposit
ratings in that they (1) consider only the risk of default rather than
expected loss, and (2) apply to counterparty obligations and contractual
commitments rather than debt or deposit instruments. The CR Assessment
is an opinion of the counterparty risk related to a bank's covered bonds,
contractual performance obligations (servicing), derivatives (for
example, swaps), letters of credit, guarantees and liquidity
facilities.
The PRA on CR Assessment is positioned at A3(cr), three notches
above the bank's BCA of baa3, based on the buffer against default
provided to the senior obligations represented by the CR Assessment by
subordinated instruments. The main difference with our Advanced
LGF approach used to determine instrument ratings is that the CR Assessment
captures the probability of default on certain senior obligations rather
than expected loss. Therefore, we focus purely on subordination
and take no account of the volume of the instrument class.
Counterparty Risk Ratings
Counterparty Risk Ratings are opinions of the ability of entities to honour
the uncollateralized portion of non-debt counterparty financial
liabilities (CRR liabilities) and also reflect the expected financial
losses in the event such liabilities are not honoured. CRR liabilities
typically relate to transactions with unrelated parties. Examples
of CRR liabilities include the uncollateralized portion of payables arising
from derivatives transactions and the uncollateralized portion of liabilities
under sale and repurchase agreements. CRRs are not applicable to
funding commitments or other obligations associated with covered bonds,
letters of credit, guarantees, servicer and trustee obligations,
and other similar obligations that arise from a bank performing its essential
operating functions.
The PRA on the CR Ratings is placed at A3, three notches above the
BCA.
There is a considerable amount of debt outstanding that is junior to the
CRR obligations. In this case we assume a nominal amount of volume
at failure as we are not able to accurately assess the volume of CRR liabilities
at failure and the inherently more volatile nature of such liabilities
as the bank approaches failure. This combination provides 3 notches
of LGF uplift for the CRR from the bank's adjusted BCA of baa3.
GOVERNMENT SUPPORT
The ratings reflect a low assumption of government support resulting in
no uplift. This is due to Estonia adopting BRRD whereby creditors
and investors are expected to bear the costs of failures, and although
LHV Group is the fourth largest banking group in Estonia, and has
a certain degree of interconnectedness, its deposits account for
8% of the market, which Moody's considers, in
the context of Estonia being a small open economy, does not constitute
a reason to incorporate government support uplift in the ratings.
OUTLOOK
The long-term bank deposits carry a stable outlook, reflecting
Moody's view that over the next 12-18 months the bank will
continue growing its loan book rapidly, which Moody's expects
will reduce total capital slightly, potentially triggering the need
for additional issues of tier 2 capital, but allowing the bank to
meet a Tier 1 ratio above 14%, in line with similarly rated
peers. The group will maintain its profit level despite some moderate
cost increases due to the launch of a UK branch. Funding profile
will remain unchanged with deposit gathering the primary source of funding.
Factors that could lead to an upgrade/downgrade
Factors that could lead to an upgrade include: 1) a more gradual
and sustained loan growth while maintaining a low problem loan ratio;
2) higher capitalization; and/or 3) substantial issuances of senior
unsecured debt that would clearly demonstrate access to market funding
and increase the volumes of loss absorbing obligations
Factors that could lead to a downgrade include: 1) continued fast
growth leading to additional deterioration in capital levels and buildup
of additional asset risk; 2) more rapid increase in problem loans;
3) deteriorating levels of liquidity; and/or 4) lower levels of subordinated
debt would lead to lower levels of loss absorbing obligations, increasing
losses for depositors in case of failure.
Issuer: AS LHV Pank
..Assignments:
.... Adjusted Baseline Credit Assessment,
Assigned baa3
.... Baseline Credit Assessment, Assigned
baa3
.... Long-term Counterparty Risk Assessment,
Assigned A3(cr)
.... Short-term Counterparty Risk Assessment,
Assigned P-2(cr)
.... Long-term Counterparty Risk Rating,
Assigned A3
.... Short-term Counterparty Risk Rating,
Assigned P-2
.... Short-term Bank Deposits,
Assigned P-2
.... Long-term Bank Deposits,
Assigned Baa1, Outlook Assigned Stable
..Outlook Action:
....Outlook Assigned Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. 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.
Niclas Boheman
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
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 Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
