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Rating Action:

Moody's assigns first time Baa2 deposit rating to BlueStep Bank AB; stable outlook

24 Jun 2019

Stockholm, June 24, 2019 -- Moody's Investors Service ("Moody's") today assigned to BlueStep Bank AB (publ) (BlueStep) foreign and local currency long- and short-term deposit ratings of Baa2/P-2, a baseline credit assessment (BCA) of baa2, long- and short-term counterparty risk assessment of A2(cr)/P-1(cr), and foreign and local currency long- and short-term counterparty risk ratings of A3/P-2. The outlook on the long-term deposit ratings is stable.

The main driver of the deposit ratings is the BCA of baa2, which incorporates: 1) BlueStep's moderate asset risk, reflecting its profile as a Swedish and Norwegian mortgage lender, moderate Loan-to-Value (LTV) ratios, and strong historical track record of low problem loans to gross loans (1.6% at year-end 2018) despite offering mortgages to customers with limited or more adverse credit history; 2) the bank's strong capitalization, with a ratio of tangible common equity to risk weighted assets of 18.74% at year-end 2018; and 3) its sound profitability, with net income to tangible assets of 0.93% for 2018. These strengths are balanced against: 4) BlueStep's high reliance on market funding in the form of residential mortgage-backed securities (RMBS) and warehouse facilities. The assessment also reflects the bank's planned diversification into covered bonds in the near future, which Moody's considers to be a more stable source of funding because they are less sensitive to shifts in investor sentiments.

Bluestep operates in an operating resolution regime and Moody's therefore applies its advanced loss given failure (LGF) analysis, reflecting expected loss severity in case of failure. There are limited amounts of loss absorbing liabilities, such as issued volumes of senior debt, protecting depositors in the event of failure, indicating a high loss severity for junior depositors, and no further uplift in the ratings above the BCA of baa2. These ratings do not incorporate any uplift from government support assumptions, as BlueStep poses limited systemic risk.

The counterparty risk assessment of A2(cr)/P-1(cr) and the counterparty risk ratings of A3/P-2 reflect the BCA of baa2 and three and two notches of uplift, respectively, due to the volumes of subordinated obligations providing protection in case of failure, as indicated by LGF analysis.

The outlook on the long-term deposit rating is stable, reflecting Moody's expectation of a stable credit profile over the next 12-to-18 months. The outlook takes into account the bank's strategy to continue growing within its segment and its diversification into covered bond funding and additional issuances of senior unsecured debt.

A full list of ratings can be found at the end of this press release.

RATINGS RATIONALE

BASELINE CREDIT ASSESSMENT

BlueStep's BCA is assessed in the context of the Swedish and Norwegian markets. Although the bank targets customers that have been rejected by traditional banks, losses in its mortgage portfolio are very low, partly because the prime segment in Sweden and Norway is narrowly defined, meaning the non-conforming segment includes borrowers that have strong repayment capacity, but also because the bank has plenty of collateral and full recourse on the borrower. BlueStep's 1.6% ratio of problem loans to gross loans is higher than that of its Nordic peers, but remains low by international standards. . The average weighted loan to value is 71% in Sweden and 64% in Norway, and the loan portfolio does not include any buy-to-let. BlueStep also provides unsecured personal loans, accounting for 7% of the loan portfolio. To mitigate the higher risk of this portfolio, the bank has put in place a forward flow contract under which it sells problem loans.

The BCA captures the very strong capitalisation, with tangible common equity (TCE) to risk weighted assets of 18.7% by year-end 2018, and TCE-to-tangible banking assets of 8.02%. Bluestep's Board has set a long term CET1 ratio target of 16%, supported by the bank's owner EQT, comfortably above the regulatory requirement of 13.58% per year-end 2018.

A key driver in the BCA is Bluestep's strong profitability, driven by the relatively high interest rates on its mortgages. Net income to tangible assets was a strong 0.93% in 2018. However, the bank's efficiency is relatively weak, with a cost-to-income ratio of 62% during 2018, compared with 50% or lower for most Nordic peers.

These strengths are balanced against BlueStep's reliance on wholesale funding in the form of RMBS. The BCA also reflects the bank's planned covered bond issuances in 2019. This will diversify its funding profile and allow the bank to gain access to the significant domestic covered bond investor base. BlueStep also sources deposits online (SEK 10.4 billion at year-end 2018, 65% of funding), and had outstanding RMBS (SEK 3.2 billion at end-2018), as well as a SEK 2 billion warehouse facility. BlueStep holds adequate liquid reserves of high quality assets rated Aaa, and cash at banks with a target of 19% of deposits.

LOSS GIVEN FAILURE ANALYSIS

BlueStep is subject to the EU Bank Recovery and Resolution Directive (BRRD), which Moody's consider to be an Operational Resolution Regime, and thereby the LGF analysis is applied. The LGF assessment is forward looking and incorporates a continued issuance of senior unsecured debt during the next 12 months.

The deposit ratings of Baa2 do not receive any uplift above the BCA of baa2 according to the LGF analysis due to the expected high loss given failure given the limited amounts of loss absorbing liabilities that would protect junior depositors in case of failure.

COUNTERPARTY RISK RATINGS

Counterparty Risk Ratings (CRR) are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities and also reflect the expected financial losses in the event that such liabilities are not honoured. BlueStep's CRRs are positioned at A3/Prime-2, incorporating two notches of uplift from the LGF analysis.

There is a considerable volume of loss absorbing liabilities junior to the CRR obligations. In this case the rating agency assumes a nominal amount of volume at failure, as Moody's is not able to accurately assess the volume of CRR liabilities at failure, nor the inherently more volatile nature of such liabilities as the bank approaches failure. This combination provides two notches of LGF uplift for the CRR from the bank's adjusted BCA of baa2.

COUNTERPARTY RISK ASSESSMENT

Counterparty Risk Assessments (CRA) 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.

BlueStep's CR Assessment is positioned at A2(cr)/Prime-1(cr), incorporating three notches of uplift from the LGF analysis.

The main difference with Moody's 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, assessment focuses purely on subordination and takes no account of the volume of the instrument class.

Owing to the small size of BlueStep's retail operations, Moody's assumes a low probability of government support for the bank, resulting in no uplift in any of its ratings or assessments.

FACTORS THAT COULD LEAD TO AN UPGRADE

» A funding profile geared toward covered bonds, together with a larger liquidity portfolio, could lead to a higher BCA, and thereby to a higher rating

» Larger amounts of loss absorbing liabilities protecting depositors in case of failure and resulting in lower expected losses could lead to higher ratings

FACTORS THAT COULD LEAD TO A DOWNGRADE

» A rapid increase in problem loans or an increased shares of unsecured lending in its portfolio

» A decline in capitalization and/or aggressive dividend policies

» A loss of pricing power, leading to lower income or other factors that could lead to lower profitability

» Reduced access to market funding

LIST OF AFFECTED RATINGS

Issuer: BlueStep Bank AB (publ)

..Assignments:

....Long-term Counterparty Risk Ratings, assigned A3

....Short-term Counterparty Risk Ratings, assigned P-2

....Long-term Bank Deposits, assigned Baa2 Stable

....Short-term Bank Deposits, assigned P-2

....Long-term Counterparty Risk Assessment, assigned A2(cr)

....Short-term Counterparty Risk Assessment, assigned P-1(cr)

....Baseline Credit Assessment, assigned baa2

....Adjusted Baseline Credit Assessment, assigned baa2

..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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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