Moody's takes rating actions on five Swedish banking groups; outlooks now stable

Actions conclude 15 February 2012 review announcement

London, 24 May 2012 -- Moody's Investors Service has today downgraded the long-term debt and deposit ratings for two Swedish banking groups by one notch, one institution by two notches, and confirmed the ratings for two other groups.

Specifically, the debt and deposit ratings for Nordea Bank AB, (Nordea, deposit rating Aa3, bank financial strength rating (BFSR) C / baseline credit assessment (BCA) a3) were downgraded by one notch. Moody's also downgraded by one notch the ratings for Svenska Handelsbanken AB (Handelsbanken, deposits Aa3, BFSR C / BCA a3). The debt and deposit ratings for specialised agricultural lender Landshypotek AB (deposits Baa2, BFSR C- / BCA baa2) declined by two notches.

In contrast, Moody's confirmed the debt and deposit ratings for SEB (deposits A1, BFSR C- / BCA baa1), as well as those for Swedbank AB (deposits A2, BFSR C- / BCA baa2).

All ratings for these groups now carry stable outlooks.

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142301 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

For additional information on bank ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/bankratings2012.

RATINGS RATIONALE

Today's actions reflect, to varying extents for each group, the following key drivers:

1.) Comparatively high reliance on wholesale funding, which Moody's regards as less reliable under a severe stress scenario, although Moody's acknowledges the relatively good capital markets access for most Swedish banks despite difficult market conditions in recent years;

2.) Modest profitability, driven by price competition for retail loans in a low interest rate environment and increasing funding costs. The resulting low profit margins would make it challenging for Swedish banks to rebuild capital in the event of unexpected losses; and

3.) Risks to asset quality, despite robust performance to date, given (i) the EU export-oriented Swedish economy and therefore corporate borrowers are exposed to weakness in Europe, and (ii) banks' large, mostly variable-rate mortgage books are vulnerable to credit deterioration in the event of rising interest rates.

Additional, bank-specific rating drivers are detailed below.

Moody's notes that several mitigating issues have limited the magnitude of today's downgrades and led to rating confirmations for two banks. Specifically, Moody's recognises that the Swedish economy has so far performed well compared with other EU economies, and Swedish banks have been able to attract market funding on economic terms from international investors. Furthermore, Swedish banks have strengthened their capitalisation since 2008.

RATING OUTLOOKS ARE STABLE

Moody's has changed the rating outlooks to stable for the banks affected by today's actions. The revised rating levels reflect currently-foreseen risks and the ratings are expected to be resilient to a degree of further stress. The stable outlooks reflect the relatively resilient domestic operating environment, the strong domestic demand for the banks' market funding, their stable earnings and relatively sound capitalisation levels.

RATINGS FOR SWEDISH BANKS ARE HIGHER THAN FOR MANY EUROPEAN PEERS

The (asset-weighted) average deposit ratings of just below Aa3 and average standalone credit assessments of just below a3 for Swedish banks are now at the higher end of the range across large Western European banking systems. This relative positioning reflects Moody's view that Swedish banks are overall in a stronger position than their European peers to manage the credit risks emanating from the challenging European operating environment, limiting the extent and scope of today's rating actions. Five rated Swedish credit institutions were not included in the review, because in Moody's view their existing ratings already reflect the currently-foreseen risks to creditors.

TODAY'S RATING ACTIONS CONCLUDE REVIEWS ANNOUNCED ON 15 FEBRUARY 2012

Today's actions follow Moody's decision to review for downgrade the ratings for 114 European financial institutions, including Swedish banks (see "Moody's reviews Ratings for European Banks", 15 February 2012 (http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914).

Moody's has published a special comment today titled "Key Drivers of Swedish Bank Rating Actions," (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142124) which provides more detail on the rationales for these rating actions.

RATINGS RATIONALE -- STANDALONE CREDIT STRENGTH

Today's downgrades of the debt and deposit ratings for Nordea, Handelsbanken and Landshypotek reflect concurrent downgrades of their standalone credit assessments. Accordingly, the rating confirmations for SEB and Swedbank reflect confirmations of their standalone credit assessments.

All five groups are affected, to varying degrees, by the key adverse drivers and mitigating factors listed above. On balance, these factors have reduced the standalone credit strengths of the three groups whose ratings were downgraded today. In contrast, the impact is not sufficient to lower the standalone credit assessments and debt and deposit ratings for the two other groups.

- FIRST ADVERSE DRIVER -- RELIANCE ON WHOLESALE FUNDING

Swedish banks rely to a significant extent on wholesale market funds. Moody's views market funds as less stable than retail-sourced funding, given their inherent confidence-sensitivity and the potential for sharp swings in the availability and cost of such funds. More than half of the largest banks' funding stems from capital markets. This reliance on potentially volatile funding sources is a primary reason behind today's rating downgrades for Nordea and Handelsbanken who nevertheless still rank among the highest-rated European banks. It is also a key driver, along with a concentrated asset portfolio, behind the ratings downgrade for Landshypotek which is almost entirely wholesale-funded.

Moody's recognises, however, two mitigating factors that limit its concerns about Swedish banks' wholesale funding reliance. First, these banks have remained successful in accessing capital markets on economic terms so far. Second, Moody's believes that Swedish covered bonds, an important funding source for Swedish banks, are less volatile than, for example, short-term unsecured market funds, due to the market's long track record and a strong domestic investor base with few asset alternatives.

Importantly, compared to other covered bond markets, particularly Denmark, the maturities of Swedish covered bonds largely match those of the assets they fund, minimising refinancing risk. Moreover, the structure of the Swedish covered bond market has been stable for some time. And while Swedish house prices have risen steadily over a long period, Moody's notes the absence of a significant buy-to-let or speculative investor segment, as seen in other countries.

- SECOND ADVERSE DRIVER -- MODEST PROFITABILITY

Compared with most other large European banks, the Swedish banks continue to show low profit margins, reflecting the relatively large portion of retail lending backed by property. Net interest margins have narrowed in 2009-10, reflecting the low interest-rate environment, increasing funding costs and fierce competition for retail lending. At the same time, Moody's recognises that Swedish banks have returned to pre-crisis net profit levels in 2011, reflecting a relatively benign domestic operating environment and very low loan loss provisions. First-quarter 2012 results showed a continuing positive trend.

- THIRD ADVERSE DRIVER -- RISKS TO ASSET QUALITY

Problem loan levels of Swedish banks have remained low throughout the crisis -- except for some increases related to Baltic exposures in 2009-10 at Swedbank and SEB in particular. Nevertheless, Moody's sees potential risks to asset quality going forward. About 50% of Swedish housing credit institutions' total customer loans carry variable rates, which leads to low payments in the current low interest-rate environment, but leaves borrowers susceptible to higher rates. Moreover, Sweden's open economy is exposed to weakness at its trading partners, including in Europe, which may affect bank asset quality.

- MITIGATING FACTORS -- RELATIVELY STABLE ECONOMIC ENVIRONMENT

Moody's considers the recent strong performance of the Swedish economy to be an important factor supporting Swedish banks and their creditors. Overall, the operating environment for Swedish banks is much more favourable than for many other European countries. Sweden's economy rebounded in 2010 and 2011, and Moody's expects sluggish, but still positive, economic growth for 2012. Moreover, the Baltic economies, to which several Swedish banks have meaningful exposures, have been recovering from deep recessions, although the recent uptrend remains fragile. In addition, Swedish banks have increased their capital resources in recent years. Combined with the comparatively favourable domestic operating environment, these increased buffers enable Swedish banks to better absorb potential losses. These considerations have limited the extent and scope of today's downgrades, and they are reflected in the current rating levels and stable outlooks.

RATINGS RATIONALE -- LONG- AND SHORT-TERM DEBT & DEPOSIT RATINGS

Moody's ratings for banks reflect their standalone strength (described above) and assumptions about external support. Moody's has not changed its assumptions about government (or systemic) support, and the four main banks' (Nordea, Handelsbanken, SEB and Swedbank) deposit ratings continue to be positioned three notches above their standalone credit assessments. The ratings for Landshypotek do not incorporate any systemic-support-driven uplift, given its specialized franchise and lower involvement in the national payment system.

RATINGS RATIONALE -- SUBORDINATED DEBT AND HYBRID RATINGS

In addition to the above-described rating actions, Moody's has today downgraded the subordinated debt ratings of four Swedish banks by up to four notches, following the removal of systemic support for these securities and, in the case of Nordea and Handelsbanken, the one- notch reduction of their standalone credit assessments. The removal of support for this debt class reflects Moody's view that in Sweden, systemic support for subordinated debt is no longer sufficiently predictable and reliable to warrant incorporating uplift into Moody's ratings. (For more detail, see 29 November 2011 announcement "Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade" - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).

In addition, Moody's downgraded the junior subordinated debt ratings of four Swedish banks by up to two notches, reflecting the securities' junior rank compared with subordinated debt and, in the case of Nordea and Handelsbanken, the one notch reduction in standalone credit assessments.

Non-cumulative Tier 1 securities' ratings at Nordea and Handelsbanken were downgraded by one notch, following the downgrade of these bank's standalone credit assessments, as these securities are notched down from the banks' standalone credit assessments.

Nordea Bank Finland's subordinated and junior subordinated debt ratings were also downgraded by four and three notches, respectively, which places them in line with those of its parent.

WHAT COULD MOVE THE RATINGS UP/DOWN

Rating upgrades are unlikely in the near future for banks affected by today's actions, for the reasons cited above. A limited amount of upward rating momentum could develop for some banks if a bank substantially improves its credit profile and resilience to the prevailing conditions. This may occur through increased standalone strength, e.g. bolstered capital and liquidity buffers, work-out of asset quality challenges or improved earnings. Improved credit strength could also result from external support, such as a change in ownership or improved systemic support.

While the current rating levels and outlooks incorporate a degree of expected further deterioration, ratings may decline further if (i) operating conditions worsen beyond current expectations, notably if Sweden's sovereign creditworthiness and economic environment encounter material negative pressure, leading to asset quality deterioration exceeding current expectations, and (ii) Swedish bank's market funding access, via covered bonds or wholesale markets, experiences a significant decline.

RESEARCH REFERENCES

For further detail please refer to:

- List of Affected Issuers (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142301), 24 May 2012

- Special Comment: Key Drivers of Swedish Bank Rating Actions, 24 May 2012

- Press Release: Moody's Reviews Ratings for European Banks, 15 Feb 2012

- Special Comment: How Sovereign Credit Quality May Affect Other Ratings, 13 Feb 2012.

- Special Comment: Euro Area Debt Crisis Weakens Bank Credit Profiles, 19 Jan 2012

- Special Comment: European Banks: How Moody's Analytic Approach Reflects Evolving Challenges, 19 Jan 2012

Moody's webpages with additional information:

- http://www.moodys.com/bankratings2012

- http://www.moodys.com/eusovereign

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology, published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology, published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

BANK-SPECIFIC RATING CONSIDERATIONS

HANDELSBANKEN

The risks related to its reliance on market funding are the main reason for our rating action on Handelsbanken, with only 35% of Handelsbanken's funding coming from customer deposits. However, the ratings are supported by the bank's strong position in the Swedish market (70% of lending and 80% of profit) and its very strong asset quality metrics, which reflect the bank's conservative risk management practices in our view. In addition, the good resilience of its earnings during the crisis compared to many of its European peers, primarily driven by net interest income (over 70% of operating income), is also a positive rating factor. More negatively, we note some concentration towards the property management sector (25% of loans), which we view as susceptible to a decline in commercial property prices or rental rates.

NORDEA

Nordea is also dependent on market funding, and this is one of the main reasons for our rating action. However, we see its unique business model as a truly pan-Nordic institution as a positive rating driver; we believe the bank's strong foothold in Sweden, Denmark, Finland and Norway supports (i) its profitability due to its pricing power in all four markets, (ii) its liquidity, particularly in regards to the covered bond platform it has established in each market and (iii) its ability to manage risk as this is done centrally. It also gives some degree of diversification, though we note that the operating environment in Denmark has been more challenging than that in other Nordic countries. We also continue to view Nordea's involvement in real estate and shipping as a potential vulnerability in terms of future asset quality.

We acknowledge that Nordea is run as a group rather than according to legal entities and that liquidity and capital are managed centrally, but see some differences in the standalone financial strengths of the three subsidiaries:

- Nordea Bank Finland's (NBF) standalone assessment of C (a3) primarily reflects its relatively strong liquidity position underpinned by a strong deposit base and sizeable liquidity buffer and its strong capital level, the highest in the Nordea Group. It is however constrained by the substantial size of the derivative book as Nordea's capital market activities are booked on NBF's balance sheet. While we take comfort from the fact that counterparty risk is mitigated by closeout netting and collateral agreements, we typically regard involvement in such activities as a source of volatility.

- Nordea Bank Norge's (NBN) standalone assessment of C-(baa1) is supported by the subsidiary's good asset quality, reflecting its retail-focus and the more supportive operating environment in Norway although we see potential for deterioration in the shipping book. The main negative rating driver in our view is NBN's reliance on group funding despite its sizeable deposit book, although we expect this reliance will be reduced as covered bond issuances increase.

- Nordea Bank Danmark's (NBD) standalone assessment of C-(baa1) is underpinned by its retail focus and the sizeable portion of its funding in the form of deposits and mostly matched-funded Danish covered bonds. However, the operating environment in Denmark is less favourable, especially in certain sectors such as agriculture and small and medium-sized enterprises, and as a result its asset quality metrics lag behind those of the Group. In addition, its Tier 1 ratio is low, compared to the overall Group. NBD's deposit rating is one notch below the other rated entities in the Nordea Group, reflecting our view that systemic support is less likely in the context of Bank Package III.

SEB

Despite also relying on market funding to a large extent, SEB's A1/C-(baa1) ratings are underpinned by sizeable improvements in the bank's profitability and asset quality metrics reflecting SEB's successful management of its problematic Baltic exposures, which is reflected in the consistent reduction in Baltic problem loans since YE2009. Other important rating drivers mitigating the bank's reliance on market funding are SEB's efforts to lengthen the maturity profile of its funding, an increasing share of deposit funding, and improved liquidity buffers. In addition, SEB's capital level is among the strongest across its Nordic peers.

- SEB AG's Baa1/D+(ba1) ratings continue to incorporate the bank's modest profitability and the risks arising from its loan book concentration toward commercial real estate and the uncertainties regarding the success of its strategy to focus on commercial business. Due to its strong integration in the SEB group, we believe there is a very high probability of Group support.

SWEDBANK

Similar to its peers, Swedbank's usage of market funds is high. Nevertheless, Swedbank's A2/C-(baa2) ratings also reflect the substantial and continuing improvements in the bank's financial fundamentals, particularly liquidity metrics which improved due to lengthened funding maturities and increased liquidity reserves. Swedbank has also undergone a change of management, strengthened its corporate governance and has undertaken various measures to clean up its troubled Baltic and CIS operations. The rating action also captures Moody's view that a sizeable portion of Swedbank's loans relate to its retail mortgage business which is mainly funded by covered bonds.

- Swedbank Mortgage's A2 issuer and senior debt ratings mirror those of its parent Swedbank AB as it benefits from a full, irrevocable and unconditional guarantee on all its senior and covered bond obligations. We also note its high degree of operational and strategic integration within the Swedbank Group.

LANDSHYPOTEK

Landshypotek's ratings of Baa2/C-(baa2) primarily reflect our view that the bank's focus on a single business line and heavy reliance on market funds, almost entirely in the form of domestic covered bonds, makes it particularly vulnerable to deterioration in its operating environment or disruption in capital markets. Even though the Sweden covered bond market has been reliable so far, we see Landshypotek's reliance on a unique source of funding combined with its exposure to a single asset class, agricultural mortgages, as a major negative rating driver and believe the institution is less well prepared to withstand external shocks than some of its peers with more diversified business model.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

The ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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