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.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's Investors Service may have provided Ancillary or Other Permissible
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for the last rating action and the rating history.
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
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MD - Financial Institutions
Financial Institutions Group
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Gregory?Winans?Bauer
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Moody's takes rating actions on five Swedish banking groups; outlooks now stable