Stockholm, February 13, 2020 -- Moody's Investors Service, ("Moody's") today
upgraded BlueStep Bank AB (publ)'s (BlueStep) long-term deposit
ratings to Baa1 from Baa2, and the long- and short-term
Counterparty Risk Ratings (CRR) to A2/P-1 from A3/P-2.
Moody's affirmed the Baseline Credit Assessment (BCA) and Adjusted
BCA at baa2, the Counterparty Risk Assessments (CRA) of A2(cr)/P-1(cr),
and the short-term deposit ratings of P-2. Moody's
changed the outlook on the long-term deposit ratings to positive
from stable.
The upgrade in the deposit ratings and CRR reflects the increased buffers
of loss absorbing liabilities protecting creditors in case of failure
following the issuance of SEK 2 billion of debt since December 2018.
The increased volume of loss absorbing liabilities protecting creditors
in case of failure have reduced the level of expected losses for junior
depositors, and unsecured counterparties.
The positive outlook reflects Moody's view that the current volume
of deposits and senior unsecured debt could result in an upgrade in the
long-term deposit ratings if maintained over the medium term amid
BlueStep's evolving funding profile.
A full list of ratings can be found at the end of this press release.
RATINGS RATIONALE
BASELINE CREDIT ASSESSMENT
The affirmation of the BCA reflects BlueStep's continued strong
capitalisation, with tangible common equity to risk weighted assets
of 18.6% at the end of June, and the strong recurring
profitability, with net income to tangible assets at 1.1%
for the first six months of 2019, a slight improvement from 0.9%
for the year 2018. This is balanced against the higher risk compared
to other Swedish and Norwegian mortgage lenders, due to BlueStep's
focus on borrowers with weaker repayment capacity, and the evolving
funding profile of the bank with higher reliance on shorter maturity senior
unsecured debt and first-time issuances of covered bonds.
BlueStep's problem loans to gross loans ratio remains low,
at 1.8%, and loan loss provisions to pre-provision
income at 17.4% during the first six months 2019 remains
lower than the Euro area average of rated banks at 23.3%.
This is a consequence of prudent underwriting standards in Nordic banks
overall, and the social safety nets available, allowing borrowers
to continue servicing their mortgage even in the event of unemployment.
The funding profile of the bank is evolving towards senior unsecured and
covered bonds, away from Residential Mortgage Backed Securities
(RMBS) and warehouse facilities. While Moody's typically
views Swedish covered bonds, which the bank aims to issue during
2020, as a stable source of funding, BlueStep is the first
covered bond issuer within the non-conforming segment, and
the liquidity of these instruments remains to be tested. Furthermore,
the large volumes of senior debt that the bank issued during 2019 have
short maturities of two and three years and have high refinancing risks.
LOSS GIVEN FAILURE ANALYSIS
The Baa1 long-term deposit ratings include one positive notch of
uplift above the Adjusted BCA, following the application of Moody's
advanced LGF analysis, previously none, and three notches,
previously two, for the A2 CRR.
The increased notching reflects the bigger buffers of loss absorbing liabilities
protecting creditors in case of failure. During 2019, BlueStep
issued SEK 1.8 billion of senior unsecured debt, in addition
to the SEK 200 million issued in late December 2018, leading to
significantly increased volumes of loss absorbing liabilities protecting
junior depositors and counterparties with unsecured claims in case of
failure.
As a result of the significant 2019 debt issuance Moody's LGF analysis
now indicates an a3 preliminary rating assessment for deposits.
However, the Baa1 long-term deposits rating considers that
the liability structure of BlueStep is continuing to undergo changes and
reflects an expectation of future volatility in the amounts of loss absorbing
obligations as the balance sheet continues to grow.
The CRA adjustment remains at three notches above the Adjusted BCA,
the maximum number of positive adjustments possible according to the LGF,
resulting in the affirmation of CRA at A2(cr)/P-1(cr).
Factors That Could Lead to an Upgrade/Downgrade
Factors that could lead to an upgrade include: 1) additional issuance
of senior unsecured debt or growth in deposits; or 2) a shift toward
lower risk customers alongside a demonstrated improvement in loan loss
performance; and 3) a slower pace of loan growth combined with continued
strong capitalisation.
Factors that could lead to a downgrade include: 1) rapid increase
in problem loans; 2) a decline in capitalisation; 3) a loss
of pricing power, leading to lower income or decline in profitability;
4) reduced access to market funding or failure to issue volumes of covered
bonds. Furthermore, lower buffers of loss absorbing obligations,
protecting depositors or counterparties in case of failure, could
lead to a downgrade.
OUTLOOK
The positive outlook on the deposit ratings reflects Moody's view
should the bank maintain or grow the volume of unsecured liabilities as
share of its liabilities this would result in an additional notch of uplift,
while the BCA remains at baa2.
LIST OF AFFECTED RATINGS
..Issuer: BlueStep Bank AB (publ)
Upgrades:
.... Long-term Counterparty Risk Ratings,
Upgraded to A2 from A3
.... Short-term Counterparty Risk Ratings,
Upgraded P-1 from P-2
.... Long-term Bank Deposit Ratings,
Upgraded to Baa1 from Baa2, Outlook Changed to Positive from Stable
Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... Long-term Counterparty Risk Assessment,
Affirmed A2(cr)
.... Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
.... Short-term Bank Deposit Ratings,
Affirmed P-2
Outlook Action:
....Outlook Changed to Positive from Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in November 2019. 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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
