May 26, 2016 / 1:42 PM / in a year

Fitch Upgrades Svenska Handelsbanken to 'AA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has upgraded Svenska Handelsbanken AB's (Handelsbanken) Long-Term Issuer Default Rating (IDR) to 'AA' from 'AA-', Viability Rating (VR) to 'aa' from 'aa-', and affirmed the Short-Term IDR at 'F1+'. The Outlook on the Long-Term IDR is Stable. Fitch has also upgraded the Long-Term IDR of Handelsbanken's wholly-owned subsidiary Stadshypotek to 'AA' from 'AA-'. A full list of rating actions is available at the end of this rating action commentary. The rating actions are part of a periodic portfolio review of major Swedish banking groups rated by Fitch. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The upgrade reflects Handelsbanken's through-the-cycle resilient financial metrics, which compare well to other highly rated international banks rated by Fitch. The bank's financial profile is underpinned by its highly successful and traditional business model that focuses on stable long-term strategic objectives. Fitch expects Handelsbanken's strong earnings and profitability to remain healthy, driven by robust income generation, good cost efficiency and low loan impairment charges (LICs). The Swedish operations are the largest profit generator, with an increasing contribution from other home markets, particularly the UK. Its financial track record compares well with other highly rated global banks, particularly its low and stable LICs through the cycle. Asset quality is supported by the bank's low risk appetite and strong risk controls. It has significant exposures to property management, although Fitch believes they are of good quality, underpinned by cash flow focused underwriting standards, and lending mainly to large, financially strong companies. A large part of the UK loan book is relatively unseasoned, but Fitch expects this portfolio to remain sound. Handelsbanken's risk-weighted capital ratios compare well with peers, with a Fitch core capital/risk exposure amount ratio of 25.1% at end-March 2016. Leverage is less outstanding, and its fully loaded Basel III leverage ratio of 4.4% at end-2015 is more in line with peers. Handelsbanken's capital base is fairly small compared with international banks rated in the 'aa' category, although we believe this is offset by its low risk appetite and strong asset quality. Wholesale funding is an important funding tool for Nordic banks, and Handelsbanken is no exception, making strong liquidity management key for the ratings. It has a fairly sizeable portion of short-term wholesale debt, although this is largely matched by cash deposits with central banks. The domestic loan book is funded by local deposits and Swedish covered bonds, which Fitch views as a stable source of funding, and benefits from a captive investor base. Handelsbanken also uses international bond markets for diversification and for its non-domestic lending. Fitch expects uninterrupted access to the debt capital markets supported by a strong and geographically diversified funding platform. Fitch has assigned a common VR to Stadshypotek (Handelsbanken's mortgage lending subsidiary) as a result of its large size (almost half of group assets) and its close integration in Handelsbanken, meaning their credit profiles cannot be meaningfully disentangled. SUPPORT RATING AND SUPPORT RATING FLOOR Handelsbanken's and Stadshypotek's '2' Support Ratings (SRs) and 'BBB-' Support Rating Floors (SRFs) reflect Fitch's expectation that support from the Swedish authorities remains highly likely in case of need. Sweden has been the leading EU advocate of flexibility, partly due to its experience of cleaning up banks in its 1990s crisis, but also because it has a concentrated, largely homogenous banking sector that relies on attracting international and foreign currency funding. The banking sector's wholesale funding reliance, with a material interconnectedness between the banks, means faltering investor confidence could spill over to the whole sector. For this reason, prudential requirements for its banks are very high. In maintaining control over supervision and resolution decisions, Sweden has more flexibility to interpret and apply the EU's Bank Recovery and Resolution Directive (BRRD) than Banking Union member countries. While Sweden is likely to retain a high propensity to support its major banks to safeguard financial stability in light of the concentrated structure, it is bound by EU state aid rules, meaning it does not have full control over support decisions. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated, hybrid Tier 1 and Additional Tier 1 debt issued by Handelsbanken is notched off the bank's VR. In accordance with Fitch's criteria, subordinated debt is rated one notch below Handelsbanken's VR to reflect the above-average loss severity of this type of debt. Hybrid Tier 1 and Additional Tier 1 securities are rated four and five notches, respectively, below Handelsbanken's VR to reflect the higher loss severity risk of these securities relative to average recoveries (two notches from the VR) as well as high risk of non-performance (an additional two and three notches, respectively). RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Stable Outlooks on Handelsbanken's and its main subsidiary Stadshypotek's Long-term IDRs reflect Fitch's expectation that the group will continue to operate a conservative business model and maintain strong financial metrics through the cycle. Worsened investor perception, particularly if driven by concerns about the Swedish housing market, could affect long-term access and/or pricing of debt issuance and be rating negative. Fitch does not believe this is a likely scenario. A negative fall-out from a significant house price correction in Sweden could affect the wider economy. We believe Handelsbanken could withstand a material correction without large retail loan losses, and that losses from its corporate exposures - driven by lower consumption - would be manageable. An upgrade is unlikely in light of the bank's already high ratings. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SRs and upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. The SRs and SRFs are also sensitive to the implementation of minimum own funds and eligible liabilities (MREL) in Sweden. In particular, while the Swedish resolution authority appear to promote part of eligible liabilities being debt securities, the status of these securities will be important to the SR. This is particularly the case as 20% of risk-weighted assets (or 8% of liabilities) need to be bailed-in before any public funds can be used, and this is after the point of non-viability is reached. Should these MREL buffers be in the form of senior debt, ie requiring the bail-in of senior unsecured creditors before support can be considered, Fitch is likely to downgrade the SRs to '5' and revise the SRFs to 'No Floor'. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by Handelsbanken are all notched down from Handelsbanken's VR. Their ratings have been upgraded and are therefore broadly sensitive to the same considerations that affect the bank's VR. Additional Tier 1 securities are also sensitive to Fitch changing its assessment of the probability of their non-performance risk relative to the risk captured in Handelsbanken's VR. The rating actions are as follows: Svenska Handelsbanken: Long-term IDR: upgraded to 'AA' from 'AA-'; Stable Outlook Short-term IDR: affirmed at 'F1+' Viability Rating: upgraded to 'aa' from 'aa-' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt: upgraded to 'AA/F1+' from 'AA-/F1+' Subordinated debt: upgraded to 'AA-' from 'A+' Hybrid debt: upgraded to 'A-' from 'BBB+' Additional Tier 1 instruments: upgraded to 'BBB+' from 'BBB' Stadshypotek: Long-term IDR: upgraded to 'AA' from 'AA-'; Stable Outlook Short-term IDR: affirmed at 'F1+' Viability Rating: assigned at 'aa' Support Rating: downgraded to '2' from '1' Support Rating Floor: assigned at 'BBB-' Svenska Handelsbanken Inc.: US commercial paper: affirmed at 'F1+' Contact: Primary Analyst Jens Hallen Senior Director +44 20 3530 1326 Fitch Rating Limited 30 North Colonnade London E14 5GN Secondary Analyst Bjorn Norrman Senior Director +44 20 3530 1330 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 299 174 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1005148 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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