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Fitch Affirms Landshypotek at 'A+'; Outlook Stable
September 18, 2014 / 3:17 PM / 3 years ago

Fitch Affirms Landshypotek at 'A+'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, September 18 (Fitch) Fitch Ratings has affirmed Landshypotek Bank AB's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1' and Viability Rating (VR) at 'a+'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - VR, IDRS, AND SENIOR DEBT The affirmation reflects Landshypotek's excellent asset quality, solid risk weighted capital ratios, experienced management, modest profitability and niche franchise in the Swedish forestry and agriculture sector. The ratings also reflect the bank's monoline business model and geographical concentration, its relatively small size compared with similarly rated peers and its wholesale funding reliance. Landshypotek's excellent asset quality is a key rating driver. The level of impaired and non-performing loans has increased somewhat in recent years, reflecting the tougher trading environment for the bank's clients. Landshypotek has responded by strengthening its risk management framework, and Fitch expects this to improve the quality of the loan portfolio over time. Lending consists exclusively of collateralised loans to the domestic agriculture and forestry sector. The bank's underwriting policy is conservative and loan-to-value ratios are low, at around 40% on average. Landshypotek's risk-weighted capital ratios are solid and compare well with those of domestic and international peers, although they are boosted by low risk weights. Leverage, defined as tangible equity/tangible assets, is modest in a European context, at around 5%. Landshypotek is largely wholesale funded, mainly through covered bonds. This makes the bank sensitive to a prolonged dislocation in the debt capital markets, but Fitch expects continued good market access and that the bank will maintain sound liquidity. Fitch expects deposits to represent a growing share of the bank's funding. The bank aims to be 20% deposit-funded within five years, having obtained a banking license in 2012. Fitch expects Landshypotek to continue to generate moderate but stable profitability. This is in line with its cooperative status and its main objective of providing low-cost, low-risk loans to its members, rather than to maximise profit. Net interest income makes up the bulk of the bank's operating income, and the bank benefits from operational efficiency. Loan impairment charges are very low. Landshypotek has a leading market position in the Swedish forestry and agriculture sectors. It has a management team that is experienced in the industry it operates. It is vulnerable to losing key staff although historical turnover is low. Its mutual structure encourages strong customer loyalty. Forestry represents Sweden's largest export industry and agriculture property values have been stable in recent years. The ratings of Landshypotek's senior unsecured debt are aligned with those of its IDRs. Despite the bank's high usage of covered bonds and, consequently, high balance sheet encumbrance, Fitch has not notched down for structural subordination due to the inherent difficulty of accurately assessing recoveries in a liquidation scenario for highly rated entities. RATING SENSITIVITIES - VR, IDRS, AND SENIOR DEBT The Stable Outlook on Landshypotek's Long-term IDR reflects Fitch's view that a rating change is currently not expected. Negative rating pressure would arise if Landshypotek was unable to address its weakening asset quality within a reasonable timeframe. This would include a failure to reduce its stock of non-performing loans that are not considered impaired, although these have not traditionally resulted in significant need for impairments. A downgrade could also result from a prolonged dislocation in funding markets, reducing Landshypotek's access to funding or materially increasing pricing. An upgrade is unlikely, given the limited franchise, small size of capital for the rating and significant reliance on debt capital markets for structural funding. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's expectation of a moderate probability of support from the Swedish authorities if required. This is driven by the systemic importance of the covered bond market and the agricultural and forestry sectors in Sweden. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. As an EU member country, Sweden is subject to the requirements of Bank Recovery and Resolution Directive (BRRD). However, the country was notable in its desire for flexibility in the application of BRRD, in part because of 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. For this reason, prudential requirements for its banks are high. In maintaining control over supervision and resolution decisions, Sweden has more flexibility to interpret and apply BRRD than Banking Union member countries, for example. However, Sweden is bound by EU State Aid rules, meaning it does not have full control over support decisions. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are primarily sensitive to the progress made in implementing a resolution regime in Sweden. As outlined in the report 'Sovereign Support for Banks: Rating Path Expectations' dated 27 March 2014, Fitch expects to downgrade Landshypotek's Support Rating and revise down the Support Rating Floor to '5' and 'No Floor', respectively, within the rating horizon. While Sweden will most likely adopt a flexible approach in the application of BRRD, Fitch believes that future support for Landshypotek from the authorities cannot be relied upon, given the limited systemic importance of Landshypotek to the Swedish banking system. The rating actions are as follows: Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured debt: affirmed at 'A+'/'F1' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Fitch France S.A.S. 60 Rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Cristina Torrella Senior Director +34 93 323 8405 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here 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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