Moody’s lowers LF Bank to A3

Moody’s downgraded Länsförsäkringar Bank’s debt and deposit ratings from A2 to A3, on stable outlook, yesterday (Wednesday), citing relatively light capitalisation at the bank level, high growth rates in recent years, and market funding reliance.

In a separate release, the rating agency affirmed the A3 rating of Länsförsäkringar AB, the entity through which the Länsförsäkringar alliance would extend any support to LF Bank, noted Moody’s. The rating of Länsförsäkringar AB was revised from negative to stable.

Moody’s said that LF Bank’s capital levels are “relatively light”, even after factoring in a capital increase in the first quarter of 2013, through a shareholder contribution, that raised Tier 1 capital to 8.1% (on a Basel II basis with transitional floors) at end-March 2013, and the bank’s less aggressive stance on its risk weights than many of its larger Swedish peers. It said this results from the alliance’s policy of providing small, regular capital injections to meet any increased need, whilst keeping absolute capital levels at the lower end of its peer group.

“As a result, in Moody’s scenario testing, the bank looks, relatively weakly capitalised on a standalone basis, although the regular injections are factored into the support from the Alliance in LF Bank’s LT ratings,” it said.

Moody’s also highlighted rapid loan growth, with an average total loan portfolio growth rate of over 18% over the last four years, and a rate of 33% for the higher risk agricultural sector. The rating agency said that such growth has often preceded higher problem loan levels. However, it noted that a high proportion of LF Bank’s agricultural portfolio is secured and done in a way so that volumes can increase without a significant increase in risk.

Market funding of 60% of LF Bank’s total funds, of which nearly 80% is covered bonds, is down from a peak of 70% in 2010-2011, but Moody’s said it remains high, leaving the bank exposed to any changes in investor confidence. It nevertheless noted positively the bank’s liquidity position. It added that the transfer of nearly all first lien retail mortgages to LF’s cover pool means the remaining pool of assets is of a lower average quality, resulting in the structural subordination of senior creditors, including depositors.