S&P frowns upon Danes, Swedes, but Swedbank, Jyske escape negativity

Danish banks’ funding profiles are a weakness and the Swedish banking system shows a structural mismatch of assets and liabilities, Standard & Poor’s said in July in the context of a range of rating actions on banks and their debt in these jurisdictions.

Although there were no downgrades or upgrades, S&P’s biggest move was to put Svenska Handelsbanken (AA-) and SBAB Bank (A) on CreditWatch negative. The outlook on Swedbank’s rating (A+) was revised from negative to stable. Nordea Bank and SEB had their ratings affirmed, at AA- and A+, respectively, on negative outlook.

In Denmark, S&P lowered the outlooks on four banks’ ratings: Danske Bank’s and DLR Kredit’s went from positive to stable, while Nykredit Realkredit’s and BRFkredit’s were revised from stable to negative. Jyske Bank had its outlook affirmed, at stable.

The rating agency also changed the outlooks on senior secured issuance, or Section 15e bonds, of BRFkredit, DLR Kredit, Nykredit Realkredit and Realkredit Danmark.

With respect to Sweden, S&P said that the country’s banking system shows a high share of wholesale and net external funding, and a structural mismatch of assets and liabilities, and that this makes it more confidence-sensitive than most European and global banking systems.

However, S&P said that some of the funding risks facing Swedish banks are mitigated by government support and the domestic covered bond market.

“In our view, Swedish banks’ high use of secured debt is structural and not a reflection of increasing funding risks or diminishing market access, as we have seen in other markets,” it said. “We believe it demonstrates the effect of strong social cohesion in Sweden and implicit system support from authorities.

“Nevertheless, increasing levels of asset encumbrance could create additional funding risks.”

Many of Sweden’s large banks have improved their capital and earnings, added S&P, which expects the banking sector to “continue to demonstrate strong earnings, low credit losses, and high cost efficiency, despite the underlying risks in the market”.

S&P said that it placed Svenska Handelsbanken and SBAB on negative review because of concerns about the banks’ use of short term wholesale funding, with their efforts to better match assets and liabilities lagging those of international and domestic peers.

The outlook on Swedbank’s rating was improved because its capitalisation is improving.

“We believe Swedbank will maintain a relative advantage versus peers in terms of capital and earnings, funding, and liquidity,” said S&P.

With respect to Denmark, the rating agency said that it no longer has a more positive view of banking regulation there relative to other European Union countries, and that potential changes to Denmark’s regulatory framework could mean reduced government support and lower state involvement in the banking sector.

“In addition, we regard Danish banks’ funding profiles as a weakness,” it said, “mainly due to large maturity mismatches between assets and liabilities and their reliance on wholesale funding.

“These factors set Denmark’s banking sector apart from most banking markets within the EU, where mismatches are lower.”

A “well-developed and resilient” bond market, which remained open and functioning through to 2008 and 2009 crisis, partly offsets this weakness, said S&P, but “this relative success is not a sign of structural strength, but rather an effect of favourable cyclical factors”.

These considerations led the rating agency to revise the outlooks on Danske Bank (A-) and DLR Kredit (BBB+) to stable from positive, and the outlooks on Nykredit Realkredit (A+) and BRFkredit (A-) to negative from stable.

“The negative outlooks on Nykredit Realkredit and BRFkredit reflect the possibility of downgrades over the short term should there be no material improvement in the banks’ funding profiles, either stemming from their own initiatives or regulatory changes,” said S&P. “This could lead us to lower our ratings on Nykredit Realkredit and BRFkredit by one notch.

“In such a scenario, we would likely affirm the ratings on Danske Bank and DLR Kredit because other factors could offset the impact of a weaker assessment of funding and liquidity.”

The outlook on Jyske Bank’s rating (A-) was kept at stable because in S&P’s opinion “its funding profile remains superior to that of other Danish banks”.