S&P ups Danske but BRRD hits banks, covered RFC due

May 1st, 2014

S&P upgraded Danske and took rating actions on Swedish banks on Tuesday in connection with a raft of actions on European banks to reflect less assumed government support given new resolution frameworks, and also flagged plans to incorporate this into covered bond ratings.

The rating agency in total took rating actions on members of more than 80 European banks and banking groups domiciled in the EU, Switzerland, Norway and Lichtenstein. The rating actions came after Standard & Poor’s reviewed the potential for extraordinary government support for European banks in the face of regulators implementing reforms intended to avoid taxpayer bail-outs of banks.

“As a result of this review, we have revised the outlooks to negative on many systemically important banks in Europe because we believe that the likelihood of extraordinary government support for these banks is likely to become less predictable and certain,” said S&P.

DanskeApproval of the Bank Recovery & Resolution Directive (BRRD) by the European Parliament on 15 April was “a key milestone” in the emergence of resolution frameworks, according to S&P.

S&P’s review led to upgrades of only two banks, Danske Bank and Argenta Spaarbank, a Dutch issuer. Danske was upgraded by one notch, from A- to A, because S&P considers asset quality has improved, mainly in the bank’s Irish business.

“We consider that risks in Danske Bank’s Irish portfolio have decreased meaningfully and expect group losses to continue to decline, remaining well below our normalised loss level,” said S&P.

The rating agency therefore adjusted its view of Danske’s risk position from “moderate” to “adequate”, which led S&P to raise the bank’s long and short term ratings and to revise the standalone credit profile from bbb+ to a-.

The rating agency also cited improvements in Danske’s capital position and earnings generating capacity, noting that although earnings remain weaker than at its peers Danske is in its view likely to narrow that gap within the next two years.

Danske’s S&P counterparty credit ratings are on negative outlook because the rating agency may by the end of 2015 remove the uplift it assigns for expected government support (two notches in Danske’s case) and considers that this “may only be partially offset by an improvement in the bank’s standalone credit profile due to its strengthening capital and earnings”.

Expectations of less government support were also behind rating actions on nine Swedish banks, although these additionally reflected S&P’s view that the economic situation in the country has improved. The economic risk trend for Swedish banks is no longer negative but stable, according to S&P, due to receding economic imbalances and an improving overall economic climate in Europe.

S&P revised the outlook on Swedbank (rated A+) from stable to negative and maintained negative outlooks on the ratings of the other systemically important Swedish banks — Nordea Bank (AA-), SEB (A+), and Svenska Handelsbanken (AA-) —because it expects government support to fall over the next two years. The outlook is negative on SBAB (A) because S&P considers that the bank’s funding and liquidity profile needs to improve for the prevailing ratings. The change in economic risk trend led S&P to revise the outlook on Landshypotek (A) from negative to stable.

S&P on Tuesday also announced that it plans to revise its covered bond rating methodology to reflect the bail-in framework. It will consult on proposed new criteria, it said, following in the footsteps of Moody’s and Fitch.

“We are assessing the impact of market developments on covered bonds worldwide,” said the rating agency, “arising from, among other things, legislative changes, such as the new EU BRRD, and from the broader role of jurisdictional support.”

Florian Eichert, senior covered bond analyst at Crédit Agricole CIB, said that while the full implications of S&P’s plans are unclear, he expects extra uplift for covered bonds under certain conditions, which could offset any downgrades resulting from the pressure on issuer ratings.

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