Swedish Export Credit Corporation

Transcription

1 CREDIT OPINION 1 January 19 Swedish Export Credit Corporation Update to credit analysis Update Summary RATINGS Swedish Export Credit Corporation Domicile Sweden Long Term CRR Type LT Counterparty Risk Rating - Fgn Curr Outlook Not Assigned Long Term Debt Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Not Assigned Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Swedish Export Credit Corporation's (SEK) long-term senior unsecured ratings of, with stable outlook, benefits from a two-notch uplift from the agency's a1 Baseline Credit Assessment (BCA) based on our Advanced Loss Given Failure (LGF) analysis given the sizeable cushion of bail-in eligible liabilities. We also assign one notch uplift to SEK s senior unsecured, dated subordinate and junior subordinate ratings to reflect government support. The agency's short-term commercial paper ratings is Prime and other short-term (P)Prime, its Counterparty Risk Ratings (CRR) are /Prime1 and its Counterparty Risk Assessment (CR Assessment) (cr)/prime1(cr). SEK's a1 BCA is supported by its weighted macro profile of Strong+, the agency's mandate to act as Sweden's export credit agency, the lender s strong asset quality and capital position and its stable, although moderate, profitability, as well as its largely matched funded balance sheet. The a1 BCA is in line with the BCA of other Nordic public sector issuers and takes into account SEK's small proportion of problem loans and for-profit mandate. Exhibit 1 Rating Scorecard - Key Financial Ratios Swedish Export Credit Corporation (BCA: a1) Median a1-rated banks 1% 5% 9% 8% Niclas Boheman AVP-Analyst niclas.boheman@moodys.com Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion MD-Financial Institutions sean.marion@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA % 6% 15% 5% 4% 1% % Liquidity Factors Contacts Solvency Factors % % 5% 1.4% 1.1% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS).% Profitability: Net Income/ Tangible Assets 9.5% 4.% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 1% % Liquidity Factors (RHS) These represent our Banks methodology scorecard ratios, whereby asset risk and profitability reflect the weaker of either the three year average and the latest annual figure. Capital ratio is the latest reported figure. Funding structure and liquid resource ratios reflect the latest fiscal year-end figures. Source: Moody's Financial Metrics THIS REPORT WAS REPUBLISHED ON 4/1/19 WITH UPDATED RECAPITALISATION AMOUNT ON PAGE 6.

2 Credit strengths» A Government owned entity that supports Swedish export industry» Good asset quality benefiting from guarantees and insurance» Solid capital and stronger-than-peers leverage» A diversified funding profile and a large liquidity portfolio» Supportive operating environment as expressed by the Strong+ Macro profile Credit challenges» Moderate profitability» High reliance on wholesale funding, however largely matched funded Rating outlook The outlook on all long-term ratings is stable. This stable outlook reflects our expectation that the financial fundamentals of the agency will remain in line with its current ratings, over the next 1 to 18 months. Factors that could lead to an upgrade» Increasing support from the Swedish government could prompt upward rating pressure.» Significant volumes of loss absorbing junior senior unsecured debt could lead to higher notching for senior debt in the loss given failure analysis. Factors that could lead to a downgrade» Downward pressure on SEK s standalone rating could be triggered by: (1) a dilution of its policy mandate to act as Sweden's export credit agency, () weaker profitability over an extended period of time, and/or () a weaker standing in debt capital markets. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 1 January 19

3 Key indicators Exhibit Swedish Export Credit Corporation (Consolidated Financials) [1] Total Assets (SEK million) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (SEK million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,167 8,575,19 18,17 1,759, ,864 5,11,7 17,95 1,8, ,89 9,97,69 17, 1,795 1, ,56 8,7,66 16,79 1,84 1, , CAGR/Avg. 16,581,41 4,441 15,986 1,688, , ,41.5 [1] All figures and ratios are adjusted using Moody's standard adjustments. [] Basel III - fully-loaded or transitional phase-in; IFRS. [] May include rounding differences due to scale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented. Source: Moody's Financial Metrics Profile SEK is a credit institution that provides long-term financial solutions to the Swedish export sector. As of September 18, SEK reported total consolidated assets of SEK.9 billion ( 9. billion). SEK has a mandate from the Swedish government to support the Swedish export industry. The institution delivers on this mandate by lending to Swedish companies that export their products and services (corporate lending). In addition, it lends to foreign buyers of Swedish exports, thus supporting Swedish companies and the economy (end-customer financing). SEK was established in 196, under the joint ownership of the state and the Swedish commercial banks, with a mandate to provide long-term credit solutions to Swedish exporters and their customers. SEK is wholly owned by the Swedish government through the Ministry of Enterprise and Innovation. For more information, please see Swedish Export Credit Corporation's Issuer Profile - Key Facts and Statistics - H1 18, published 7 September 18. Detailed credit considerations Government entity that supports Swedish export industry SEK is an agency wholly owned by the Swedish government (Aaa stable1) with the mission to support the Swedish export industry by providing both Swedish exporters and their foreign customers with corporate and export lending, structured financing, project financing, trade financing, and leasing solutions. SEK does not take deposits and funds these loans by actively borrowing in the global capital markets. In addition to the government ownership, SEK has also further ties with Swedish government: it manages the export credit system on behalf of the government and in line with OECD rules on state support, collaborates extensively with Exportkreditnamnden (EKN), a Swedish government agency that guaranteed around 5% of SEK's lending at year-end 17. Furthermore, SEK benefits from a SEK15 billion borrowing facility with the Swedish National Debt Office, approved by parliament, which SEK can use to finance the state supported export financing system, the Commercial Interest Rate Reference System (CIRR). All this results in our assessment of a high probability of government support for SEK s senior, and subordinated debt instruments. 1 January 19

4 As an agency established with an explicit public policy mandate, we consider that SEK benefits from an entrenched franchise in a niche market. These conditions provide stability to SEK s asset quality, capital, and profitability, supporting the agency s ongoing operating performances and resulting in a low risk profile. This feature is reflected in a qualitative positive adjustment of one notch in our scorecard for business diversification. Good asset quality benefitting from guarantees and insurance SEK's problem loan ratio has been consistently low as a reflection of its good asset quality, strong underwriting and asset guarantees. The ratio decreased to.5% as of end-september 18 compared to 1.% for the same period in 17. This is explained largely by the transition to IFRS 9 from IAS 9 effective as of 1 January 18 (see FAQ: Limited impact from IFRS 9 first time adoption, but disclosure uneven so far, published April 18). At end-december 17, SEK reported SEK195 billion outstanding loans, of which 48% to exporters and 5% to end-customers. In comparison, the originated new lending during the nine months ending September 18 was more skewed towards end-customers, with around 7% share, while only 7% was directly to Swedish exporters. SEK underwrites loans at prevailing fixed or floating market interest rates (68% of its book at end-september 18) as well as loans under the State Support System (the S-system, a state-support credit system, including CIRR, which accounts for the remaining % of the book), which is administered on behalf of the State in return of a fixed compensation. At end-september 18, 8% of SEK's net credit exposure was outside Sweden, including relatively small exposures in weaker countries such as Italy and Spain. SEK uses various mechanism to mitigate credit risk under its operations: most important, the agency transfers its private sector borrower credit risk by collaborating with export credit agencies. This results in a high exposure to governments, which consequently represented 49% of SEK's net exposure at end-september 18 (see exhibit ). Additionally, SEK uses credit default swaps (CDS) to mitigate credit risk. This effectively transfers credit risk to the CDS counterparty whose creditworthiness potentially could deteriorate. In order to minimise this credit counterparty risk, SEK has signed ISDA agreements and credit support annexes (CSA) with all counterparties with whom it enters into derivatives contracts. In addition, SEK is working with private insurance companies in order to militate against credit risks. Our assigned a1 Asset Risk score reflects SEK s low problem loan ratio and its asset guarantees. Exhibit SEK's net exposures at end-september 18 A significant proportion of SEK's net exposures are to regional- and central governments Regional governments 6% Financial institutions 9% Central governments 49% Corporates 6% Source: company reports Strong capital and lower-than-peers leverage SEK s capital position is strong and its Tier 1 leverage ratio is higher than Swedish bank peers, as reflected in our aa Capital score. SEK reported a Common Equity Tier 1 (CET1) ratio of.1% for end-september 18, adequate relative to its risks, compared to a CET1 ratio of 18.9% at same period for 17. The agency's total capital equals its CET1 ratio of.1% for end-september 18, as the agency does not have any Additional Tier 1 capital, compared to 1.1% for the same period in 17. SEK is regulated by the Swedish Financial Supervisory Authority (SFSA) and required to comply with bank capital adequacy rules. The CET1 and total capital requirement 4 1 January 19

5 published by the SFSA as of the end of the third quarter 18, was 11.7% and 16.7% respectively. Leading to a solid headroom of 84 bps for its CET1 and 4 bps for its total capital ratio at end-september 18. SEK's capital target is for its total capital ratio to exceed the SFSA requirements by 1- percentage points, which the agency surpasses for the third quarter 18. The agency also strengthened its Moody s Tangible Common Equity on risk-weighted assets, to 1.1% at end-september 18 (19.6% at end-september 17). SEK's dividend policy is a % ordinary payment of the yearly profit. SEK reported a 5.6% Tier 1 leverage ratio at end-september 18, equating a Moody s Tangible Common Equity on Tangible Assets ratio of 6.% for the same period. This places SEK in a stronger position compared to Nordic public sector peers such as Kommuninvest i Sverige (Aaa stable), Municipality Finance Plc ( stable) and Kommunalbanken (Aaa stable), who currently report leverage ratios around the three percent threshold that might become regulatory requirement in 18. Lower earnings as higher funding costs and resolution fees decrease margins In the nine months ending September 18 SEK reported operating profits of SEK597 million, down from SEK666 million during the same period in 17. The decline was largely driven by a reduction in net interest income but mitigated by decreased operating costs of 5% as personnel expenses declined. The net interest income was negatively affected by a higher resolution fee (SEK million in the nine months ending September 18 compared to SEK145 million during the same period in 17) and higher borrowing costs. As a result, reported return on equity (ROE) fell to.4% for the nine months ending September 18 compared to.9% a year earlier. SEK targets a long-term 6% ROE unlike other Nordic government related entities such as Kommuninvest i Sverige AB and Municipality Finance Plc, which do not have profitability targets. Overall, we assess the profitability of SEK as moderate. SEK's annualized net interest margin declined to 5 basis points in the nine months ending September 18, down from 6 basis points in end-december 17 and from 7 basis points in end-september 17, however, it is still higher than some of the previous mentioned government related issuers that operate under a not-for-profit mandate. SEK has a track-record of earnings stability which we consider is driven by its mandate and stable business model and that is unlikely to change in the future. Operating expenses are moderate and decreasing, offsetting some of the lower income, but SEK's Moody's adjusted cost-income ratio of 41.6% at end-september 18 (see exhibit 4) is weaker than.9% in the same period in 17 (year-end 17: 4.1%) because of decreased income for end-september 18. Our assigned ba Profitability score captures SEK s stable, although moderate, profitability. Exhibit 4 SEK's cost to income ratio compared to peers % 6% 5% 41,6% 41,4% 4% % 16,% % 1,7% 1% % SEK Municipality Finance Plc Kommunalbanken Eksportfinans ASA Note: 18 is based on latest available data Source: Moody's Financial Metrics A diversified funding profile and a large liquidity portfolio Our a Combined Liquidity score incorporates SEK s high reliance on wholesale funding, although mitigated by its largely matched funding, funding diversification, a consolidated track record of market access, and a large liquidity portfolio. SEK's risk appetite ensures a diversified funding profile to fund all credit commitments through maturity and adequate liquidity investments for new lending even during times of financial stress. 5 1 January 19

6 At end-september 18 SEK s reported outstanding debt (including borrowing from credit institutions, senior unsecured and subordinated debt) was SEK56 billion, or 85% of its balance sheet. This very high reliance on confidence-sensitive funding is mitigated by funding diversification (virtually all long-term funding is issued in foreign currencies, with largest concentration in USD, about 59%, followed by JPY at 16% as of end-september 18) and by a strong track-record of market access (SEK s balance sheet grew during the 8/9 period, when many other financial institutions were unable to do so because of the lack of access to the debt capital markets). Refinancing risks are very low as assets and liabilities are matched both by maturity and in the terms of currencies, directly or through the use of derivatives. SEK has received an updated decision on its minimum requirement for own funds and eligible liabilities (MREL) on 19 December 18. The bank will need to fulfil the recapitalisation amount, expressed as 1.6% of risk weighted assets, equivalent to approximately 4.1% of total assets, with junior senior unsecured debt by. The MREL for SEK was increased in December 18 to 8.% of total assets from 7.%, and are met with capital, subordinated and senior unsecured debt (see Sweden applies MREL requirements to midsize banks, a credit positive, published 5 June 18). SEK reported liquidity investments of SEK74.5 billion at end-september 18, an increase from SEK7.7 billion for the same period in 17. The agency also reported a strong liquidity coverage ratio (LCR) of 494% for end-september 18, compared to 85% in endseptember 17. Supportive operating environment, as expressed by a Strong+ macro profile We assess SEK's macro profile to reflect the average macro profile of the countries where the institution has its net exposures (after taking guarantees and credit derivatives into consideration). SEK's combined Strong+ Macro Profile is in line with Sweden (see Sweden's Macro Profile: Strong+, published 1 October 18), where the institution has around 7% of its net exposures at end-september 18. The remaining exposures are mostly towards other European countries where the blended Macro profile is Strong. Source of facts and figures cited in this report Unless noted otherwise, the bank specific figures originate from bank's reports and Moody's Banking Financial Metrics. All figures are based on our own chart of accounts and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of Financial Institutions, published on 9 August 18. Support and structural considerations Loss Given Failure We apply our Advance Loss-given-failure Analysis on SEK as the institution is subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. For this analysis we assume that equity and losses stand at % and 8%, respectively, of tangible banking assets in a failure scenario. Under this analysis, SEK's senior unsecured creditors benefit from a two-notch rating uplift from the a1 BCA, because all the agency's liabilities are eligible for bail-in, assuming a currently unlikely stress-scenario. SEK's subordinated and junior subordinated debt are positioned at the BCA level and one notch below the BCA, respectively. Government support SEK's senior debt instruments continue to benefit from high government support given its strong linkages with the sovereign due to both its government ownership, as well as the special mandate the bank has to promote Swedish exports and manage the CIRR system. We assign one notch of uplift to its senior unsecured obligations, resulting in senior unsecured ratings. We also assign one notch of uplift to the subordinated and junior subordinated ratings reflecting a moderate government support, reflecting the importance of the company to the Swedish economy and reputational damage to the state if any payment obligations would not be fulfilled, resulting in (P)A1 subordinated and (P)A junior subordinated ratings. Counterparty Risk Ratings (CRR) Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs 6 1 January 19

7 are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions. The CRR's of SEK are positioned at /Prime The CRRs are positioned three notches above SEK's Adjusted BCA of a1, reflecting extremely low loss-given-failure from the high volume of instruments that are subordinated to CRR liabilities. Counterparty Risk (CR) Assessment The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, and liquidity facilities. The CR Assessments is distinct from debt and deposit ratings in that they consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default. The CR Assessment of SEK is positioned at (cr)/prime(cr) The CR Assessment is positioned three notches above the a1 BCA, based on the cushion against default provided by senior unsecured and subordinated debt. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 7 1 January 19

8 Rating methodology and scorecard factors Exhibit 5 Swedish Export Credit Corporation Macro Factors Weighted Macro Profile Strong + Factor Historic Ratio Initial Score Expected Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans 1.4% aa a1 Quality of assets Capital TCE / RWA 1.1% aa1 aa Risk-weighted capitalisation Profitability Net Income / Tangible Assets.% b1 ba Return on assets Earnings quality Market funding quality Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 9.5% caa a Term structure Liquid Resources Liquid Banking Assets / Tangible Banking Assets 4.% baa1 a Stock of liquid assets b1 Balance Sheet in-scope (SEK million) 1,94 5,15,5 8,855 95,167 1 January 19 Key driver # a a Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Other liabilities Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 8 1% a a 1 1 Aaa aa-a a1 -a1 % in-scope 1.8% 85.4%.8%.% 1% at-failure (SEK million) 1,94 5,15,5 8,855 95,167 % at-failure 1.8% 85.4%.8%.% 1%

9 Debt class Counterparty Risk Rating Counterparty Risk Assessment Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA aa1 aa1 (cr).8%.8% aa.8%.%.8%.% a.%.%.%.% a Instrument class Counterparty Risk Rating Counterparty Risk Assessment Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Loss Given Failure notching Additional Preliminary Rating Assessment Notching aa1 aa1 (cr) aa a a Government Support notching Local Currency Rating (cr) --- Foreign Currency Rating - (P)A1 (P)A [1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. Source: Moody's Financial Metrics Ratings Exhibit 6 Category SWEDISH EXPORT CREDIT CORPORATION Outlook Counterparty Risk Rating Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured -Fgn Curr Senior Unsecured -Dom Curr Senior Unsec. Shelf (Foreign) Senior Unsecured MTN (Foreign) Senior Unsecured MTN (Domestic) Subordinate MTN Jr Subordinate MTN Commercial Paper Other Short Term Moody's Rating Stable /P a1 a1 (cr)/p(cr) (P) (P) (P) (P) (P)A1 (P)A P (P)P Source: Moody's Investors Service Endnotes 1 The ratings shown in this report are the long-term issuer rating 9 1 January 19

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11 CLIENT SERVICES 11 Americas Asia Pacific Japan EMEA January 19