Credit Opinion: Swedish Export Credit Corporation

Transcription

1 Credit Opinion: Swedish Export Credit Corporation Global Credit Research - 11 Dec 2014 Stockholm, Sweden Ratings Category Moody's Rating Outlook Stable Issuer Rating Aa1 Senior Unsecured -Fgn Curr (P)Aa1 Senior Unsecured -Dom Curr Aa1 Subordinate Aa2 Jr Subordinate MTN Commercial Paper (P)Aa3 P-1 Other Short Term (P)P-1 Contacts Analyst Phone Jan Skogberg/London Oscar Heemskerk/London Sean Marion/London Forssen, Daniel/London Key Indicators Swedish Export Credit Corporation (Consolidated Financials)[1] [2]9-14 [3]12-13 [3]12-12 [3]12-11 [3]12-10 Avg. Total Assets (SEK million) Total Assets (EUR million) 316, , , , ,687.6 [4] , , , , ,663.6 [4]-2.0 Total Assets (USD million) Tangible Common Equity (SEK million) 43, , , , ,527.3 [4] ,662.1 [4]3.7 15, , , ,601.3 Tangible Common Equity (EUR million) 1, , , , ,514.8 [4]3.4 Tangible Common Equity (USD million) Net Interest Margin (%) 2, , , , ,032.2 [4] [5]0.6 PPI / Average RWA (%) Net Income / Average RWA (%) [6] [6]1.6 (Market Funds - Liquid Assets) / Total Assets (%) Core Deposits / Average Gross Loans (%) [5] [5] [6] [6] [5] [5]1.2 Cost / Income Ratio (%) Problem Loans / Gross Loans (%) Tier 1 Ratio (%) Tangible Common Equity / RWA (%) Problem Loans / (Equity + Loan Loss Reserves) (%) Source: Moody's 21.9[5]14.7 [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - transitional phase-in & IFRS reporting periods have been used for average calculation

2 Opinion SUMMARY RATING RATIONALE In accordance with Moody's rating methodology for government-related issuers (GRIs), the Aa1/Prime-1 ratings of Swedish Export Credit Corporation (SEK) reflect (1) a baseline credit assessment of aa3, and (2) a high likelihood of support from the Aaa rated Swedish government. SEK's BCA of aa3 rest on the agency's (1) close ties with the Swedish government as a result of the institution's mandate to act as Sweden's export credit agency, (2) good asset quality although some investments are rated below investment grade, (3) good access to capital markets although some funding is callable, (4) stable profitability irrespective of macroeconomic conditions, and (5) adequate capital position. Rating Drivers - Government owned SEK supports Swedish industry - Good asset quality supported by government guarantees and CDS - Profitability is predictable although not a key priority - SEK benefits from matched funding and a large liquidity portfolio - No need to build capital base unlike other Nordic GRI's Rating Outlook The outlook is stable. 29 May 2014 Moody's affirmed the long term rating and stable outlook for four Nordic government related issuers (GRIs). Municipality Finance plc in Finland (Aaa stable) and Kommuninvest i Sverige Aktiebolag in Sweden (Aaa stable) are guaranteed by their local governments. While the interaction between guaranteed debt and the bail in tool is not entirely clear, Moody's does not currently believe that the likelihood of governments being able or required to bail in such debt is sufficiently high to warrant a negative outlook. Swedish Export Credit Corporation (SEK, Aa1 stable) is already rated one notch below the Swedish sovereign, which in Moody's view reflects an adequate level of uncertainty over support. Kommunalbanken AS's Aaa stable rating reflects Moody's very high expectations of support from the Norwegian government (Aaa stable), which Moody's believes will have greater latitude in implementing the BRRD in a manner that would allow it to continue to support the entities it sees as closest to the government, including Kommunalbanken. Denmark based Kommunekredit (Aaa stable) is exempt from BRRD. What Could Change the Rating - Up An unconditional guarantee from the Swedish government could prompt upward rating pressure. What Could Change the Rating - Down Downward ratings pressure could materialise as a result of (1) a dilution of SEK's policy mandate to act as Sweden's export credit agency, (2) materially weaker asset quality that would erode SEK's capital base, (3) a weaker standing in debt capital markets or (4) sustained weaker profitability. DETAILED RATING CONSIDERATIONS GOVERNMENT OWNED SEK SUPPORTS SWEDISH INDUSTRY SEK has a mandate from the Swedish government to support Swedish industry. The export credit agency delivers on this mandate by lending to Swedish companies that export their products and services (`corporate lending'). In addition, SEK lends to foreign buyers of Swedish exports, thus supporting Swedish companies and the economy (`end-customer financing'). Exports amount to more than 50% of Swedish gross domestic product according to the World Bank and that is why SEK plays an important role in the Swedish economy. SEK benefits from close ties with the Central Government of Sweden. The agency (1) is 100% owned by the government (rated Aaa stable), (2) manages the export credit system (CIRR) on behalf of the government and in line with OECD rules on state support, and (3) collaborates extensively with Exportkreditnamnden (EKN), a Swedish-government controlled agency that guarantees much of SEK's lending (EKN benefits from an unlimited

3 borrowing facility with the Swedish National Debt Office). GOOD ASSET QUALITY SUPPORTED BY GOVERNMENT GUARANTEES AND CDS SEK's problem loan ratio stood at 0.4% at 30 September 2014 which reflects good asset quality. This ratio has remained relatively stable in recent years, even after the 2008/09 financial crisis that was followed by the sovereign debt crisis in Europe. This is at first glance surprising because much of the agency's lending goes to customers located outside Sweden where asset quality has been weaker in recent years. SEK for example continues to have exposure to entities in Portugal, Italy and Spain. SEK uses various mechanism to mitigate against credit risk. Most importantly, the agency transfers credit risk from borrowers to governments by collaborating with export credit agencies. These include EKN which is controlled by the Swedish government as well as EKN's foreign counterparts such as the Export Import Bank of the United States and the Exports Credits Guarantee Department of the United Kingdom. Indeed, approximately half of SEK's net exposure at 30 September 2014 was to governments (mainly export credit agencies). SEK also uses credit default swaps (CDS) to mitigate credit risk. This effectively transfers credit risk from the borrower 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 many counterparties. In addition, SEK has recently started to work with private insurance companies in order to mitigate against credit risks. The exposure arising from this activity remains small. SEK's asset quality is constrained asset backed securities (ABS) that mainly consist of collateralised debt obligations (CDO) with ultimate exposure to entities located in the United States. These securities amounted to SEK 861 million at 30 September A potential further deterioration in credit quality however does not pose a material risk to SEK because these securities amount to approximately five percent of the agency's equity. PROFITABILITY IS PREDICTABLE ALTHOUGH NOT A KEY PRIORITY SEK is subject to a long-term profitability target which is a return of at least five percent on top of the risk-free rate. In this instance the risk-free rate is defined as the average ten year government bond rate over a ten year period. Such a profit target is in some contrast with other Nordic government related issuers such as Kommuninvest I Sverige AB (Aaa stable) and Municipality Finance Plc (Aaa stable) whose mandate is low cost lending ahead of profitability. The above said, SEK is not a very profitable business. Its net interest margin tends to be around 50 basis points which is comparable with the above mentioned government related issuers that operate under a not-for-profit mandate. More positively, SEK has a track-record of earnings stability which we think is driven by its unchanged monoline business model and that is unlikely to change in the future. Operating expenses are low because, aside from an office in Singapore, the agency does not operate a branch network such as many other financial institutions. SEK BENEFITS FROM MATCHED FUNDING AND A LARGE LIQUIDITY PORTFOLIO SEK issues different types of debt instruments, in various geographies, to a broad investor base. We view this approach as prudent because it means that SEK is not dependant on a single or even a few sources of funding. Moreover, the agency has a strong track-record of issuing debt due to its safe-haven status, even when debt capital markets in general have been under pressure. Indeed, SEK aggressively grew its balance sheet in 2008/09 when many financial institutions were reluctant to lend due to constrained debt capital markets. SEK is match-funded which means that the maturity of its liabilities is at least as long as the maturity of its assets. Consequently, and in a currently unlikely stress scenario, the institution could simply wind down its business without having to refinance its debt. Such an orderly wind down scenario assumes that SEK's customers would have the means to repay their debt, rather than refinancing it, which might not be the case in an extreme stress scenario Some of SEK's funding comes with callable features that suddenly could shorten the agency's liability profile. However, this is not a key risk because SEK assumes that its callable debt is called at the first possible call date. SEK also has ample means to refinance debt that has been called by accessing multiple markets. In addition, the agency has a large liquidity portfolio. SEK benefits from a large liquidity portfolio which amounted to 27% of total assets per our calculations at 30 September The portfolio is of good quality with 41% of the investments rated at least Aa1. The rest of the

4 investments are mainly in the investment grade category. Approximately one percent of the portfolio is rated noninvestment grade (see asset quality section). Separately, SEK cannot repo its lending with the Swedish Central Bank like Kommuninvest I Sverige AB (Aaa stable). NO NEED TO BUILD CAPITAL BASE UNLIKE OTHER NORDIC GRI'S SEK is regulated by the Swedish FSA and required to comply with capital adequacy rules normally associated with banks although the institution is an export credit agency. The institution reported a common equity tier 1 ratio of 17.9% at 30 September 2014 which in our view is adequate to cover unexpected losses. We calculate a five percent leverage ratio for SEK at 30 September This places SEK in a stronger capital position compared to Nordic Aaa rated government related issuers such as Kommuninvest I Sverige (Sweden), Municipality Finance Plc (Finland) and Kommunalbanken (Norway). Currently, they report leverage ratios below three percent that might become a regulatory requirement in The principal methodology used in the rating is "Government-Related Issuers: Methodology Update" published in July Please see the Credit Policy page on for a copy of these methodologies. 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 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATION") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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