U.K.-Based Handelsbanken PLC Rated 'AA-/A-1+'; Outlook Stable

  • Handelsbanken PLC is a newly created subsidiary of Svenska Handelsbanken (SHB) in the U.K. The bank assumed almost all of SHB group's U.K. operations as of Dec. 1, 2018, and will play a key role in the group's post-Brexit contingency plans as a fully licensed, U.K.-domiciled bank.
  • We assess Handelsbanken as a core subsidiary of SHB Group, given its integral role in the group's strategy, and expect it to benefit from group support for both capital and funding, if needed.
  • We expect Handelsbanken, as a material subsidiary, to benefit from additional loss-absorbing capacity at SHB group and therefore equalize our ratings on it with the supported group credit profile.
  • Consequently, we are assigning our 'AA-/A-1+' long- and short-term issuer credit ratings to Handelsbanken.
  • The stable outlook on Handelsbanken mirrors that on Svenska Handelsbanken group, and reflects our view that Handelsbanken will remain a core subsidiary of the group.
FRANKFURT (S&P Global Ratings) Dec. 3, 2018--S&P Global Ratings today assigned 
its 'AA-' long-term and 'A-1+' short-term issuer credit ratings to U.K.-based 
Handelsbanken PLC. The outlook is stable.

We are also assigning our 'AA-' long-term and 'A-1+' short-term resolution 
counterparty ratings to Handelsbanken.

Handelsbanken is a newly established U.K. subsidiary of Svenska Handelsbanken 
group (SHB). The bank obtained a banking license on Nov. 5, 2018, and assumed 
operations under U.K. banking regulation on Dec. 1, 2018. The parent bank is 
migrating almost its entire U.K. business, previously operated through its 
London branch, to Handelsbanken PLC. Brexit has weighed on SHB's decision to 
operate under local regulation in future. 

We believe that the U.K. operations will remain an integral part of SHB 
group's overall business strategy and Handelsbanken will therefore benefit 
from material ongoing and extraordinary support from senior group management 
in good times and under stressful conditions. Although Handelsbanken is a new 
legal entity, the SHB group has been active in the U.K. market for more than 
three decades, through a branch. Its U.K. operations made up 10% of its 
lending book and contributed 13% of group revenues and 8% of operating profits 
in 2017. We expect SHB group to remain committed to its U.K. operations, which 
are underpinned by the ongoing funding agreement, the contingency funding 
agreement that provides short-term liquidity, and a letter of intent offering 
potential capital support. We consider that Handelsbanken PLC is closely 
linked to the group's reputation, brand, and risk management, which supports 
its core group status.

Given Handelsbanken's importance to the group's overall strategy, we expect it 
to be part of the group's resolution plan as a material operating entity. 
Therefore, we anticipate that if SHB Group underwent a resolution process, due 
to its single point of entry resolution strategy, Handelsbanken PLC would 
benefit from the additional loss-absorbing capacity (ALAC) built at the group 
level. Consequently, we align our ratings on Handelsbanken with Svenska 
Handelsbanken's 'aa-' supported group credit profile (GCP). 

With total assets of about £30 billion, Handelsbanken will be one of the 
smaller players in the U.K. market and will have a marginal market share in 
both customer lending and deposits business. The bank is active in retail and 
corporate business, servicing private and mainly small and midsized corporate 
customers across the country. The bank has been growing relatively fast, with 
a compound annual growth rate of 14% over the past five years, primarily 
through mortgage lending and property financing. Handelsbanken aims to expand 
its product and service offering over time; in particular, its wealth 
management expertise, which is housed at Heartwood, its fully owned subsidiary 
managing about £3.5 billion of assets. We view Handelsbanken's concentrated 
business model and narrow product offering as the main weakness in its 
business model, in terms of revenues and the risks the bank assumes in its 
lending business.

SHB has replicated its traditional group strategy in the U.K. market by 
focusing on proximity and quality of service to customers; each branch has its 
well-defined market area and is responsible for its customer selections, 
pricing, local marketing, profitability, risks, etc. We expect Handelsbanken 
to adhere to the group strategy.

We understand that Handelsbanken will be capitalized with £1.9 billion, 
leading to a common equity Tier 1 ratio of 15.7%. This will build a 
comfortable buffer above its regulatory capital requirement of 13.88%, set by 
the Prudential Regulation Authority, and its internal capital target of 
14.88%. We expect Handelsbanken to finance further business growth through 
fully retained earnings over the next two years and therefore do not 
anticipate any additional capital measures in this period. Importantly, SHB 
group has provided a letter of intent to provide Handelsbanken with capital in 
the event of a breach of its capital risk tolerance level.

The loan portfolio transferred to Handelsbanken will amount to about £20 
billion, of which 67% is loans to corporates and 33% loans to private 
customers. We consider the loan portfolio to show sector and single-name 
concentrations due to the heavy bias toward commercial real estate financing 
and mortgage lending. This could expose the bank to adverse developments in 
the U.K. real estate market and represents the main weakness in 
Handelsbanken's risk profile, in our view. We expect Handelsbanken's asset 
quality metrics to remain sound, with reported impaired loans amounting to 
0.25% as of June 30, 2018. The average loan losses reported by SHB group's 
U.K. operations have consistently been below those of its U.K. peers over the 
past 10 years.

We expect that Handelsbanken's overall funding structure will not change from 
the funding profile of the current U.K. branch. This consists of term customer 
deposits, short-term wholesale funding through a U.K. certificate of deposit 
issuance program, and long-term wholesale funding through central treasury at 
SHB's headquarters. Importantly, Handelsbanken will continue to be managed 
under SHB group's centralized funding model, with day-to-day funding and 
liquidity managed by central treasury. We anticipate that Handelsbanken's 
deposit base will grow in tandem with business growth, but consider the 
deposits base shows some concentration, given the bank's customer selection. 
This is also demonstrated by the lower share of deposits covered by a deposit 
protection scheme compared with domestic peers. Customer deposits will be 
covered by the U.K.'s Financial Services Compensation Scheme, going forward. 
Handelsbanken currently holds an ample liquidity reserve of £7 billion at the 
Bank of England and we expect it to benefit from parental support (ensuring 
one year of liquidity under stress), in case of need.

The stable outlook on Handelsbanken reflects our outlook on Svenska 
Handelsbanken AB on a 12-24 month horizon. It also reflects our view that 
Handelsbanken will remain a core subsidiary of SHB Group, and that the group 
will remain committed to the U.K. market, which it considers an integral part 
of its business operations, next to the Nordics. 

A rating action on Svenska Handelsbanken--positive or negative--would result 
in a similar action on the U.K. subsidiary. 

Additionally, we could lower our ratings on Handelsbanken if we perceived a 
weaker commitment from Svenska Handelsbanken to support its subsidiary. In 
that context, an adverse development in the U.K. market, such as a disorderly 
Brexit (not our base case at this point) causing Handelsbanken's financial 
profile to weaken could lead us to question our view of the importance of 
Handelsbanken, and its group status within the SHB Group.
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