Nordic Credit Rating (NCR) said today that it had revised its outlook on Sweden-based mortgage lender Danske Hypotek AB (publ) (Danske Hypotek) to stable from negative. At the same time NCR affirmed its 'A' long-term issuer rating and 'N-1+' short-term issuer rating.
Economic uncertainty reduced
NCR today revised its outlook on the wider Swedish banking sector to stable from negative, while affirming its 'bbb+' assessment of the industry. Earlier this year, we revised our assessment score for Swedish financial institutions down by one notch to its current level (see NCR sees increased risks in the Swedish banking sector, published 3 Apr. 2020), mainly to reflect the initial impact of COVID-19. We have also revised our outlook on the Danish banking sector to stable from negative, which in turn impacts our view of the outlook on Danske Hypotek's owner, Danske Bank A/S. The outlook revision to stable for Danske Hypotek also indicates that a downward revision of our credit assessment of Danske Bank is currently unlikely.
Danske Hypotek's mortgage volumes grew by 44% in the year to 30 Jun. 2020 to SEK 112bn, with net interest income rising 16% in the first half of 2020 compared with the first half of 2019. Net interest income is expected to improve further given that many loans were transferred from Danske Bank in the second quarter. We note that Danske Bank (including Danske Bank's Swedish branch and Danske Hypotek) increased its share of the Swedish mortgage market with a 6.8% marginal market share during the first half of 2020, improving on its 3.8% overall share. Danske Hypotek's common equity Tier 1 (CET1) ratio remains in line with expectations at 16.0% when considering the mid-year result (16.7% at end-2019).
Upside to Danske Hypotek's issuer rating remains constricted by our 'a' credit assessment of Danske Bank. Danske Bank's first-half results were affected by material increases in credit loss provisioning in response to COVID-19 and the economic scenarios the bank uses to make forward-looking provisions. While core revenues were relatively stable, an increase in compliance and legal costs weighed on the pre-provision result. However, Danske Bank maintains a robust capital position with its fully loaded CET1 ratio of 17.3% well above the regulatory minimum requirement of 13.2%.
Stable outlook
The stable outlook reflects our expectations of a flatter U-shaped recovery rather than the sharp V- or W-shaped rebound that we anticipated previously. In addition, the Swedish mortgage market remains robust after an initial downturn in March and April of this year and is expected to grow by up to 5% in 2020. We could revise our rating on Danske Hypotek due to changes in our credit assessment of Danske Bank, which we currently see as unlikely.
Potential positive rating drivers
- Improvement in NCR's view of Danske Bank group's creditworthiness.
Potential negative rating drivers
- Deterioration in NCR's view of Danske Bank group's creditworthiness.
- Long-term economic recession, affecting economic activity and employment.
- Lower capital ratios or increased margin compression for Swedish residential mortgages.
If you have any questions, please contact:
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, credit rating analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.