OREANDA-NEWS. Fitch Ratings has affirmed Landshypotek Bank AB's (Landshypotek) Long-Term Issuer Default Rating (IDR) at 'A', Viability Rating (VR) at 'a', and Short-Term IDR at 'F1'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this commentary.



The ratings are underpinned by Landshypotek's conservative risk appetite as a first-lien mortgage provider to Sweden's forestry and agriculture sector. Fitch expects the bank to continue to benefit from strong asset quality, solid capitalisation and good funding and liquidity. Landshypotek has a leading niche franchise in the market it operates, but its monoline business model, geographical concentration and relatively small size compared with similarly rated peers are considered rating weaknesses.

Landshypotek's asset quality is underpinned by the resilience of the Swedish forestry and agricultural sectors, and the level of impaired loans is very low. A more challenging trading environment has emerged for the Swedish farmers in recent years. The bank has taken several steps to mitigate this, including introducing stricter underwriting criteria and processes and establishing a credit workout department, and Fitch expects these to stabilise asset quality metrics at current levels. Lending consists almost exclusively of collateralised loans to the domestic agriculture and forestry sector. Loan-to-value ratios are low, at around 40% on average.

Risk-weighted capital ratios are solid and compare well with those of domestic and international peers, although they are boosted by low risk weights. Leverage, defined as tangible equity/tangible assets, is in line with similarly rated European peers, at around 5%. The bank targets a payout ratio of 50% over time.

Landshypotek is largely wholesale funded, mainly through covered bonds. The Swedish covered bond market benefits from a large captive investor base. Combined with good liquidity, this significantly mitigates the risk of capital market dislocation. Fitch expects deposits to represent a growing share of the bank's funding. It aims to be 20% deposit-funded within a few years, having obtained a banking licence in 2012.

Landshypotek has a leading market position in financing the Swedish forestry and agriculture sectors. It has a management team that is experienced in the industry it operates. Its mutual structure encourages strong customer loyalty. Forestry represents Sweden's largest export industry, and agriculture property values have been stable in recent years.

Landshypotek should continue to generate moderate but stable profitability. This is in line with its cooperative status and its main objective of providing low-cost, low-risk loans to its members, rather than to maximise profit, although management has recently placed more focus on returns.


The '5' Support Rating and 'No Floor' Support Rating Floor reflect Fitch's view that extraordinary support cannot be relied upon, although it is still possible, due to the bank's small franchise and lack of systemic importance. Fitch believes the Swedish authorities will exercise some flexibility in applying the EU's Bank Recovery and Resolution Directive legislation should any of the country's large banks face financial distress, but that this will most likely not be applied to Landshypotek.



The Stable Outlook reflects Fitch's view that Landshypotek will continue to maintain strong asset quality while generating stable profitability.

Negative rating pressure could arise from weakening of asset quality metrics or any indication of an increase in risk appetite. Any notable weakening of earnings or capital could also result in a downgrade. The ratings are further sensitive to a prolonged dislocation in funding markets, reducing Landshypotek's access to funding or materially increasing pricing.

An upgrade is unlikely given the constraints of its business model, the bank's limited franchise and small size compared to more highly rated peers.


Any upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the Sweden's propensity to support Landshypotek. While not impossible, this is highly unlikely in Fitch's view. The SR could also be upgraded if the bank was acquired by a large, strong institution, which is again highly unlikely given its mutual status.

The rating actions are as follows:

Long-Term IDR: affirmed at 'A'; Outlook Stable

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'a'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'A'/'F1'