Fitch Rates Handelsbanken's Additional Tier 1 Capital Instruments 'BBB' Final Rating
The final rating is in line with the expected rating Fitch assigned to the notes on 13 February 2015 (see "Fitch Rates Handelsbanken's Additional Tier 1 Capital Instruments 'BBB(EXP)'' at www.fitchratings.com).
The notes will be CRD IV-compliant perpetual non-cumulative additional Tier 1 instruments. The notes are subject to partial or full temporary write-down if Handelsbanken's consolidated Common Equity Tier 1 (CET1) ratio falls below 8%, and any coupon payments may be cancelled at the discretion of the bank. The notes are callable in March 2021.
KEY RATING DRIVERS
The rating is five notches below Handelsbanken's Viability Rating (VR) of 'aa-' in accordance with Fitch's criteria for assessing and rating bank subordinated and hybrid securities. The notching reflects the notes' higher expected loss severity relative to senior unsecured creditors (two notches) and higher non-performance risk (three notches).
The notching for loss severity reflects the instruments' deep subordination, the full contractual write-off language, and that the instruments can be written down before the point of non-viability.
The three notches for non-performance risk reflect the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption, and the mandatory write-down trigger. The notching is limited to three notches in light of the bank's solid capital buffers, strong profitability and high level of distributable reserves in the form of retained earnings.
Handelsbanken is subject to stringent capital requirements by the Swedish regulator, including an estimated Pillar 1 CET1 requirement of 10.5% based on end-December 2014 risk weights and an additional estimated 7.3% CET1 Pillar 2 buffer, taking the total estimated CET1 requirement to 17.8%. Fitch expects the Swedish regulator to impose restrictions on interest payments on the notes should Handelsbanken's capital approach the estimated Pillar 1 limit of 10.5% CET1. Fitch does not believe that a breach of the Pillar 2 buffer would automatically trigger a coupon cancellation. Handelsbanken reported a CET1 ratio of 20.4% at end-2014.
Given the securities are perpetual, their deep subordination, coupon flexibility and going concern mandatory write-down of the instruments, Fitch has assigned 100% equity credit.
As the notes are notched down from Handelsbanken's VR, their rating is primarily sensitive to any change to the VR. The notes' rating is also sensitive to a wider notching if Fitch changes its assessment of the probability of the notes' non-performance risk relative to the risk captured in Handelsbanken's VR, including that of the impact of a possible breach of the Pillar 2 buffer.