The bank financial strength rating (BFSR) was downgraded to D from C- and the bank's subordinated debt ratings were downgraded by four notches Baa3 in line with the senior debt downgrade. The bank's short-term ratings were also downgraded to Prime-2 from Prime-1. The outlook on all of the bank's ratings remains negative.
"The downgrade of Hansapank's BFSR reflects the bank's significantly weakened asset quality and the continuing difficult environment in the Baltic region," says Kimmo Rama, Vice President -- Senior Analyst in Moody's Financial Institutions Group. "The severe deterioration in the global and regional macroeconomic environment has hit the Baltic countries especially hard, beyond Moody's initial expectations."
Moody's notes that the bank has a relatively large exposure to the property and construction sector in the three Baltic countries, which is likely to lead to further weakening asset quality and higher loan loss provisioning needs over the next couple of years. In conjunction with the deterioration in the economic environment, this will weigh on the bank's profitability and put pressure on its internal capital generation.
According to Moody's, the effects of the contracting economy are reflected in the increase in Hansapank's problem loans, which accounted for 3.1% of total loans at year-end 2008, up from 0.8% in 2007. Over the same period, the loan loss coverage ratio decreased to 48% from a more comfortable 93%. Moody's expects the problem loan ratio to rise due to high levels of lending growth over recent years and the slowing domestic economy.
The downgrade of Hansapank's long-term bank deposit and senior debt ratings to Baa2 reflects the weaker intrinsic financial strength of the bank, as indicated by the D BFSR as well as today's downgrade of the bank's ultimate parent, Swedbank (rated A1/Prime-1/C-, negative outlook) (see separate press release). However, Moody's said that it sees a very high probability of support from its parent and a moderate probability of systemic support, which leads to a three-notch uplift for the deposit and debt ratings from the Ba2 Baseline Credit Assessment.
Moody's negative outlook on Hansapank's ratings reflects the difficult operating environment in the Baltic region as well as the challenges on the funding side. The rating agency notes that Hansapank's funding has become increasingly dependent on the parent bank. At the end of 2008, interbank and market funds accounted for nearly 50% of the bank's funding, which originates almost exclusively from the parent bank. Moody's further notes that Swedbank's BFSR also has a negative outlook.
The following ratings of AS Hansapank have been downgraded :
- BFSR to D from C-
- Long-term bank deposit rating to Baa2 from A1
- Senior Unsecured rating to Baa2 from A1
- Subordinate MTN rating to Baa3 from A2
- Commercial Paper rating to Prime-2 from Prime-1
- Other Short Term rating to Prime-2 from Prime-1
Moody's previous rating action on Hansapank was on 10 October 2008, when the BFSR was downgraded to C- with a negative outlook and the long-term ratings were downgraded to A1 with a negative outlook.
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