Europe’s Safest Bank Shows S&P Fading Role in Funding Debate

Investors are ignoring criticism from Standard & Poor’s that Svenska Handelsbanken AB is too reliant on short-term funding as bonds sold by the European Union’s best-capitalized bank rally.

Since S&P’s July 19 warning, the yield on Handelsbanken’s 4.194 percent perpetual bond eased to its lowest since the middle of June. Five-year credit default swaps on its senior unsecured debt were unchanged at 65 basis points, a few basis points lower than contracts on the governments of Japan and France, suggesting a smaller risk of default. The bank’s shares have gained 5.5 percent since the end of last week, beating a 2.5 percent gain in the 40-member Bloomberg index of European banks.

“Handelsbanken’s model is essentially unchanged over 40 years and is tried and tested,” Nick Anderson, an analyst at Joh. Berenberg, Gossler & Co. KG in London, said by phone. “I trust Handelsbanken, but can’t say the same about many European banks. Handelsbanken manages for risk; most European banks manage for regulation.”

Focus on short-term funding reliance has grown since the collapse of Lehman Brothers Holdings Inc. crippled the wholesale lending market almost five years ago. The ensuing panic helped bring down the entire financial system in Iceland as banks stopped lending to each other. In Sweden, a lack of short-term dollar funds in 2008 forced the Riksbank to provide as much as $30 billion to support the nation’s biggest banks.

Deposit Funding

S&P said last week it may downgrade Handelsbanken’s AA-issuer rating unless the bank takes steps to wean itself off short-term wholesale funding. Swedish banks in general rely too much on short borrowing compared with their peers in the rest of the world, the rating company said.

Yet Europe’s debt crisis has shown bank deposits can disappear as quickly as wholesale funding, Anderson said.

Deposits “are only sticky until you need them to be,” he said. Handelsbanken “instead favors wholesale funding with known maturities. I think conventional deposit-funded banks are more reliant on short-term funding than Handelsbanken.”

The bank, based in Stockholm, said it plans to “sit down” with S&P and explain its model.

“We’ll hopefully straighten out the question marks they have about our short-term funding,” Henrik Westman, a spokesman for Handelsbanken in Stockholm, said in an interview. “I don’t want to speculate what that work will result in, but Handelsbanken is one of the world’s strongest banks. The market seems to take this calmly and our funding costs are still very low.”

Lower Yield

The yield on Handelsbanken’s perpetual bond traded at 3.57 percent yesterday, according to composite Bloomberg bond trader prices. The day before S&P’s downgrade warning, the yield was at 3.65 percent.

After the liquidity crisis that followed Lehman Brothers’s failure, and Swedish bank losses in the Baltics in 2009, Prime Minister Fredrik Reinfeldt imposed some of the world’s strictest capital rules on his nation’s banks.

Sweden’s biggest banks have spent the past few years building bigger reserves than their competitors elsewhere. Handelsbanken is now the best-capitalized major bank in the EU, with a core Tier 1 capital ratio of risk-weighted assets of 17.8 percent at the end of June. It was also Europe’s strongest lender and No. 11 globally on a Bloomberg Markets ranking in May that looked at measures such as capital ratios, non-performing assets and deposit-to-funding ratios.

Hedging Risks

Yet Handelsbanken is more reliant on short-term funds than its Swedish peers. At the end of June, 27 percent of its issued securities were shorter than three months, while a further 23 percent had a maturity of between three and 12 months. At Swedbank AB, 11 percent of securities were shorter than three months and 19 percent were due in between three and 12 months.

Finance Minister Anders Borg and central bank Governor Stefan Ingves have repeatedly urged Handelsbanken, Nordea Bank AB, Swedbank and SEB AB to curtail their short-term borrowing in foreign currencies, even warning banks may have to help pay for central bank reserves needed to hedge the risks they create.

In its report, S&P said it was “increasingly concerned that government support would not fully mitigate the risks associated” with Handelsbanken’s high share of short-term funding. The rating company also said the bank’s efforts to improve its funding balance were behind those of both international and domestic peers.

Stress Test

Sweden’s banks have used short-term funds to help build liquidity buffers to comply with national rules introduced in January. The nation’s four biggest banks all passed a 2012 central bank stress test gauging their ability to handle liquidity outflows during 30 days of turmoil.

Still, the Riksbank cautions against complacency. The bank, whose Governor Ingves is also the head of the Basel Committee on Banking Supervision, said in a May 27 report that while Swedish banks have had cheap access to liquidity, lenders should build models that are sustainable during periods of market turmoil.

“Some of the investors that buy the banks’ certificates have in periods been volatile and pulled away during times of financial stress,” the central bank said.

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