Fitch Ratings says that commercial banks rated in the 'AA'-category by Fitch are an elite group globally. In Europe, there are only four of them: Rabobank Group is rated 'AA'/Negative Outlook, and HSBC Holdings, Nordea Bank and Svenska Handelsbanken are rated 'AA-'/Stable Outlook.
Key strengths of these banks include resilient business models over time, robust capitalisation, substantial liquidity buffers and strong risk management. Rabobank's Negative Outlook reflects credit fundamentals that on balance are becoming more in line with, rather than superior to, its 'AA-' rated peers.
Capitalisation at each of the four banks continues to improve - both in volume and in quality. This is in line with global banking trends, but these four banks come from a higher starting point. Risk weighted assets benefit from low weightings particularly on mortgage loans, and leverage ratios compare less favourably with major banks' around the world, but are strong for large European banks.
The three northern European banks have a structural reliance on wholesale funding, while HSBC benefits from a large customer deposit base. Wholesale funding reliance makes banks sensitive to market sentiment, which in turns means that it is important that these three banks continue to outperform peers in most metrics. These banks all retained very good access to the capital market during the crisis, and liquidity is conservatively managed.
Asset quality at the four banks is solid - a function of the relatively safe markets in which they primarily operate, as well as controlled risk appetite and (especially in the Nordics) close regulatory oversight. Rabobank's and HSBC's loan books are generally healthy; however, some asset quality indicators, such as unreserved impaired loans as a proportion of equity, are weaker than those of most of the 'AA'-category banks, only somewhat explained by conservative classification.
Profitability levels at Handelsbanken, HSBC and Nordea Bank have remained healthy. Rabobank's earnings generation has been structurally modest, although resilient, compared with peers', and is further challenged by competitive pressures on income and elevated loan impairment charges as a result of the weak Dutch economic environment. Lower earnings at Rabobank historically have been balanced by much better capitalisation than at highly rated peers; however, the gap has now narrowed.
For more information :Peer Review: 'AA'-Category European Banks
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