OREANDA-NEWS. Fitch Ratings has downgraded Landshypotek Bank AB's (Landshypotek) Long-term Issuer Default Rating (IDR) to 'A' from 'A+', its Viability Rating (VR) to 'a' from 'a+', and affirmed its 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 downgrades are driven by Fitch's expectation that Landshypotek will continue to report somewhat weaker asset quality metrics for the foreseeable future. The level of impaired loans remains low compared with similarly rated peers, but the trading environment for the bank's clients, notably in the domestic agricultural sector, has become more difficult, and Fitch no longer views the bank's asset quality as outstanding.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The ratings reflect Landshypotek's still strong asset quality, conservative risk management, solid risk-weighted capitalisation, good funding and liquidity as well as a niche franchise in Swedish forestry and agricultural sectors' financing. The ratings also consider the bank's monoline business model, its geographical concentration and its relatively small size compared with similarly rated peers.

Landshypotek's asset quality is underpinned by the resilience of the Swedish forestry and agricultural sectors, and the level of impaired loans is still 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 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 modest in a European context, at around 5%.

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 license 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.

SUPPORT RATING AND SUPPORT RATING FLOOR
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 have some flexibility to use EU's Bank Recovery and Resolution Directive legislation, but that this will most likely not be applied to Landshypotek.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
The Stable Outlook reflects Fitch's view that Landshypotek will continue to maintain strong asset quality while continuing to generate stable profitability.

Further downgrade pressure is limited but could arise from continuous weakening of asset quality metrics. The ratings are also sensitive to a prolonged dislocation in funding markets, reducing Landshypotek's access to funding or materially increasing pricing, although this is not expected.

An upgrade is unlikely in the short to medium term, given the current pressure on asset quality, as well as the bank's limited franchise and small size compared to more highly rated peers.

SUPPORT RATING AND SUPPORT RATING FLOOR
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 rating actions are as follows:

The rating actions are as follows:
Long-term IDR: downgraded to 'A' from 'A+'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Viability Rating: downgraded to 'a' from 'a+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: downgraded to 'A'/'F1' from 'A+'/'F1'