DBRS Assigns Long-Term Debt Rating of A (high) to Swedbank AB (publ), Trend Stable

DBRS has assigned Senior Unsecured Debt and Deposits ratings of A (high), and Short-Term Debt and Deposits ratings of R-1 (middle) to Swedbank AB (publ) (Swedbank or the Bank). The ratings consider DBRS’s designation of Swedbank as a Critically Important Banking organisation (CIB) in Sweden. Further, DBRS has assigned its AAA / R-1 (high) ratings to all debt which is guaranteed by the Swedish government. The trend on all ratings is Stable.

The CIB designation follows DBRS’s introduction of a floor rating in Sweden. As a CIB, Swedbank’s ratings are subject to the floor rating, which is A (high) for long-term debt and deposits and R-1 (middle) for short-term debt and deposits at the bank level. The level of the floor reflects DBRS’s expectation that the Swedish state will provide support, if necessary, to prevent any CIB from weakening below this rating level. DBRS views A (high) / R-1 (middle) as the level of creditworthiness that market participants demand for CIBs to be viewed as stable counterparties. CIBs need to be perceived as reliable partners in undertaking a wide range of financial transactions. DBRS views the floor as the level of support at which the Swedish state will sustain its CIBs to ensure that its financial system is fully functioning. The CIB designation provides significant uplift to the ratings, as Swedbank’s ratings are set at the floor level, representing an uplift from Swedbank’s intrinsic rating of BBB (high).

Swedbank boasts of a strong Swedish banking franchise, with a leadership position in retail banking and a strong position in corporate lending and deposits. The Swedish operations continue to generate solid earnings, which help support Swedbank’s overall franchise. Moreover, the Bank maintains leading positions in each of the three Baltic countries and is active in Ukraine and Russia. While the operations outside of Sweden provide long-term growth potential and add geographic diversity, the Eastern European operations are currently operating at significant losses, as credit performance and business activities are negatively impacted by the deep recession in the region.

Swedbank’s ongoing negative operating performance reduces its intrinsic strength. Large impairments for loan losses in the Baltics and Ukraine caused losses in each of the first three quarters of 2009, with a total net loss of SEK 8.7 billion for the nine months ending 30 September 2009. DBRS anticipates continued and significant pressure on earnings, given the expectation that the Baltic and Ukrainian economies will remain stressed, new lending volume will remain low and credit costs will remain high, especially in the loan books outside Sweden. Notwithstanding, the Bank continues to generate reasonably stable income before impairments for loan losses, provisions and taxes (IBPT). DBRS views Swedbank’s IBPT of SEK 13.3 billion in the nine months ending 30 September 2009 as evidencing that its franchise, especially the Swedish franchise, remains intact despite the difficult operating environment.

The Bank has taken appropriate measures to strengthen its capital position. Capital has been bolstered by two rights offerings since autumn 2008 with combined net proceeds of SEK 27.0 billion. Including the most recent rights issue which closed on 15 October 2009, Swedbank’s pro-forma core Tier 1 ratio, excluding hybrids, improved to a strong 12.3%. In light of the current environment and the challenges facing Swedbank, DBRS views the increased capitalisation positively, as the enhanced capital position better enables the Bank to absorb the impact of the challenging economic environment while supporting its efforts to reduce the risk inherent in its balance sheet.

DBRS views Swedbank’s propensity for and reliance on wholesale funding as a weakness. Wholesale funding totals 68% of funding, yet the funding and liquidity profile has been strengthened by its participation in the Swedish government’s debt guarantee programme. The scheme helped stabilise liquidity after the Bank experienced significant liquidity pressures and deposit outflows following the failure of Lehman Brothers. While DBRS recognises the recent progress Swedbank has made in raising unguaranteed debt, mostly through covered bond issuances, guaranteed funding still amounted to a significant SEK 277 billion or 32% of wholesale funding at 30 September 2009. In DBRS’s view, going forward, the Bank faces the challenge of reducing its dependence on government-guaranteed funding, particularly for unsecured long-term debts.

DBRS considers the Bank’s risk profile as weakened by its noteworthy exposure to the Baltics and Ukraine, which represents 15% of gross lending, but 90% of impaired loans at 30 September 2009. Swedbank’s total impaired loans amounted to an elevated SEK 35.8 billion or 2.5% of lending, however 63% of impaired loans are covered by provisions. DBRS sees the Bank facing the challenge of managing the severe impact from the deep recession in the Baltics and Ukraine on earnings and credit quality. Growth in impaired loans has slowed recently, which could indicate a level of stabilisation in credit quality. However, DBRS remains conscious of the risk of currency devaluation and legal changes in the Baltics which could lead to re-accelerating impaired loan growth.

The AAA / R-1 (high) ratings for Swedbank’s liabilities covered under the guarantee scheme reflect the Swedish government’s ability to honour its guarantee, as determined by DBRS’s internal assessment of the sovereign. All future issuances of Swedbank that fall within the scope of the guarantee will carry the AAA / R-1 (high) ratings.

The trend on all ratings is Stable. As discussed above, the ratings are at the floor, reflecting DBRS’s view that Swedbank is a CIB in Sweden. Given the long- and short-term ratings are at the floor, further weakening in the Company’s intrinsic strength will not result in a concurrent downgrade of the final rating below the floor rating.

DBRS continues to ascribe implicit systemic support to banks in Sweden. As such, a SA-2 Support Assessment has been assigned to Swedbank. The SA-2 reflects DBRS’s expectation that some form of systemic support would be provided to Swedbank. The ongoing, strong support provided by the Swedish government to Swedbank is consistent with the CIB and SA-2 designation.

Note:
All figures are in SEK unless otherwise noted.

This rating is based on public information.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments.

This is a Corporate (Financial Institutions) rating.