DBRS Comments on Swedbank's 3Q12 Results – Senior Unaffected at A (high), Trend Stable

DBRS Ratings Limited (DBRS) has commented today on the 3Q12 results of Swedbank AB (Swedbank or the Bank). Swedbank’s ratings, including its A (high) Senior Unsecured Debt & Deposits rating and its R-1 (middle) Short-Term Debt & Deposits rating, are unaffected by the results. The trend is Stable. The quarter was highlighted by improved efficiency, continuing solid asset quality, and improved regulatory capital.

The Bank reported an operating profit of SEK 4.7 billion for 3Q12, up 13% from 2Q12 and 10% from 3Q11. The result was driven by sustained net interest income, marginal growth in fee income, higher trading income, and lower expenses. Stable net interest income, at SEK 5.3 billion for 3Q12, was supported by successful re-pricing on corporate lending, as well as marginally higher lending volumes. These helped to offset margin pressure from falling Stibor and Euribor rates. Fee income, at SEK 2.4 billion, was boosted by seasonally higher income from payment commissions and positive performance in fixed income and trading helped contributed to gains on financial items. Complementing the 2% quarter-over-quarter (QoQ) growth in total income (revenues) to SEK 9.1 billion, total expenses were reduced 6% QoQ and were the main contributor to positive operating leverage. Cost containment remains an important strategic objective for Swedbank. Thus far for 2012, the Bank has achieved SEK 937 million of its targeted SEK 1 billion of run-rate cost savings for the year and the cost-to-income ratio improved to 44% at 3Q12 (2Q12: 48%). Overall, DBRS views Swedbank’s results as illustrating the Bank’s further progress despite the challenging operating environment.

Swedbank’s business segments continue to deliver solid earnings which are underpinned by the strength of its franchise. Despite on-going margin pressure, the Retail segment increased its operating profit by 3% QoQ to SEK 2.8 billion, helped by credit re-pricing, a relative fall in credit costs and an improvement in customer penetration made possible by the Bank’s investment in technology. Within Large Corporates & Institutions (LC&I), operating profit increased 26% QoQ to SEK 912 million on the back of corporate credit re-pricing, higher business volumes, and net recoveries in credit losses. In Swedbank’s Baltic Banking segment, however, lower market rates, unfavourable exchange rates, and significantly smaller net recoveries in credit losses led to a 30% QoQ decline in operating profits to SEK 733 million. Earnings trends remain stable in the Asset Management segment although financial market concerns affected investor fund flows. The Bank’s Group Functions & Other segment recorded a profit in 3Q12 of SEK 127 million, the segment’s first profitable quarter in more than one year. The result benefitted from declining impairments, higher net interest income from Group Treasury, and sustained income from sales of repossessed properties at Ektornet.

Swedbank’s results indicate solid asset quality metrics. Total non-performing loans represented 1.3% of gross loans at 30 September 2012, down from 1.5% at the end of 2Q12 and 2.1% a year earlier. Meanwhile, Bank-wide credit impairments totalled SEK 204 million in 3Q12, or 0.06% of total lending. Credit losses in the Retail segment, which represents 69.8% of gross loans, remain very low at 0.03%. Conversely, credit losses in Swedbank’s Ukrainian operations are elevated and are likely to remain so in the near-term. Due to the difficult environment, management has thus decided to close the last ten Ukranian branches in 4Q12. Importantly, given the scale of the Ukrainian loan book (representing 0.17% of total loans, excluding repos) DBRS does not expect the elevated credit impairments in Ukraine to materially impact overall asset quality. Positively, the Baltic Banking segment, which had been the source of outsized credit impairments in the past, continues to experience net reversals.

DBRS views Swedbank’s funding and liquidity profile as stable and the Bank has continued to enjoy good access to the funding markets throughout 2012. The Bank issued SEK 31 billion during 3Q12 comprising SEK 18 billion of covered bonds and SEK 13 billion of senior. This followed issuance of SEK 97 billion in long-term debt during 1H12, of which covered bonds represented SEK 50 billion. DBRS notes that Swedbank has an additional SEK 9 billion of maturities upcoming in 4Q12 with SEK 86 billion coming due in 2013, which includes SEK 10.9 billion of government guaranteed bonds.

Swedbank has a tendency towards wholesale funding, yet a large portion of this is linked to the relatively more stable Swedish covered bond market used to fund the sizeable mortgage book. Notably, wholesale funding represented 60.5% of total funding at 30 September, 2012, but was materially lower, at 27.7%, after adjusting for covered bonds. Retail deposits increased modestly during the third quarter and the bank reported a relatively stable 22% share of Swedish retail deposits. Yet, corporate deposits increased sharply by 24% during 9M12 and in part reflected the quality of both Swedbank and Sweden in the current environment. Supporting the Bank’s funding and liquidity profile is its SEK 296 billion liquidity buffer, comprised largely of cash and holdings at central banks as well as highly rated securities eligible for ECB funding. Swedbank estimated its Basel III liquidity coverage ratio to be 144% at 30 September 2012.

Swedbank reported further strength in its regulatory capital ratios, bolstered by retained earnings and reductions in risk weighted assets. The Bank recorded a solid Basel II Tier 1 capital ratio of 18.8% and a Basel II Core Tier 1 capital ratio of 17.3%, up from 18.2% and 16.6% in 2Q12, respectively. Based on expected future Basel III regulations, the Bank estimates its Basel III Core Tier 1 capital ratio to be 16.1% as of 30 September 2012, well above Swedish regulatory requirements.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: 18 December 2009
Most Recent Rating Update: 24 April 2012

For additional information on this rating, please refer to the linking document under Related Research.