DBRS Confirms Swedbank at A (high); Trend revised to Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Swedbank AB (Swedbank or the Bank), including its A (high) rating for Senior Unsecured Debt & Deposits and the R-1 (middle) Short-Term Debt and Deposit rating. The Trend on the long-term ratings has been revised to Positive from Stable and the Trend on the R-1 (middle) Short-Term Debt and Deposit rating remains Stable. Swedbank’s current ratings reflect an Intrinsic Assessment (IA) of A combined with a support assessment of SA-2, and this results in a one notch uplift to the final rating from the IA. The SA-2 considers the importance of Swedbank to the financial system in Sweden and DBRS’s expectation of some level of government support should it prove necessary.

The revision of the trend to Positive reflects the wide-ranging turnaround implemented by the management team that has led to a reduction in the risk profile, improved earnings, a lengthened funding profile, and improved capital. DBRS also recognises the strength of the Bank's solid Swedish franchise, the solid earnings generation, and its strong capital position but also the relatively high level of encumbered assets.

Swedbank has a strong franchise in its domestic market and DBRS views the solid, stable earnings from the Swedish operations as providing a strong foundation for the Bank’s underlying earnings ability. As well as its leading market positions in the Swedish lending, mortgage, and deposits markets the Bank also has market leading positions in the three Baltic countries of Estonia, Latvia and Lithuania. Group-wide the Bank has 7.9 million private customers and 600,000 corporate and organisational customers, which are served through its broad distribution network of almost 500 branches.

DBRS now views Swedbank’s earnings generation ability as increasingly solid. In 9M13 the Bank reported income before provisions and taxes (IBPT) of SEK 15.1 billion, up from SEK 14.4 billion in the same period of 2012. As a result of the sale of the Ukrainian operations in the second quarter of 2013 the Bank’s net profit was down slightly on the same period of 2012. However, the performance continues to show the impact of the turnaround in the Bank since the large losses reported in 2009 that were due to the high credit costs associated with asset quality issues in the Baltic Banking and Russia & Ukraine segments. Since then, the Bank’s provisioning requirements have been reduced dramatically and recoveries in some areas have also boosted net profits.

Swedbank’s liquidity and funding profile has also improved in recent years. DBRS notes, however, that the Bank’s funding profile is reliant on capital market sources, particularly covered bonds, to a higher degree than many European peers, and this leads to a relatively high level of encumbered assets. At end-September 2013, covered bonds accounted for 33% of the Bank’s total funding and deposits and other borrowings from the public accounted for 42%. Nonetheless, DBRS sees the deposit base (and other borrowings from the public) as providing a stable foundation to the Bank’s funding, given its stability and the large market share that the Bank has in Sweden. Although DBRS recognises the strength of the covered bond market in Sweden, and the progress that the Bank has made in improving its funding profile, DBRS continues to view the high usage of wholesale funding as a potential vulnerability. As a result, further strengthening of the funding profile would be viewed positively.

DBRS considers that Swedbank has reduced its risk profile in recent years due to the ongoing exit from the higher risk Russian and Ukrainian markets, the improvement in the performance in the Baltic countries and its focus on retail and business banking in Sweden. At end-September 2013, the Bank’s SEK 650 billion residential mortgage book accounted for approximately 54% of the total loan portfolio (excluding the Swedish National Debt Office and repurchase agreements) with the remainder of the Bank’s loan portfolio consisting primarily of the corporate lending book and lending to housing cooperatives. Credit quality remains extremely sound in the domestic Swedish market as evidenced by the 0.04% impaired loan ratio in the residential mortgage book and the low impaired ratios of corporate customers in both the Retail and LC&I segments (0.55% and 0.72% respectively at end-September 2013). Total gross impaired loans continued their downward trajectory and were SEK 9.1 billion at end-September 2013, or 0.76% of total gross lending, down from 2.9% in 2009.

Swedbank has a strong capital position with, at end-September 2013, a fully-loaded Basel III common equity tier 1 (CET1) ratio of 18%, up from 15.4% at end-2012 (based on the Bank’s current understanding of Basel III). DBRS notes that, although the Bank benefits from the low risk-weighting of mortgage assets, it is well placed to cope with a potential increase in the risk weighting of mortgages to 25%, under Pillar 2, as currently being discussed by the Swedish authorities.

Given the change in the trend to Positive downward ratings pressure is unlikely over the medium-term. Upward pressure on the rating could result from further progress in reducing the risk profile and improving the funding profile, while maintaining the already good levels of earnings and capital.

Separately, DBRS has also withdrawn the R-1 (high) short-term rating on debt guaranteed by the Kingdom of Sweden, as this debt has been repaid.

Notes:
All figures are in Swedish kronas (SEK) unless otherwise noted.

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All can be found on the DBRS website under Methodologies.

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: December 18, 2009
Most Recent Rating Update: April 24, 2012

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

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