DBRS: Swedbank Delivers Solid Q4 Results Despite Pressure on Costs

Summary:
• Good revenue performance QoQ (up 5%) however overall performance impacted by a 12% increase in expenses.
• Asset quality continues to improve, resulting in further provision releases.
• DBRS rates Swedbank at A (high) with a Positive trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) considers Swedbank AB’s (Swedbank or the Bank) Q413 results as solid, despite a 12% overall increase in expenses compared to Q313. Although the weaker expense performance was partially due to seasonally higher expenses and to a reallocation of staff to more customer-focused roles, DBRS views positively management’s focus on cost efficiency and the announcement of a 2014 cost target in line with 2013.

For the 4th quarter, income before provisions and taxes (IBPT) was relatively flat, however net income was down 13% reflecting write-downs of Ektornet’s property values, and an increased tax charge (Ektornet is the Bank’s subsidiary that manages and develops the assets repossessed by the Bank). As a result of the reducing size of Ektornet’s portfolio DBRS would not expect to see further write-downs of this magnitude. Asset quality continues to improve and the Bank’s capital position is strong.

In recent years the Bank’s asset quality has improved dramatically as a result of the on-going recovery in the Baltic countries, together with substantial provisioning and the strong loan quality of the domestic portfolio. In Q413 these trends continued with the Bank reporting a further decrease in the level of impaired loans, across the different business lines and geographies, and also further provision releases reflecting primarily the improvement in the Baltic portfolios.

At end-Q413 the Bank reported a Common Equity Tier 1 ratio (according to Basel 3) of 18.3%, up from 18% at Q313. The Swedish authorities intend to increase the risk weight floor for residential mortgages, within the Pillar 2 calculation to 25%, from the current 15%. DBRS notes that if this was included in the Pillar 1 calculation, Swedbank would still maintain a strong Basel 3 Common Equity Tier 1 ratio of approximately 14%. As a result, and due to the Bank’s internal capital generation, DBRS views the Bank as well placed to manage the impact of the evolving regulatory environment.

DBRS rates Swedbank at A (high) with a Positive trend for Senior Unsecured Debt & Deposits. The ratings, and the Positive trend, remain supported by 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.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]