DBRS: Swedbank’s Fundamentals Remain Strong with Stable Earnings in Q1 2014

Summary:
• Stable overall earnings performance with IBPT down 1% on Q4 2013, but net profit up 9% QoQ
• Asset quality and capital remain strong, and direct exposure to Ukraine and Russia is manageable
• DBRS rates Swedbank at A (high) with a Positive trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) views the Q1 2014 results of Swedbank AB (Swedbank or the Bank) as solid. Compared to Q4 2013 income before provisions and taxes (IBPT) was down 1%, with a 6% fall in operating expenses and a lower tax charge mitigating a 3% fall in income. The reduction in operating expenses partly reflects that expenses in Q4 2013 were seasonally higher, but management’s focus on cost efficiency and the 2014 cost target to hold expenses in line with 2013 is viewed positively by DBRS. Nearly half of the 3% decrease in net interest income, the largest contributor to total income, was due to the lower number of days during Q1 compared to Q4. The net interest margin was down slightly in the quarter as a result of lower deposit margins, however importantly, given the size of the Bank’s portfolio, mortgage margins were stable. Overall the Bank’s net profit was up 9% boosted by lower write-downs related to Ektornet (the Bank’s subsidiary that manages and develops the assets repossessed by the Bank), higher net recoveries and a lower tax charge.

Balance sheet indicators continued to be strong in the quarter with asset quality continuing to improve while the Bank’s capital position remains strong. The Bank’s operations in the Ukraine have now been sold and those in Russia are now in wind-down and are classed as discontinued. DBRS views the remaining direct exposures as manageable given that at end-March 2014, they total about SEK 1.5 billion. In addition the Bank has repossessed properties in Ukraine totaling SEK 124 million and other properties booked at SEK 8 million. This compares to consolidated common equity tier 1 capital of SEK 82 billion at end-March 2014. DBRS will continue to monitor whether the elevated risks stemming from the ongoing issues in Ukraine and Russia will impact upon Swedbank’s operations in the Baltic countries.

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 Q4 2013 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-Q1 2014 the Bank reported a Common Equity Tier 1 (CET1) ratio, according to Basel 3, of 18.3%, unchanged from end-2013. The Swedish authorities are currently proposing 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’s CET1 ratio would be reduced by 4.2% to or just over 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.