DBRS: Swedbank Reports Stable Results in 2Q14

Summary:
• Stable results for 2Q14, with flat net interest income, and commission income up QoQ.
• Asset quality remains strong, and direct exposure to Ukraine and Russia is manageable.
• Strengthened capital ratios due to approval of the advanced IRB approach for corporate lending in Sweden and Norway.
• Franchise in south of Sweden strengthened via Sparbanken Öresund purchase.
• DBRS rates Swedbank at A (high) with a Positive trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) views the 2Q14 results of Swedbank AB (Swedbank or the Bank) as stable. Compared to 1Q14, income before provisions and taxes (IBPT) was up 9% and was up 14% compared to 2Q13. However the higher IBPT mainly reflected substantial gains on financial items held at fair value, and other income which DBRS generally views as less predictable. Core net interest income (NII) was stable across all business segments, whereas commission income rose by 4.5% mainly due to higher income from cards and asset management. During the quarter, both income and expenses rose. However, excluding the acquisition of Sparbanken Öresund, total costs remained fairly flat and helped to evidence the stability of Swedbank’s underlying expense management. Sparbanken Öresund, which was acquired by Swedbank in the quarter, reported a loss before impairments of SEK 162 million for 2Q14, but will help to improve the franchise in the south of Sweden. Excluding the acquisition, Swedbank’s IBPT for 2Q14 increased by a pro-forma 12%.

Asset quality developments remained strong in the quarter. At end-2Q14 impaired loans were SEK 6.3 billion (or 0.49% of the customer loan portfolio), a significant improvement on the SEK 10.1 billion level at end-2Q13. Although impaired lending was up slightly on end-1Q14, this was partly driven by the acquisition of Sparbanken Öresund. Impairment charges in 2Q14 remained extremely low at SEK 30 million, reflecting continued recoveries in the Baltic Banking division. The Bank’s operations in Russia are in wind-down and are classed as discontinued. DBRS views the remaining direct exposures as manageable given that at end-June 2014, they totalled SEK 0.9 billion. In addition the Bank has repossessed properties in Ukraine totaling SEK 122 million. This compares to consolidated common equity tier 1 capital of SEK 84.9 billion at end-2Q14. 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.

At end-2Q14 the Bank reported a Common Equity Tier 1 ratio (according to Basel 3) of 20.9%, up from 18.3% at end-1Q13 and 17.2% at end-2Q13. The substantial increase principally reflects a reduction in the risk exposure amount (REA, formerly risk weighted assets) due to the approval by the Swedish Financial Supervisory Authority (FSA) to use the advanced internal ratings-based (A-IRB) approach for its corporate exposures in Sweden and Norway. In May 2014 the FSA announced details on the proposed structure of how capital requirements for Swedish banks will be devised in the future. These include an increase in the risk weight floor for residential mortgages to 25%, a systemic risk buffer of 3% of risk weighted assets (RWAs) and a 2% buffer requirement within the Pillar 2 framework, both of which are to be met with common equity tier 1 capital. In addition, a decision on the likely activation and final level of the counter‐cyclical capital buffer is expected in the autumn of 2014. Given the Bank’s strong internal capital generation and its current capital base, 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.