DBRS: Swedbank’s Fundamentals Remain Strong as the Bank Reports Solid FY14 Results

Summary:
• Solid FY14 result, with net profit up 27%
• Asset quality and capital ratios remain strong
• DBRS rates Swedbank at A (high) with a Positive trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) views the FY14 results of Swedbank AB (Swedbank or the Bank) as solid. For the full year 2014, net profit was SEK 16.4 billion, or 27% higher than in 2013. On a quarterly basis, operating profit for 4Q14 was SEK 4.8 billion, significantly lower than the SEK 5.7 billion reported in 3Q14. This was driven primarily by higher covered bond repurchases and negative valuation effects caused by increased credit spreads that impacted Group Treasury income.

Net interest income was flat on 3Q14 but increased 3% on a yearly basis, due to both repricing and to increased deposit and lending volumes, with mortgages and corporate lending driving the increase in lending. Net commission income increased 2% on a quarterly basis positively impacted by the Bank leading a number of preference share issues in the property sector, as well as increased M&A related activity in Norway. The 11% increase year on year mainly reflected increased asset management fees.

Driven by seasonal effects, operating expenses in 4Q14 were 3% higher on 3Q14, however the total expenses for FY14 totalled SEK 17.6 billion, within the SEK 17.7 billion target for 2014. The cost/income ratio for 2014 was 45%, remaining flat on 2013. DBRS views positively the management’s focus in managing expenses and notes that the Bank’s 2016 target to lower operating expenses to SEK 16 billion remains in place.

Asset quality remained strong. At end-December 2014 impaired loans were SEK 6.3 billion, or 0.41% of total lending, substantially lower than the SEK 7.5 billion recorded at end-2013. Total credit impairments for the year reached SEK 419 million, significantly higher than the SEK 60 million reported in 2013, due to the impact of a single, problem corporate loan in 3Q14, as well as lower recoveries in the Baltic Banking division. DBRS notes that Swedbank estimates that it has a portfolio of SEK 19 billion that is negatively impacted by the lower oil price. DBRS will continue to monitor the performance of this portfolio closely, but notes that the bulk of this portfolio is to lower risk publicly listed companies with long-term customer contracts.

Swedbank’s capital levels improved further and at end-2014 the Bank reported a Common Equity Tier 1 (CET1) ratio of 21.2%, up from 18.3% at end-2013, due to accumulated profit and the approval of the advanced internal ratings-based (A-IRB) approach for the Swedish and Norwegian corporate exposures, although the total Risk Exposure Amount did increase in 4Q14 mainly due to lending growth. The current 21.2% CET1 ratio is above the 19.3% minimum ratio that the Bank calculates based on its interpretation of the Swedish Financial Supervisory Authority proposals and therefore given this, and the Bank’s strong internal capital generation capacity, DBRS views Swedbank as well placed from a capital perspective.

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.