DBRS Confirms Swedbank at A (high); Trend Remains Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Swedbank AB (Swedbank or the Bank), including the Bank’s Senior Unsecured Debt & Deposits rating of A (high), its Short-Term Debt & Deposits rating of R-1 (middle) and the Intrinsic Assessment (IA) of ‘A’. The trend remains Positive on the long-term rating and Stable for the short-term rating. DBRS maintains a Support Assessment of SA-2 for Swedbank reflecting DBRS’s expectation that some form of timely systemic support would be provided to the Bank, if needed, and as a result the A (high) senior ratings are positioned one-notch above the intrinsic assessment.

The Senior Unsecured Debt & Deposit rating currently has a Positive trend. Upward pressure on the rating could result from further evidence of the Bank’s turnaround, including maintaining the improved funding profile and capital levels, while continuing to generate strong earnings, as well as evidence that the ongoing geo-political issues in Russia and Ukraine do not impact significantly on the Baltic operations of Swedbank. The confirmation of the ratings reflects the wide-ranging turnaround implemented by the management team that has led to a reduction in the risk profile, a strong and stable earnings profile, a lower level of encumbered assets, and improved capital levels.

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. Swedbank benefits from its leading market positions in the Swedish lending, mortgage, and deposits markets and it also has market leading positions in the three Baltic countries of Estonia, Latvia and Lithuania. Group-wide the Bank has 8 million private customers and over 600,000 corporate and organisational customers, which are served through its broad distribution network of over 520 branches, as well as through a distribution agreement with 60 savings banks.

In DBRS’s view, Swedbank’s earnings generation ability has become increasingly solid. In 2014 the Bank reported income before provisions and taxes (IBPT) of SEK 21.7 billion, up from SEK 19.4 billion in 2013, and a net profit of SEK 16.4 billion, or 27% higher than in 2013. Swedbank also continues to be a very efficient bank, with the reported cost-income ratio in 2014 at 45%, the same as in 2013. DBRS views positively the Bank’s focus in managing expenses and notes that the Bank’s 2016 target to lower operating expenses to SEK 16 billion remains in place.

Swedbank’s liquidity and funding profile has improved in recent years. DBRS notes, however, that Swedbank’s funding profile does rely on capital markets, particularly domestic covered bonds, to a higher degree than many European peers and that the level of encumbered assets remain relatively high, albeit significantly reduced from previous levels. At end-2014 covered bonds accounted for 30% of the Bank’s total funding and deposits and other borrowings from the public accounted for 40%. Nonetheless, DBRS sees the deposit base as providing a solid foundation to its funding profile 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.

Overall DBRS sees Swedbank’s risk profile as increasingly low risk given its focus on retail and business banking and Swedbank’s 2013 decision to discontinue the higher risk Russian and Ukrainian operations. At end-2014 the SEK 696 billion residential mortgage book accounted for approximately 53% of the Bank’s loan portfolio with the remainder of the Bank’s loan portfolio consisting primarily of the corporate lending book and lending to housing cooperatives.

The vast majority of the loan book is in Sweden but, at end-2014, just under 10% of the net loan portfolio was to the Baltic countries. The exposure to the Baltics, and to Russia and Ukraine, significantly impacted the Bank’s performance in 2009 but since then, as a result of lower lending, substantial provisioning, the sale of the Ukrainian operations and the winding down of the Russian operations, the Bank’s total exposure to these higher risk markets has reduced. This has, together with the on-going recovery in the Baltic countries, reduced the balance sheet risk and the potential impact on the Bank’s income statement. Credit quality remains extremely sound and total gross impaired loans have continued their downward trajectory and were SEK 6.2 billion at end-2014, or 0.47% of total gross lending, down from 2.9% in 2009. The largest segment exposure of the Bank, outside of residential mortgages, is to property management. The total gross portfolio is SEK 206 billion of which the Baltics account for SEK 17 billion. As a result of strong underwriting and a substantial focus on residential property, which has historically had very low loss rates in Sweden, the asset quality of this portfolio has remained good. Overall, DBRS recognises the substantial effort made by Swedbank to address the asset quality challenges it had in the past and with the stable credit quality in the Bank’s core Swedish market, the improvements in the Baltics, and the ongoing exit from Russia and the Ukraine, DBRS views Swedbank’s risk profile as greatly improved.

DBRS views Swedbank’s capital position as strong and notes the further improvement in capital levels. At end-2014, the Bank reported a Common Equity Tier 1 (CET1) ratio of 21.2%, up from 18.3% at end-2013 and a leverage ratio at end-2014 was 4.5% (CRR basis). DBRS also notes the issuance of an additional tier 1 instrument of USD 750 million during 1Q15 that further improves the capital base. During 2014 the Swedish Financial Supervisory Authority (FSA) finalised the capital requirements for the four major banks, including Swedbank. Unlike its Swedish peers, Swedbank has not disclosed a targeted CET1 ratio but DBRS notes that the current 21.2% CET1 ratio is notably above the 19.3% minimum requirement set by the Swedish FSA. Given the Bank’s strong internal earnings generation ability DBRS views Swedbank as well-placed from a capital perspective.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. 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:
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Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Roger Lister
Initial Rating Date: December 18, 2009
Most Recent Rating Update: January 8, 2014

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