DBRS Confirms Swedbank AB at A (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Swedbank AB (Swedbank or the Bank), including the A (high) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposits rating. The trend on all ratings is Stable. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the final senior debt rating is positioned in line with the A (high) Intrinsic Assessment (IA).

The ratings reflect the Bank’s solid franchise in Sweden, the increasingly resilient earnings generation ability and the strong capitalisation levels. The ratings also incorporate the Bank’s improving risk profile as well as the diversified and increasingly improving funding profile, despite the reliance on wholesale funding.

Swedbank has a very strong franchise in Sweden and this is a key factor underpinning the ratings. The solid Swedish franchise is complemented by market leading positions in the Baltic countries Estonia, Latvia and Lithuania. Across these four markets Swedbank serves seven million private customers and 600,000 corporate customers through a network of nearly 420 branches in Sweden and the Baltic countries.

In DBRS’s view Swedbank’s earnings generation ability has been increasingly resilient. Both net interest income and net fee and commission income have strengthened steadily in recent years thanks to the relatively stable economic conditions in Sweden and the recovery in the economies of the Baltic region. In 2015 the Bank reported pre-impairment operating profit (IBPT) of SEK 21.3 billion, or 2% lower than the previous year mainly due to valuation effects on net gains and losses on financial items at fair value. Furthermore, efficiency continues to remain strong. The Bank’s reported cost/income ratio improved further to 43% in 2015 and operating expenses for the year totalled SEK 16.3 billion. DBRS views positively the Bank’s commitment to reduce operating costs to SEK 16 billion in 2016.

DBRS views Swedbank’s portfolio as low risk, given its focus on retail and commercial banking. This is further supported by Swedbank’s decision to discontinue the Ukrainian operations in 2013 and by the wind down of Russian operations. At end-2015 the Bank’s largest exposure was towards household mortgages and accounted for 53% of the total book while total lending to private individuals totalled SEK 767 billion, up 4% on 2014. The remaining loan exposure comprised mainly lending to housing associations, the property management book, agriculture, manufacturing, as well as other corporate lending. Credit quality in the domestic Swedish market remains extremely strong as evidenced by the 0.02% impaired loan ratio in residential mortgages at end-2015 and the low impaired loans ratio in both the private and corporate segment (0.05% and 0.56%, respectively). Total gross impaired stood at just over SEK 6 billion, or 0.47% of total gross lending, down from SEK 6.2 billion at end-2014, and SEK 7.5 billion at end-2013. The Bank’s shipping and offshore exposure is low and at end-2015 the exposure totalled SEK 29.8 billion, or 2.2% of the total gross portfolio. DBRS acknowledges the improving risk profile. However, given the Bank’s significant exposures to the Swedish market and the Baltic region, DBRS will continue monitoring developments in the Swedish housing market and the macroeconomic environment in the Baltic countries. Regarding senior management, DBRS notes that the CEO was dismissed in February 2016 and the permanent replacement has not yet been appointed. However, DBRS does not expect any material change in the Bank’s risk strategy or profile.

DBRS views Swedbank’s funding profile as diversified and robust. However, like its Nordic peers, the Bank relies to a higher degree than other European banks on capital market funding due to significant issuance of mortgage covered bonds. At end-2015 covered bonds accounted for 30% of total funding while deposits and borrowings from the public combined accounted for 40% of total funding. DBRS views that the covered bond market has been a relatively stable source of funding for Swedbank and notes the Bank’s ample liquidity buffer which at end-2015 covered 2.9x the short-term funding of SEK 108 billion. The Liquidity Coverage Ratio (LCR), according to Swedish rules, was 159% in total at end-2015, and at 638% in Euros and at 363% in US Dollars, respectively while the Bank’s Net Stable Funding Ratio stood at 107% at end-2015.

DBRS views Swedbank’s capitalisation as strong and notes both the increased capital levels and regulatory ratios. At end-2015 the Bank reported a Basel III Common Equity Tier (CET1) ratio of 24.1%, up from 21.2% at end-2014. The increase was due to both accumulated profit for the period and a reduction in Risk Exposure Amounts. This is above Swedbank’s current minimum regulatory requirement of 19.9%, as estimated by Swedbank assuming an increase in the required countercyclical buffer to 1.5% as of June 2016 from the current 1.0% level. On a leverage ratio basis, Swedbank demonstrated further improvement, with a leverage ratio of 5.0% at end-2015, up from 4.5% at end-2014.

Given the high rating level further upward pressure on the rating is unlikely in the medium term. However DBRS would view positively a substantial reduction in the level of wholesale funding, while maintaining (i) low levels of credit losses, (ii) solid and predictable underlying profitability, and (iii) continued sound capital management. Negative pressure on the rating would likely be driven by a deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or a significant further encumbering of the balance sheet.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016. 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:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 18, 2009
Most Recent Rating Update: September 29, 2015

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