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) Issuer Rating, 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, and 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, its robust earnings generation ability and strong capitalisation levels. The ratings also incorporate the Bank’s low risk profile as well as its well-managed 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.

In DBRS’s view, Swedbank’s earnings generation ability is robust. Both net interest income and net fee and commission income have strengthened steadily in recent years thanks to the growing Swedish economy and the growth in the economies of the Baltic region. In 2016, the Bank reported pre-impairment operating profit (IBPT) of SEK 23.1 billion, excluding one-off items, or 9% higher than the previous year mainly due to increased net interest income and improved net gains and losses on financial items within Group Treasury. Furthermore, efficiency continues to remain very strong. The Bank’s reported cost/income ratio improved further to 39% in 2016 on good revenue growth (2015: 43%). In addition, DBRS notes that, in 2016, the Bank benefited from a one-off net capital gain of SEK 2.1 billion related to the Visa Inc’s acquisition of Visa Europe.

DBRS views Swedbank’s portfolio as low risk, given its focus on retail and commercial banking. At end-2016, the Bank’s largest exposure was towards household mortgages and accounted for 54% of the total book. The remaining loan exposure comprised mainly lending to housing associations, the property management book, agriculture, manufacturing, as well as other corporate lending. Total gross impaired stood at just 0.52% of total gross lending (2015: 0.40%). Credit quality in the domestic Swedish market remains extremely strong as evidenced by the 0.02% impaired loan ratio in residential mortgages at end-2016 and the low impaired loans ratio in both the private and corporate segment (0.05% and 0.36%, respectively). However, given the Bank’s significant exposures to the Swedish market, which has experienced high levels of house price rises in the past ten years, and the Baltic region, which has proven more volatile in the past, DBRS will continue monitoring developments in the Swedish housing market and the macroeconomic environment in the Baltic countries.

DBRS views Swedbank’s funding profile as sound and well-managed. 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-2016, covered bonds accounted for 32% of total funding while deposits and borrowings from the public combined accounted for 46% of total funding. DBRS views that the covered bond market has been a stable source of funding for Swedbank and notes the Bank’s ample liquidity buffer which at end-2016 covered 3.2x the short-term funding of SEK 103 billion. The Liquidity Coverage Ratio (LCR), according to Swedish rules, was 156% in total at end-2016, and at 330% in Euros and at 160% in US Dollars, respectively, while the Bank’s Net Stable Funding Ratio stood at 108% at end-2016.

DBRS views Swedbank’s capitalisation as strong. At end-2016, the Bank reported a Basel III Common Equity Tier (CET1) ratio of 25.0%, up 90 basis points from end-2015 as the accumulated profit for the period more than offset the increase in Risk Exposure Amount. On a leverage ratio basis, Swedbank demonstrated further improvement, with a leverage ratio of 5.4% at end-2016, up from 5.0% at end-2015.

RATING DRIVERS
Given the high rating level further upward pressure on the rating is unlikely in the medium term. However, DBRS would view positively lower 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.

The Dated and Undated Subordinated Debt currently rated one notch below the IA remain Under Review with Negative Implications as per DBRS’ review of European subordinated debt. See “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications” for more details.

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 (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), and DBRS Critical Obligations Rating Criteria (February 2017). 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.

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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: Vitaline Yeterian
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 7, 2009
Most Recent Rating Update: March 7, 2017

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