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

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Swedbank AB (Swedbank or the Bank), including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (high). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
In confirming the ratings DBRS Morningstar takes into account that the Bank has been continuing to generate solid earnings and robust cost efficiency in spite of higher costs relating to Anti Money Laundering (AML). In DBRS Morningstar’s view, the Bank has made changes to management, important investments in compliance, and AML systems, which seem to have contained reputational damage in its franchise.

Swedbank’s ratings continue to reflect the Bank’s strong retail franchise in its domestic Swedish market and in the Baltics, its sound asset quality, and its strong capital position with room to absorb the recent fines imposed by the Swedish regulators. Conversely, the ratings also incorporate Swedbank’s relatively high reliance on wholesale funding, when compared to European peers, although this is partially mitigated by a good liquidity position and sound access to Nordic covered bond markets.

DBRS Morningstar expects the Bank’s asset quality ratios, albeit starting from a low level, would be negatively impacted by any significant deterioration of the Swedish and Baltic economic conditions as a result of the coronavirus (COVID-19) outbreak. Similar to its Nordic peers, any disruption in the Nordic covered bond market could also have a negative impact given that this funding source represents around half of the Bank’s wholesale funding. Overall, this is still at early stage in the Bank’s key markets, and we will continue to monitor the developing situation and potential impact of the COVID-19 outbreak on revenues, profits, asset quality, as well as potential funding implications, whilst taking into account the significant relief measures being taken globally by governments and regulators.

RATING DRIVERS
An upgrade or positive pressure on the Long-Term Issuer Rating is unlikely. Any positive rating pressure would require a strengthening of the Bank’s funding profile with lower reliance on wholesale funding, while maintaining sound capital cushions and strong underlying profitability.

A downgrade or negative rating pressure to the Long-Term Issuer rating could arise if the Bank’s asset quality and profitability were to deteriorate substantially, or if the Bank were to face any major challenges accessing wholesale funding markets. Negative rating pressure could also arise if the Bank were to face significant fine as a result of the ongoing US investigation.

RATING RATIONALE
Swedbank is a leading Swedish bank with a strong retail franchise in its domestic market. The Bank is the largest provider of financial services in Estonia, Latvia and Lithuania. Since 2019, Swedbank has been involved in money laundering allegations over the Bank’s operations in Estonia. This has resulted in an investigation initiated by the regulators in Sweden and the Baltic countries, which concluded in a warning and a fine, whilst US authorities continue to investigate. The Bank has implemented management changes, including a new CEO, new Chief Compliance Officer, as well as a new Chairman, and new Vice Chairman.

In 2019, Swedbank continued to demonstrate sound profitability although the reported net profit of SEK 19,697 million down by 7% year-on-year (YoY), primarily driven by higher operating expenses and loan loss provisions. Total operating income however, was up 4% YoY primarily supported by higher net interest income and net commission income on the back of higher lending volumes and good momentum in asset management. Loan loss provisions increased to SEK 1,469 million in 2019 from SEK 521 million in 2018, mainly due to some restructuring on non-performing loans in the oil business segment, particularly in Q4 2019, although they remain low, absorbing 5.7% of the Bank’s income before provisions and taxes (IBPT).

The Bank remains amongst the best performers within its Nordic peer group in terms of efficiency, and we consider the Bank is well placed to manage increased operating costs. While operating expenses were up by 19% in 2019 to SEK 19,984 million, mostly due to consulting expenses related to ongoing money laundering investigations, the Bank’s cost-income ratio reached 43% in 2019 up from 38% in 2018, but it remains low compared to the Bank’s European peers.

DBRS Morningstar views that Swedbank has a relatively low credit risk profile and good asset quality metrics. The Bank continued to report a very low gross impaired loan (Stage 3) ratio of 0.82% at end-2019, albeit up from 69% at end-2018. Swedbank’s exposure to property management, primarily in Sweden, remains sizeable at 16% of total gross loans to the public at end-2019, which in DBRS Morningstar’s view could make the Bank vulnerable to a sharp decline in the Swedish property sector. And, although it is still at an early stage, we will also closely monitor the potential negative impact of the Covid-19 outbreak on the Bank’s asset quality.

DBRS Morningstar views Swedbank as having a good funding and liquidity profile. However, similar to its Nordic peers, the Bank’s usage of wholesale funding accounts for a higher proportion of total funding than most European peers. Total wholesale funding represented around 46% of total funding at end-2019, primarily related to covered bonds (31% of total funding) and commercial paper 7% of total funding). The Bank’s liquidity position remained solid with a liquidity reserve of SEK 380 billion at end-2019, which comfortably exceeded SEK 165 billion maturities in 2020, while the Bank’s LCR was 182% and NSFR 120%. We note Swedbank also issued senior non-preferred bonds for the first time in the last quarter of 2019, in the context of fulfilling MREL requirements which are expected to become effective on January 1, 2022. As a result of the uncertainty prompted by the Covid-19 outbreak, we note the Swedish FSA has loosened requirements on the LCR in essential currencies which should give Swedbank, similar to its Nordic peers, more flexibility to manage liquidity. In addition, Swedish banks can borrow an unlimited amount of money on a weekly basis against collateral.

Swedbank maintains solid capital cushions above regulatory minimum, and good internal capital generation. At end-2019, the Bank’s CET1 ratio was 17% representing 190 pbs above the Bank’s minimum CET1 ratio requirements or approximately SEK 12.3 billion, while it generates around SEK 20 bn net profit each year on average. DBRS Morningstar considers Swedbank's capital cushion as robust enough to absorb the SEK 4 billion fine recently imposed by the Swedish authorities and potential further sanctions from pending investigations. We also note countercyclical buffer requirements were recently reduced to 0% in Sweden (from 2.5%) providing additional room to manoeuvre the challenging environment in 2020.

ESG CONSIDERATIONS
DBRS Morningstar views that the Governance ESG factor was significant to the credit rating. Deficiencies in Swedbank’s corporate governance and practices have been identified further to the Swedish regulators investigation over AML issues, however, we also take into account the complete change in management, the important investments in compliance, and AML systems, as well as a limited impact, if any, on the Bank’s franchise, despite the widespread negative press coverage in the past year.

DBRS Morningstar also notes that the Bank continues to be under investigation by the Swedish Economic Crime Authority over unauthorised disclosure of inside information and gross fraud as well as by the US authorities over AML issues. However, we consider the Bank's reputational risk damage has been limited at this stage, and we believe appropriate measures have been taken. Furthermore, Swedbank's robust track record in cost control, earnings generation, and capitalisation, is likely to absorb further potential sanctions from pending investigations.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792/dbrs-morningstars-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The Grid Summary Grades for Swedbank are as follows: Franchise Strength – Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Strong.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019). This can be found at: https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

The sources of information used for this rating include SNL Financial, Finansinspektionen (Swedish FSA), Finanssivalvonta (Finnish FSA), company documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: [YES]
With Access to Internal Documents: [NO]
With Access to Management: [NO]

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359091

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.”

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

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings
Initial Rating Date: December 18, 2009
Last Rating Date: April 9, 2019

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