DBRS Morningstar Confirms Swedbank AB’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Swedbank AB (Swedbank or the Bank), including the Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at 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
The ratings confirmation reflects Swedbank’s ability to maintain sound earnings generation despite the economic impact of the COVID-19 pandemic, as well as the Bank’s ability to absorb higher loan loss provisions and other charges related to recent anti-money laundering (AML) investigations. The ratings also take into account the Bank's strong retail franchise in its domestic market (Sweden) and its dominant position in the Baltics. Swedbank’s risk profile remains strong, and is largely supported by a low risk household mortgages portfolio; however, DBRS Morningstar notes that uncertainty remains regarding the impact of COVID-19 once government support measures are withdrawn. The ratings also incorporate Swedbank's relatively high reliance on wholesale funding compared to its European peers. This is partly mitigated by higher deposit inflows, access to the very stable covered bonds market, as well as the Bank’s ample available liquidity.

RATING DRIVERS
An upgrade of the ratings over the longer term would require a sustained lower reliance on wholesale and institutional funding, while maintaining a significant capital buffer, strong profitability and no meaningful deterioration of asset quality.

A downgrade of the ratings would be driven by a meaningful deterioration in asset quality as a result of COVID-19, a substantial reduction in the Bank's ability to absorb credit losses as well as any adverse impact related to its ongoing AML issues.

RATING RATIONALE
Swedbank is the third largest Swedish bank by assets and benefits from a dominant position among private customers in Sweden where it also has strong market shares in the corporate segment. The Bank is also the market leader in the Baltic countries in both private and corporate segments. In March 2020, the Swedish FSA issued a warning and an administrative fine of SEK 4 billion to Swedbank over serious deficiencies in its measures to combat money laundering in its Baltic operations. DBRS Morningstar notes that the impact of the AML issues on the Bank's reputation and franchise has been contained, and that since 2019 the Bank has taken important governance actions to identify and remediate the causes of its failures, including an extensive overhaul of the Bank's top management. In addition, Swedbank has set-up a Baltic holding company to improve accountability and control at its Baltic subsidiaries.

In 2020, Swedbank maintained sound earnings generation, which was supported by resilient revenue growth and strong operating efficiency, despite higher loan loss provisions (LLPs), the administrative fine imposed by the Swedish FSA and additional investments to help strengthen the Bank’s AML functions. Swedbank reported a net profit of SEK 12,929 million in 2020, down 34% compared to 2019. Excluding the SEK 4 billion administrative fine, underlying net profit reduced by 14% Year-on-Year (YoY). As a result, the Bank reported an underlying Return-on-Equity (ROE) of 11.4% in 2020, decreasing from 14.7% in 2019 but still above the European peer average. The statutory ROE was 8.9% in 2020. LLPs increased to SEK 4,334 million in 2020, from SEK 1,469 million in 2019 leading to a cost of risk of 26 basis points (bps) in 2020, which is significantly higher than the 9 bps in 2019 although this remains manageable for Swedbank. LLPs absorbed 21% of total income before provisions and taxes in 2020 compared to 6% in 2019.

Swedbank maintained robust asset quality metrics supported by the Bank's large household mortgages portfolio which has been historically low risk. DBRS Morningstar does note that Swedbank’s exposure towards the property management portfolio remains sizeable at 15% of total lending at end-2020, and it views the shipping and offshore portfolio as high risk given an NPL ratio of 36%; however, Swedbank’s exposure is limited (1% of total gross lending) and is expected to decline further as this portfolio is in run-off. Overall the gross NPL ratio improved to 0.65% at end-2020 from 0.84% at end-2019 mainly due to write-offs of Stage 3 loans within the commercial property management portfolio. The coverage ratio of Stage 3 loans improved to 77% at end-2020 from 49% at end-2019, however, gross Stage 2 loans increased by around 2% at end-2020 especially in the corporate segment, driven by sectors exposed to COVID-19 such as hotels & restaurants (+254% YoY). The impact of COVID-19 remains uncertain and DBRS Morningstar notes that the government support measures are not to be withdrawn until August 2021.

DBRS Morningstar views Swedbank's funding and liquidity as sound and stable even if the Bank, in line with other Nordic peers, shows higher reliance on wholesale funding compared to other European peers, mainly in the form of mortgage covered bonds. While DBRS Morningstar considers the Swedish covered bonds market as very stable despite the challenging operating environment, high exposure towards wholesale funding is considered a potential vulnerability. Nevertheless, customer deposits increased by 18% at end-2020 driven by expansionary monetary policies, consumption restrictions and the uncertainty of the operating environment. This led to a loan-to-deposit ratio of 149% at end-2020, improving from 173% at end-2019. At end-2020, Swedbank’s Liquidity Coverage Ratio (LCR) was 174% and the Bank’s Net Stable Funding Ratio (NSFR) stood at 125%.

In DBRS Morningstar’s view, Swedbank maintains a solid capital position, mainly supported by its sound earnings generation capacity. At end-2020, Swedbank's Common Equity Tier1 (CET1) ratio was 17.5%, increasing from 17% at-end 2019 which excludes dividends accrued on the basis of a payout ratio of 50%. Swedbank reported a capital buffer of 510 bps above minimum requirement at end-2020 which benefited from regulatory changes and relief measures adopted to allow more capital flexibility during the COVID-19 pandemic. However, DBRS Morningstar notes that the capital buffer is expected to gradually converge towards the 100-300 bps management target due to regulatory changes which are expected to affect both capital ratios and minimum requirements.

ESG CONSIDERATION
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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

The sources of information used for this rating include Swedbank’s Annual and Sustainability Report 2020, Swedbank’s Investor Presentation 2020, Swedbank’s Fact Book 2020, Swedbank’s Pillar 3 Report, Finansinspektionen (Swedish FSA) 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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375849

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG and Global FIG
Initial Rating Date: December 18, 2009
Last Rating Date: March 31, 2020

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