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 remains Stable. The Bank’s Intrinsic Assessment was confirmed at A (high) and the support assessment remains SA3. See full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings takes into account Swedbank’s strong retail franchise in Sweden as well as its leading market position in the Baltic countries. The ratings also reflect Swedbank’s sound earnings generation capacity, its strong risk profile underpinned by the high quality mortgage book, and the Bank’s robust capital position albeit upcoming regulatory changes are expected to reduce the capital cushion against minimum requirement.

DBRS Morningstar notes however that Swedbank’s operating environment could be affected by Russia’s invasion of Ukraine and its indirect macroeconomic implications, especially in the Baltics given the important contribution of Swedbank’s Baltic subsidiaries to the group’s earnings.

The ratings also incorporate Swedbank's relatively high reliance on wholesale funding compared to its European peers, partially mitigated by higher deposit inflows during the pandemic, access to the stable Swedish covered bonds market and ample available liquidity. DBRS Morningstar will also continue to monitor other potential charges related to anti-money laundering (AML) and compliance investigations by the US and Estonian authorities.

RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require a sustained improvement in the Bank’s funding profile, as well as the maintenance of the current solid profitability and continued strong asset quality. The upgrade would also require the ongoing AML issues to be resolved without any meaningful impact on the Bank’s franchise and capital.

A downgrade of the Long-Term Issuer Rating would be driven by a significant deterioration of asset quality and profitability.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good

Swedbank is the third largest bank by assets in Sweden where it benefits from a leading market position among private customers as well as strong market shares among corporate clients. The Bank is also the market leader in the Baltic countries in both the private and corporate segments. Swedbank’s Baltic Banking division accounted for 19% of the bank’s total revenues and total income before provisions and taxes (IBPT) in 2021 as well as 12% of total loans to public.

After the warning and the administrative fine imposed by the Swedish FSA in 2020 for serious deficiencies in the Bank’s measures to combat money laundering in its Baltic operations, Swedbank remains under investigation by the Estonian Prosecutor’s office and several US Authorities. The outcome of these investigations and the timeline are unknown at this point in time. However, Swedbank has adopted important measures to identify and remediate its shortcomings in the AML and compliance framework in the Baltics, including the set-up of a Baltic holding company to improve accountability and control at its Baltic subsidiaries.

Earnings Combined Building Block (BB) Assessment: Strong / Good

In DBRS Morningstar’s view, Swedbank maintains solid earnings generation capacity. Swedbank’s underlying earnings improved in 2021 compared to 2020 mostly on the back of lower cost of risk. It remains unclear how the implications of Russia’s invasion of Ukraine could affect the Bank’s financial performance. In our view, this is likely to be mitigated by Swedbank’s demonstrated high loss absorption capacity. In 2021, Swedbank reported a net attributable profit of SEK 20,871 million, up from SEK 12,929 million in 2020. Excluding the administrative fine imposed in 2020, the underlying net attributable profit increased by 23% year-on-year (YoY) in 2021. The Bank’s return-on-equity (ROE) in 2021 was 13.2%, significantly higher than 8.9% in 2020 (11.4% excluding the administrative fine), and this is approaching management’s 15% target. Swedbank's revenues increased by 3% YoY mostly supported by higher net fees and commissions (+16% YoY), while loan loss provisions (LLPs) decreased significantly to SEK 170 million from SEK 4,334 million in 2020 after being severely affected by the COVID-19 crisis and the oil price volatility in 2020.

Risk Combined Building Block (BB) Assessment: Strong / Good

DBRS Morningstar considers Swedbank's risk profile as strong supported by the Bank's large household mortgage portfolio which has historically performed very strongly. Nevertheless, uncertainty remains regarding the full impact of the economic disruptions of the COVID-19 pandemic as well as the evolution of the operating environment following Russia’s invasion of Ukraine. At end-2021, Swedbank continued to show very strong asset quality metrics, with the NPL ratio decreasing to 0.4% at end-2021, vs. 0.6% at end-2020 and 0.8% at end-2019. Gross stage 3 loans decreased by 39% YoY, with the reduction mostly concentrated within the shipping and offshore portfolio which has been significantly reduced due to a process of sales and restructuring.

Operational risk in the Baltics has been historically high and could be further exacerbated in the current operating environment, especially as the Bank is still working to remediate serious shortcomings in its anti-money laundering framework and internal risk controls. DBRS Morningstar will continue to monitor the Bank’s progress in improving its control framework.

Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate

DBRS Morningstar considers Swedbank's funding and liquidity profile as well-managed. However, reliance on wholesale funding is higher than most European peers and mostly accessed through mortgage covered bonds which are a common source of funding in Sweden and some of the other Nordic countries. Although the Swedish covered bond market has proven to be very stable DBRS Morningstar notes that this does lead to a higher level of encumbered assets than some other European peers. DBRS Morningstar also notes that, as per the effect of the pandemic, customer deposits continued to increase, up by 11% YoY in 2021. At end-2021, the majority of customer deposits were related to private customers (52%) and the rest to corporate customers. Both deposits from private customers and from corporate customers increased by 11% YoY.

Swedbank's liquidity position is strong and further improved as a result of the ample liquidity available in the market during the pandemic. At end-2021, Swedbank’s Liquidity Coverage Ratio (LCR) was 163% (vs. 174% at end-2020) and the Bank’s Net Stable Funding Ratio (NSFR) stood at 123% (vs. 125% at end-2020).

Capitalisation Combined Building Block (BB) Assessment: Strong

Swedbank maintains a solid capital position mainly supported by its sound earnings generation capacity. At end-2021, Swedbank's Common Equity Tier1 (CET1) ratio was 18.3%, up from 17.5% at-end-2020. Nevertheless, Swedbank's minimum capital requirement increased to 13.7% at end-2021, from 12.4% at end-2020. The increase is fully attributable to the introduction of the 1.5% Pillar 2 Guidance implemented by the Swedish FSA starting from Q3 2021. As a consequence, the capital cushion above the minimum requirement decreased to 460 basis points (bps) at end-2021, down from 510 bps at end-2020. DBRS Morningstar notes that the capital cushion will decrease further and gradually converge towards the Bank's 100-300 basis points management target due to regulatory changes which will affect both capital ratios and minimum requirements. This includes the overhaul of the internal ratings based model (IRB) and the announced increase of the countercyclical buffer to 1% in Sweden, starting from 30 September 2022. The CCYB is expected to return to the original level of 2.5%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/394240

ESG CONSIDERATIONS
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.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/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.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Swedbank 2021 Annual and Sustainability Report, Swedbank FY21 Analyst Presentation, Swedbank FY21 Factbook, Swedbank Q4 and FY21 Interim Report and Svenska Finansinspektionen (Swedish FSA). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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/394238

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: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: 12/18/2009
Last Rating Date: 3/25/2021

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