Morningstar DBRS Confirms Swedbank’s LT Issuer Rating at A (high), Stable Trend

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

CREDIT RATING DRIVERS

The confirmation of Swedbank’s Long-Term credit ratings reflect the Bank’s substantial improvement in profitability as a result of higher interest rates. Morningstar DBRS sees the Bank as well positioned to retain a large share of this improvement when rates start to decrease and inflation returns to normalized levels given that it has a long track record of operating efficiency excellence and low cost of risk. The credit ratings also take into account Swedbank’s solid capital position, with large cushions over minimum regulatory requirements, as well as its robust franchise in its home markets of Sweden and the Baltic countries, where it has leading market shares for retail banking.

Swedbank’s credit ratings also incorporate its strong asset quality, partly supported by a large share of retail mortgages. Still, asset quality deteriorated in 2023 evidencing the higher financial burden on borrowers and the weaker economic conditions in the Bank’s home markets. In addition, the credit ratings reflect Swedbank’s adequate funding profile with a high reliance on wholesale funding, albeit this is mainly in covered bonds, which have proven to be very stable and resilient over time.

The credit ratings also consider Swedbank’s ongoing anti-money laundering (AML) and compliance investigations by the United States (US) authorities some of which are still pending, whose timing of completion as well as the final outcomes remain uncertain and whose impact could be material in terms of franchise and earnings.

CREDIT RATING RATIONALE

An upgrade of the Long-Term Issuer Rating would require sustained levels of sound profitability and capitalisation whilst demonstrating consistently strong asset quality across all businesses amid the still challenging economic environment.

A downgrade of the Long-Term Issuer Rating would be triggered by a significant deterioration in the Bank's asset quality, risk profile and/or its funding profile. In addition, a downgrade would also be driven by a substantial deterioration of the Bank’s franchise as a result of the ongoing AML issues and/or the appearance of additional weaknesses related to internal controls and procedures.

Franchise Combined Building Block (BB) Assessment: Strong/Good
Swedbank is the third largest Swedish bank with total assets of SEK 2,855 billion at end-2023 (c. EUR 256 billion or USD 283 billion). The Bank provides universal banking services for retail customers in Sweden and the Baltic countries, its home markets, where Swedbank has a leading franchise with substantial market shares. The Bank also provides corporate banking services to large corporates and institutions in its home markets, Norway and Finland. Swedbank remains under investigation by the US authorities in relation to AML and compliance breaches. While Morningstar DBRS recognises the Bank’s effort to strengthen its internal risk controls and AML functions, the economic and franchise impacts of the outcomes of these investigations remains uncertain.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Swedbank reported exceptional profitability in 2023 on the back of higher interest rates. The Bank reported net income of SEK 34.1 billion, up 60% YOY, as a result of strong growth in all revenue lines, especially net interest income (NII), which completely offset the higher operating costs, the two-fold increase of regulatory and banking levies and higher cost of risk. The Bank’s Return on Equity (ROE), as calculated by Morningstar DBRS, rose to 18.2% in FY23, up from 12.7% in 2022. NII rose 54% YOY in FY23 driven by strong deposit margins and larger lending volumes in the Baltic countries. Loan loss provision increased by 13% YOY in FY23, negatively impacted by the tighter financial conditions on retail borrowers as well as specific provisions for the information and communication sector. In spite of this, the net cost of risk, as calculated by Morningstar DBRS, remained very low at 9 bps in FY23, comparing very favourably to European peers.

Risk Combined Building Block (BB) Assessment: Strong/Good
Swedbank has a generally strong credit risk profile partly supported by a large share of retail mortgages. However, the Bank’s asset quality is showing signs of deterioration as the economic slowdown in its home markets and the overall tighter financial conditions are taking their toll on borrowers. This deterioration is expected to continue in 2024 amid still uncertain and challenging global macroeconomic conditions. The Bank’s total NPLs grew by 37% at end-2023 to SEK 7.9 billion, which resulted in an NPL ratio of 0.44%, mainly driven by the deterioration of the Swedish household portfolio and to a lesser extent a decline in credit quality in the information and communication sector and the real estate portfolio. The Bank’s total credit exposure to commercial real estate (CRE) stood at SEK 142 billion at end-2023, representing 8% of its total credit portfolio, with 96% located in the Nordic and Baltic countries and no exposures to CRE in the United States. The Bank’s NPLs in this portfolio doubled YOY to SEK 435 million at end-2023 (NPL ratio of 0.31% of total CRE loans). Morningstar DBRS views Swedbank’s strong coverage ratios with substantial management overlays and conservative Loan To Value (LTV) levels to be key mitigants in case of a broader additional deterioration in the sector, as the market outlook remains uncertain.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
Morningstar DBRS views Swedbank's funding profile as adequate. Customer deposits, excluding repos, declined by 5.3% YOY to SEK 1,234 million at end-2023 as a result of the quantitative tightening introduced by the Riksbank in H2 2022, which precipitated a net loan-to-deposit ratio, excluding repos, of 147% at end-2023, up from 139% at end-2022. Swedbank’s reliance on wholesale funding is significantly higher than its European peers, but in line with its Nordic peers, who are very active in the covered bond markets that have proven to be very stable and resilient over time. The Bank reported a strong liquidity position with a Liquidity Coverage Ratio of 172% and a Net Stable Funding Ratio (NSFR) of 124% at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
Swedbank’s capitalization is solid, underpinned by its strong earnings generation as well as its recurrent access to capital markets, which result in ample capital buffers over minimum regulatory requirements. The Bank reported a regulatory CET1 capital ratio of 19.0% at end-2023, up 120 bps YOY, driven by its internal capital generation as well as the positive impact of the IRB models overhaul. As a result, Swedbank’s capital buffer over minimum requirements remained solid at 390 bps in spite of the temporary increase of 100 bps introduced by the Swedish FSA to the SREP capital requirement as an “incentive” to the finalization of the review of IRB models. Morningstar DBRS notes that Swedbank’s target for capital buffer is of c. 100-300 bps. The Bank’s total MREL ratio stood at 47.6% at end-2023, substantially above its 2024 requirement of 36.7%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/429850.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There was no Environmental factors that had a significant or relevant effect on the credit analysis.

Social (S) Factors:

Morningstar DBRS considers the social subfactor ‘data privacy and security’ to be relevant but does not affect the overall rating or trend assigned to the Bank. This is reflected in the risk building block and relates to an IT incident between 28-29 April 2022 when Swedbank suffered from substantial IT disturbances in relation with the Bank’s changes to its IT system, resulting in incorrect account statements for almost one million customers. After the incident, the Swedish FSA opened an investigation to establish whether Swedbank followed the appropriate laws, regulations, internal routines and processes in connection with the IT incident. In March 2023, Swedbank received a remark and an administrative fine of SEK 850 million by the Swedish FSA due to its lack of internal controls following the changes made to its business critical IT system. Swedbank appears to have taken measures to strengthen its internal controls in this regard, although a further track record of sound internal controls are needed in Morningstar DBRS’ view.

Governance (G) Factors:

The subfactor ‘corporate governance’ is relevant but does not affect the overall rating or trend assigned to the Bank. This is reflected in the franchise and risk grids building blocks and mainly relates to pending investigations from the US authorities in relation to anti-money laundering breaches in Swedbank’s Estonian branch between 2014 and 2019. The investigations are currently at different stages and it is unclear when they will be finalized.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://www.dbrsmorningstar.com/research/427030.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://www.dbrsmorningstar.com/research/427030 in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Swedbank Annual and Sustainability Report 2023, Swedbank quarterly Investor Presentations, Fact Books and Reports in 2022 and 2023, Swedbank 2023 Capital Adequacy & Risk Management Report – Pillar 3 as well as European Bank Authority, Single Resolution Board and European Central Bank data and reports. Morningstar DBRS 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

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/429852.

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

Lead Analyst: María Jesús Parra Chiclano, Vice President - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 14 December 2006
Last Rating Date: March 15, 2023

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