Morningstar DBRS Confirms Swedbank's Long-Term 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 trends on all credit ratings remain Stable. Morningstar DBRS also maintained the Bank's Intrinsic Assessment (IA) at A (high) and its support assessment at SA3. See full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of Swedbank's Long-Term credit ratings reflects the Bank's solid profitability benefitting from its long track record of operating efficiency excellence and low costs, which has further improved in recent years as a result of the higher interest rate environment. Morningstar DBRS sees the Bank as well positioned to retain a large share of this improvement as rates decline but not return to the pre-pandemic levels. The credit ratings also consider its robust franchise in its home markets of Sweden and the Baltic countries, where it has leading market shares in retail banking. However, the Bank's geographic and product diversification is somewhat limited. Swedbank's capital position is strong, with the Bank maintaining large cushions over minimum regulatory requirements.

Swedbank's credit ratings also reflect its strong asset quality, supported by the Bank's large share of retail mortgages. Although its asset quality metrics have deteriorated since 2023, reflecting economic weakness in Swedbank's home markets, they are still among the strongest in Europe. Morningstar DBRS expects that lower rates along with an improved economic outlook will lead to a stabilisation. Swedbank's funding profile includes a high reliance on wholesale funding, but the exposure is well managed and includes long- and short-term unsecured debt and covered bonds, which have proven to be stable and resilient over time.

The credit ratings also consider the ongoing anti-money laundering (AML) and compliance investigations against the Bank by authorities in the US, that are still pending. The timing of completion as well as the final outcomes of these investigations remain uncertain and their impact could be material in terms of franchise and earnings.

The Bank's IA of A (high) has been assigned at the lower end of the IA Range. This reflects the Swedbank's more limited franchise and revenue streams, and its higher operational risk compared with banks intrinsically assessed at the midpoint of the IA Range.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require sustained levels of sound profitability and capitalisation while maintaining strong asset quality across all businesses and demonstrating a strong track record in managing operational risks. A further prudent expansion of the franchise would also be supportive of higher credit ratings.

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

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
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 (Sweden, Estonia, Latvia and Lithuania). 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 remain uncertain.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Swedbank's profitability is sound, with a return on equity (ROE) in the mid-teens and a cost-to-income ratio around 40%. Following exceptionally strong results in 2023, Swedbank reported a 2% increase in net profit in 2024, due to lower credit impairments and lower bank taxes. The resulting ROE was 17.1% [presentation p. 17], compared with 18.2% in 2023 as the amount of equity increased notably. Total operating income was flat year-on-year (YOY) as a decline in net interest income (NII) was offset by growth in fees & commissions and in net financial income. Both segments benefitted from strong capital markets. Operating expenses increased 5% YOY, while cost of risk (COR) was a small net positive of 1 basis point (bp). Going forward, Morningstar DBRS expects somewhat weaker profitability, albeit still at a high level, as NII softens from high levels, while fee income should benefit from an improving economy in Sweden and the Baltics. Morningstar DBRS further expects expenses to moderate and COR to remain low.

Risk Combined Building Block (BB) Assessment: Strong
Morningstar DBRS views Swedbank's risk profile as strong supported by a large share of retail mortgages, which are generally less risky, and solid asset quality metrics, including a low non-performing loan (NPL) ratio, robust coverage ratios, and a high proportion of loans collateralised by real-estate assets (80% of total gross loans at end-2024). The Bank's Stage 3 deteriorated in 2024 to 0.66% from 0.44% in 2023 [Interim Report, p. 5] because of higher rates and the slowdown in the Nordic economies. However, this still compares favourably with European peers. Going forward, Morningstar DBRS sees stabilisation in the Bank's asset quality, helped by lower rates and a pick-up in the Nordic and Baltic economies, but notes the downside from the elevated geopolitical risks. Given Swedbank's strong revenue generation capacity and the significant loan loss reserve in the form of management overlays, the Bank is well positioned to absorb increased credit costs without seeing a material impact on profitability.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
The Bank's reliance on wholesale funding (38% of total non-equity funding at end-2023), although in line with its Nordic peers, is much higher than its European peers. This could be a potential vulnerability during periods of market turmoil, especially the short-term wholesale funding. Long-term wholesale funding is mainly accessed through covered bonds issued in the Swedish covered bond market, which Morningstar DBRS views as resilient. Also, the Bank's wholesale funding profile is well-diversified through short-term and long-term programmes in various capital markets and in different currencies. The Bank's net loan-to-deposit ratio, as calculated by Morningstar DBRS and excluding repos, declined to 140% at YE2024, from 147% at YE2023. Swedbank's liquidity position was strong with a Liquidity Coverage Ratio of 201% and a Net Stable Funding Ratio of 127% at YE2024. [Annual Report, p. 41]

Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
Swedbank's solid capitalisation is underpinned by the ample capital buffers the Bank maintains over minimum regulatory requirements and its strong earnings generation. The Bank reported a regulatory CET1 capital ratio of 19.8% at YE2024, up 80 bps YOY, [Annual Report, p. 275] driven by internal capital generation but partially offset by the increase in risk weighted assets (RWAs) in the Baltic segment [Annual Report, p. 42]. As a result, Swedbank's capital buffer over minimum requirements remained very strong at 460 bps despite various add-ons to RWAs introduced by the European Central Bank (ECB) and temporary add-on of 1% introduced by the Swedish FSA related to the ongoing review of the Bank's internal ratings-based models. Morningstar DBRS notes that this buffer is expected to decline over time as Swedbank's target for capital buffer is c. 100-300 bps.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/450187.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Social (S) Factors
Morningstar DBRS no longer considers the Social subfactor 'data privacy and security' as relevant to the credit rating of trend assigned to the Bank. This related to an IT incident that occurred in 2022 when Swedbank suffered from substantial IT disturbances for two days, which resulted in incorrect account statements for almost one million customers. As a result, the Swedish FSA issued a remark and imposed an administrative fine of SEK 850 million on Swedbank in March 2023. While the remark and fine from the FSA are meaningful and signal the seriousness of the case, Morningstar DBRS acknowledges the incident was neither prolonged nor systemic, and Swedbank has since taken measures to strengthen its internal controls and now considers this issue as a legacy issue.

Governance (G) Factors
The subfactor 'corporate governance' is relevant but it does not affect the overall credit rating or trend assigned to the Bank. This is reflected in the franchise and risk grids building blocks assessment and mainly relates to several pending investigations from the US authorities in relation to AML breaches at Swedbank's Estonian branch between 2014 and 2019. The remaining investigations are at different stages and the timing of the completion as well as the final outcomes remain uncertain at this point. Morningstar DBRS notes that the impact could still materialise in terms of franchise and earnings, including penalties, restrictions, reputational damage, and others. In February 2024, the Bank announced that the investigation conducted by the Estonian Prosecutor's Office since March 2022 over money laundering between 2014 and 2016 in Estonia concluded that no crime was committed and the investigation was closed.

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

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 Factors in Credit Ratings" (13 August 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in Swedish krona unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS used the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings" (13 August 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include Swedbank Annual and Sustainability Report 2024, Swedbank quarterly Investor Presentations, Fact Books and Reports in 2023 and 2024, and Swedbank 2024 Risk Management and Capital Adequacy Report - Pillar 3. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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's trends and credit 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 credit rating assumptions can be found at: https://dbrs.morningstar.com/research/450186.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Senior Vice President
Rating Committee Chair: Vitaline Yeterian, Senior Vice President, Sector Lead
Initial Rating Date: 18 December 2009
Last Rating Date: 20 March 2024

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit dbrs.morningstar.com.