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

DBRS Ratings Limited (DBRS) 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
The confirmation of the ratings reflects the Bank’s strong retail franchise in its domestic Swedish market and in the Baltics. The ratings also take into account the Bank’s robust cost efficiency, its sound asset quality, and its strong capital position. Conversely, the ratings also incorporate Swedbank’s relatively high reliance on wholesale funding, when compared to European peers, particularly the significant use of covered bonds.

Swedbank is currently under joint investigation by the Swedish regulator and the regulators in the Baltic countries over money laundering allegations for its activities in Estonia. Furthermore, the Bank is also under investigation by the Swedish Economic Crime Authority over unauthorised disclosure of inside information and gross fraud. The Bank’s external communication on these developments has been poor to date. DBRS considers that as a result of the pending investigations, the Bank’s reputational risk has increased, and this could potentially result in material damage to its franchise. However, the ratings are unchanged at this point, given the extent of any deficiencies in risk management and controls is still unclear.

RATING DRIVERS
Positive pressure on the Long-Term Issuer Rating is unlikely given the pending investigations. 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.

There could be Negative rating pressure if there are signs that the Bank’s franchise is weakening, especially if the Bank were to face challenges accessing wholesale funding markets due to a reduction in investor confidence as a result of reputational issues. Negative rating pressure could also arise if the Bank were to face significant fines as a result of the current investigations, or if there were a substantial deterioration in the Bank’s asset quality, potentially prompted by a severe price decline in the Swedish property markets.

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. In recent weeks, Swedbank has been involved in money laundering allegations, which has resulted in an investigation initiated by the regulators in Sweden and the Baltic countries over the Bank’s operations in Estonia. This has also led to management changes, including the dismissal of the CEO, the appointment of an acting CEO, and the resignation of the Chair.

In 2018, Swedbank continued to demonstrate robust profitability with both net interest income (NII) and net commissions increasing steadily, driven by business growth in the Bank’s core markets. In 2018, Swedbank’s income before provisions and taxes (IBPT) was up 6.2% year-on-year (yoy), partly driven by higher lending volumes in Sweden. Estonia continues to be the Bank’s largest Baltic contributor to the results, accounting for 8.5% to the Bank’s IBPT in 2018. The Bank is amongst the best performers within its Nordic peer group in terms of efficiency. In 2018, the cost/income ratio was 38%, in line with the year before as revenue growth offset a slight increase of statutory operating expenses due to the acquisition of PayEx.

DBRS views that Swedbank has a relatively low credit risk profile and good asset quality. DBRS notes, however, that impaired loans went up by 31% at end-2018 largely as a result of the introduction of IFRS 9 Financial Instruments from January 1, 2018 due to a change in the macroeconomic scenarios and some transfer of loans from stage 2 to stage 3. The Bank, nevertheless, continued to report a very low gross impaired loan (Stage 3) ratio of 0.69% at end-2018. Exposure to the Baltic countries, that have negatively impacted asset quality in the past, represented just over 10% of the loan book at end-2018. Swedbank’s exposure to property management, primarily in Sweden, however, remains sizeable at 15% of total gross loans to the public at end-2018, which in DBRS’s view makes the Bank vulnerable to a sharp decline in the Swedish property sector. As discussed above, the potential impact to reputational and regulatory risk has increased with the recent money laundering allegations.

DBRS 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-2018, primarily related to covered bonds (27% of total funding) and commercial paper (7% of total funding). At end-2018, the Bank’s liquidity profile was strong as the Bank had liquid assets of SEK 317 million which covered 1.6x the commercial paper and the long-term funding maturing in 2019. Swedbank’s Baltic operations are self-funded with deposits higher than loans.

DBRS views Swedbank’s capitalisation as strong, supported by the Bank’s ability to generate strong and recurrent earnings. At end-2018, the Bank had a Common Equity Tier 1 (CET1) ratio of 16.3%, comfortably above its minimum regulatory requirement of 14.7%. However, the CET1 ratio was down from 24.8% at end-2017 due to a nearly 56% increase of Swedbank’s risk weighted assets at end-2018, as a result of a regulatory move of the risk weight floor for Swedish mortgages from Pillar 2 to Pillar 1 on December 31, 2018 and management’s decisions to increase risk-weighted assets (RWAs) in the Baltic countries for large corporate exposures until a new PD model is implemented.

Concurrently, DBRS has discontinued the rating on Swedbank’s Undated Subordinated Debt and Non-cumulative Perpetual Capital Contribution Securities to reflect that all of these instruments have been repaid.

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 applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Finansinspektionen (Swedish FSA), Ekobrottsmyndigheten (Swedish Economic Crime Authority), Riksgalden (Swedish National Debt Office) and company reports. DBRS 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.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS 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’s outlooks and ratings are under regular surveillance.

For further information on DBRS 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.

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

Lead Analyst: Maria Rivas, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 18, 2009
Last Rating Date: April 10, 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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