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 Bank’s Issuer Rating, Senior Unsecured Debt and Deposits Ratings of A (high), and the R-1 (middle) Short-Term Debt & Deposits rating. The trend on all ratings is Stable. The support assessment remains SA3, and as a result, the final senior debt rating is positioned in line with the A (high) Intrinsic Assessment (IA).

KEY RATING CONSIDERATIONS

The ratings reflect the Bank’s solid franchise in Sweden, its robust earnings generation ability and strong capitalisation levels. The ratings also incorporate the Bank’s low risk profile. Whilst wholesale funding accounts for a higher proportion of total funding than most EU peers, DBRS views Swedbank to have a sound and well managed funding profile.

RATING DRIVERS

There could be positive pressure on the IA (i) if the Bank continues to demonstrate its ability to generate very strong level of earnings while maintaining a strong credit profile through the cycle, and (ii) if the Bank is able to reduce the high proportion of wholesale funding.

Negative pressure on the ratings could be driven by (i) a sudden substantial deterioration in the Bank’s risk profile prompted by a severe fall in price in the Swedish residential and commercial property markets, or (ii) any severe deterioration in the Baltics’ loan portfolio, and (iii) any indication of a weakening of investors’ confidence given the high level of wholesale funding.

RATING RATIONALE

Swedbank has a strong franchise in Sweden and this is a key factor underpinning the ratings. The solid Swedish franchise is complemented by very strong positions in the Baltic countries in particular in Estonia, but also Latvia and Lithuania.

In DBRS’s view, Swedbank’s earnings generation ability is strong. Both net interest income and net fee and commission income have strengthened steadily in recent years thanks to the growing Swedish economy and to a lesser extent growth in the economies of the Baltic region. In 2017, the Bank reported pre-impairment operating profit (IBPT) of SEK 26 billion, up 3% vs. 2016 mainly due higher lending volumes and improved margins on Swedish mortgages. Furthermore, the Bank’s efficiency continues to remain very strong. The Bank’s reported cost/income ratio stood at 39% in 2017 on good revenue growth offsetting investments in the franchise (2016: 38%, 2015: 43%).

DBRS views Swedbank’s portfolio as low risk, given its focus on retail and commercial banking in Sweden. At end-2017, the Bank’s largest exposure was towards household mortgages and accounted for 55% of the total book. The remaining loan exposure comprised mainly lending to housing associations, the property management book, agriculture, manufacturing, as well as other corporate lending. Total gross impaired loans to the public stood at just 0.57% of total gross lending (2016: 0.56%). Credit quality in the domestic Swedish market remains extremely strong as evidenced by the 0.02% impaired loan ratio in residential mortgages at end-2017 and the low impaired loans ratio in both the private and corporate segment (0.04% and 0.51%). However, given the Bank’s significant exposures to the Swedish market, which has experienced high levels of house price rises in the past ten years, and the Baltic region, which has proven more volatile in the past, DBRS will continue monitoring developments in the Swedish housing market and the macroeconomic environment in the Baltic countries.

DBRS acknowledges that the Bank has a well-diversified funding profile through short-term and long-term programmes in various capital markets and in different currencies, however, similar to most of its Nordic peers, Swedbank would be sensitive to any changes in investors’ sentiment given the higher proportion of wholesale funding to total funding compared to most European peers (deposits accounted for 48% of total funding at end-2017). Like its Nordic peers, Swedbank relies heavier on wholesale funding and particularly covered bonds. At end-2017, covered bonds accounted for 29% of total funding. DBRS views that the covered bond market has been a stable source of funding for Swedbank and notes that the Bank’s Swedish mortgages are mostly funded with covered bonds. At the same time, DBRS views Swedbank as well-positioned from a liquidity perspective as it meets the liquidity requirements with a Liquidity Coverage Ratio (LCR), according to Swedish rules, of 173% in total, 374% in Euros and 362% in US Dollars. In addition, Swedbank reported an ample liquidity buffer that covered 2.3x the short-term funding of SEK 150 billion at end-2017. And the Bank’s Net Stable Funding Ratio stood at 110% at end-2017.

DBRS views Swedbank’s capitalisation as strong given its strong capital base, strong earnings generation and flexibility to access capital markets. At end-2017, the Bank reported a Basel III Common Equity Tier (CET1) ratio of 24.6% and a leverage ratio of 5.25% which remain strong and compare well with European peers. This is in spite of an increase in risk exposure amounts, which stemmed from the planned update of the model for exposures to large corporates, and particularly to oil-related exposures and leases.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). 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, Finansispektionen 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: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: December 18, 2009
Last Rating Date: July 14, 2017

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