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 and the Baltic countries. The ratings also reflect its robust profitability and operating efficiency, its conservative risk profile, as well as its strong capital position.
The ratings also incorporate Swedbank’s high reliance on wholesale funding which could be a potential vulnerability in periods of market turmoil. Nonetheless, long-term wholesale funding reliance is mainly through covered bonds issued in the Swedish covered bond market, which DBRS Morningstar considers to be a resilient and stable source of funding.
Some early signs of asset quality deterioration at Swedbank, largely in the form of a significant increase of Stage 2 loans, reflect the challenging global and domestic economic environment. This, together with the weakening economic outlook in Sweden (GDP is expected to decline 0.8% in 2023), has the potential to translate into further deterioration of asset quality, albeit from a very low base. 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 of the Bank as well as any other open claims.
An upgrade of the Long-Term Issuer Rating would require the preservation of a good funding and liquidity profile in the current challenging bank environment, while also maintaining strong asset quality, solid profitability and strong capitalization. The upgrade would also require resolution of the ongoing current investigations without any meaningful impact to the Bank’s franchise or capital.
A downgrade of the Long-Term Issuer Rating would be driven by a significant deterioration in the Bank's asset quality and/or profitability, the materially weakening of its capital position and/or a significant deterioration of the Bank’s franchise as a result of the ongoing AML investigations. Furthermore, the appearance of additional weaknesses related to internal control and procedures would also result in negative rating actions.
Franchise Combined Building Block (BB) Assessment: Strong/Good
Swedbank is the third largest Swedish bank by assets with a balance sheet of SEK 2,854 billion at end-2022 (USD 282 billion or EUR 268 billion). The Bank provides universal banking services for retail customers in Sweden and the Baltic countries, its home markets. In addition, it provides private banking services through Swedbank Robur and, insurance products through its subsidiaries Swedbank Försäkring AB (in Sweden) as well as Swedbank Life Insurance SE and Swedbank P&C Insurance AS in the Baltics. The Bank has dominant market shares for households in Sweden and is leader for retail customers in the Baltics. Swedbank also offer services for large corporates and institutions in its home markets, Norway and Finland.
Swedbank remains under investigation by the Estonian Prosecutor’s office and several US Authorities. While DBRS Morningstar recognises the Bank’s effort to strengthen its internal risk control and AML functions, the outcomes of the US and Estonian investigations remain uncertain at this point in time and the effect could be material, ranging from fines, withdrawn licences, restrictions on currency trading and others.
Earnings Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Swedbank profitability as solid with a sustained track record of strong revenue generation capability. In 2022, the Bank reported net income of SEK 21,877 million, up 5% year-on-year (YoY), driven by a robust Net Interest Income (NII) growth and a contained cost structure despite high inflation. As a result, the cost to income ratio stood at 40% at end-2022, down from 44% in 2021. The Bank reported a Return on Equity (ROE) of 13.3%, approaching its management target of 15% by end-2025. NII grew 23% in 2022 benefitting from several interest rate hikes by the Swedish Riksbank and the European Central Bank (ECB) since May 2022 that positively impacted deposit margins and the excess liquidity placed at central banks. Loan Loss Provisions increased to SEK 1,479 million (4x vs 2021’s) in order to reflect updated macroeconomic forecasts. The cost of risk, albeit higher in 2022, remained a very low 8 basis points (bps) compared to 1 bps in 2021.
Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers Swedbank's credit profile as conservative thanks to its large household portfolio (57% of total gross loans), traditionally less risky than its corporate portfolio and its diversified corporate loan book by industry. Swedbank’s credit exposure towards real-estate companies grew 12.8% YoY in 2022 and represented a relatively high 16.3% of total gross loans at end-2022. However, the 2022 average LTV in this portfolio remained at 53% for non-residential properties and 54% for residential properties in Sweden providing some cushion. There have been some signs of asset quality deterioration largely in the form of higher Stage 2 loans that went up 40% in 2022 YoY, mainly in the residential properties and construction sectors, reflecting the weaker macroeconomic outlook and the challenging real-estate sector. Stage 2 loans represented 7.7% of gross loans at end-2022, up from 5.9% at end-2021. Stage 3 loans, however, declined by 10% YoY in 2022 and the Non-Performing Loan ratio stood at 0.32%, a historical low since 2007.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Swedbank's funding and liquidity profile as adequate. Customer deposits grew by 3% in 2022 to SEK 1,298 million (excluding Repos and Swedish National Debt Office), leading to a net loan to deposit ratio of 141%. Total corporate deposits, represented 46% of total deposits and 28% of non-equity funding sources at end-2022. In addition, similar to domestic peers, reliance on wholesale funding is higher than most European peers and is mostly accessed through mortgage covered bonds. DBRS Morningstar considers the Swedish covered bond market to be very stable, however, current quantitative tightening (QT) driven by central banks to fight sticky inflation might flood the debt market with high quality securities and potentially pose a challenge to Swedbank to issue new debt. Swedbank's liquidity position is solid with a reported high-quality liquidity reserve of SEK 557 billion at end-2022 (94% of total corporate deposits), a Liquidity Coverage Ratio of 160% and a Net Stable Funding Ratio (NSFR) of 118%.
DBRS Morningstar will continue to monitor any development on Swedbank’s funding and liquidity profile related to their future access to wholesale funding after the development of the QT as well as the any liquidity impact on its large corporate deposit base following the turbulences experienced in the banking sector with the recent failures of Silicon Valley Bank and Signature Bank in the US.
Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
DBRS Morningstar considers Swedbank’s capital position as strong supported by its sound earnings generation capacity. The Bank has ample capital cushions over minimum regulatory requirements. Swedbank reported a Common Equity Tier 1 (CET1) ratio of 17.8% at end-2022, corresponding to a 340 bps cushion above the minimum regulatory requirement of 14.4%. However, DBRS Morningstar expects Swedbank’s capital buffer to gradually converge towards supporting the KPI of 200 bps above regulatory requirement by 2025.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/411498
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors:
We consider the social subfactor ‘data privacy and security’ to be relevant but does not affect the overall rating or trend assigned to the Group. 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 conjunction with the bank making 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 last year. While the remark and fine from the FSA is meaningful and signals the seriousness of the case, the bank should be able to absorb the fine due to its strong profitability (fine was 3.8% of total net profits in FY22 and 2.8% of IBPT in FY22) and high capitalization levels.
This S factor is new and was not present in the prior credit rating disclosure.
Governance (G) Factors:
The subfactor ‘corporate governance’ is relevant but does not affect the overall rating or trend assigned to the Group. This is reflected in the franchise and risk grids building block and mainly relates to pending investigations from the US and Estonian authorities in relation to anti-money laundering breaches in Swedbank’s Estonian branch back in 2019. On March 10, 2023, Swedbank announced that they had booked a provision of SEK 40 million after assessing the impact of the AML investigation by the US Treasury’s Office for Foreign Assets Control. However, it is currently unclear when the investigation will be finalized.
There were no Environmental factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)
All figures are in SEK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) 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 2022, Swedbank Investor Presentation Q4 2022, Swedbank Facts Q4 2022, Swedbank Year-End-Report 2022, Swedbank Pillar 3 Annual Report 2022. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/411499
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Maria Jesus Parra, Vice President, European FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 18 December 2009
Last Rating Date: 25 March 2022
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