RPT-Fitch Affirms Swedbank at 'A+'; Outlook Stable
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Nov 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Swedbank AB's (Swedbank) Long-Term Issuer Default Rating (IDR) at 'A+', Viability Rating (VR) at 'a+' and Short-Term IDR at 'F1'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT
The affirmation of Swedbank's IDRs and VR reflects Fitch's view that Swedbank's focus on risk management and prudent liquidity position will enable it to maintain a low risk profile while enabling the bank to generate good internal capital generation.
The ratings are also based on Swedbank's solid capitalisation, good profitability and resilient asset quality. These factors outweigh risks related to Swedbank's reliance on wholesale funding, now more limited exposure to the Baltics, and high exposure to the Swedish economy.
Swedbank's strong capitalisation benefits from the low risk weights it uses for residential mortgages, although leverage (tangible common equity/tangible assets) remains good, at just below 5%.
Fitch expects Swedbank's profitability to remain healthy in 2014 and continue to be driven by revenue growth and strict cost controls. Swedbank has taken a cautious stance on loan growth in Sweden, and combined with reducing exposures in the Baltics, margin improvements have been management's clear focus. Loan impairment charges (LICs) are virtually zero, partly due to reversals from its Baltic business. Fitch expects LICs to approach more normal levels in 2014.
Asset quality is solid, and has improved quarter on quarter since 2009, when the Baltic economies contracted significantly leading to a large stock of impaired loans. Fitch expects the asset quality trends to continue in 2014. Swedbank's pre-impairment operating profit would allow it to absorb increased LICs arising from a moderate deterioration in asset quality, which is not Fitch's base case.
Fitch expects debt market access to remain good for Swedbank in 2014, in particular for covered bonds, which are its main wholesale funding source. Like its Nordic peers, Swedbank relies on wholesale funding, driven by a structural shortage of deposits in Sweden. Fitch expects Swedbank to maintain a large liquidity buffer and minimise maturity gaps to mitigate the risks associated with such a funding structure.
RATING SENSITIVITIES - VR, IDRS AND SENIOR DEBT
The Stable Outlook reflects Fitch's expectation of Swedbank's stable performance. While unexpected, the most likely reason for a downgrade would be prolonged inability to competitively access the debt capital markets or renewed uncertainty in its Baltic portfolio. A shift away from long-term funding or significant reliance on international investors would likely be ratings negative. Because Swedbank's Swedish business is its main profit driver and represents the majority of credit exposure, its ratings are inevitably sensitive to a severe downturn in Sweden. This would particularly be the case should a downturn lead to a significant correction in house prices and higher losses in both Swedbank's mortgage and corporate portfolios. This scenario is not Fitch's expectation.
Continuous strong performance underpinning a track record of high internal capital generation and providing the bank with financing flexibility to absorb any unexpected shocks, could provide some upside potential for Swedbank's ratings.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating and Support Rating Floor reflect Fitch's expectation that there is an extremely high probability that support would be forthcoming from the Swedish authorities if required. This is driven by Swedbank's importance within the Swedish financial sector.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor are potentially sensitive to any change in Fitch's assumptions about the ability (as reflected in its ratings) or willingness of the Swedish state (AAA/Stable) to provide timely support to the bank, if required. They are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for banks more generally.
In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. On 11 September 2013, Fitch outlined its approach to incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see "Fitch Outlines Approach for Addressing Support in Bank Ratings" and "Bank Support: Likely Rating Paths", at www.fitchratings.com).
The Support Rating would be downgraded and the Support Rating Floor revised down if Fitch concluded that potential sovereign support had weakened relative to its previous assessment.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt issued by Swedbank is notched off the bank's VR. Therefore, its rating has been affirmed and is sensitive to any change in Swedbank's VR. In accordance with Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities', subordinated (lower Tier 2) debt is rated one notch below Swedbank's VR to reflect below average loss severity of this type of debt when compared to average recoveries.
The rating actions are as follows:
Long-Term IDR: affirmed at 'A+'; Stable Outlook
Short-Term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'a+'
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A-'
Senior unsecured debt: affirmed at 'A+'
Short-term debt: affirmed at 'F1'
Subordinated debt: affirmed at 'A'