Fitch Revises Swedbank's Outlook to Positive; Affirms IDR at 'A+'

Tue Jun 24, 2014 10:32am EDT

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(The following statement was released by the rating agency) PARIS/LONDON, June 24 (Fitch) Fitch Ratings has revised Swedbank AB's (Swedbank) Outlook to Positive from Stable. The agency has also affirmed the bank's Long-Term Issuer Default Rating (IDR) at 'A+', Viability Rating (VR) at 'a+' and Short-Term IDR at 'F1'. A full list of rating actions is available at the end of this commentary. The rating actions were part of a periodic review of large Swedish and Finnish banks. Fitch will issue a peer report shortly. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT The change of Swedbank's Outlook to Positive reflects Fitch's view that Swedbank is building a track record of performance and risk profile that is increasingly in line with that of 'AA-' rated banks. New management was appointed in 2009, when the bank reported a substantial loss due to the crisis in the Baltic countries. Management has since reshaped the bank's balance sheet, targeting not only the Baltic businesses but also Swedbank's overall operations. Fitch expects this to reduce volatility in the bank's performance. Management's execution capabilities in delivering on its strategic objectives are a key rating factor. Risks in the Baltic countries have been reduced, and lending to these countries accounted for 10% of total loans at end-March 2014. The funding of the local subsidiaries is now more balanced, with a loans-to-deposits ratio of around 100%, compared with 200%-250% at the time of the crisis. Problem loans have been conservatively provisioned and actively worked out and underwriting standards tightened, with a much stronger focus on cash-flow generating lending, in contrast to asset-based lending such as real estate in the past. Cost efficiency is improving, strengthening the loss absorption capacity of the Baltic operations. In Sweden, its dominant market both in terms of lending and profit generation, management has been focusing on strengthening the bank's customer relationships. It is a business model Swedbank has in common with its Nordic peers but where it had placed somewhat less emphasis on than its peers in the past. Improving customer satisfaction and cost savings initiatives should support its profitability. In addition, a focus on risk-adjusted returns, again an area where Swedbank had lagged some of its peers in the past, combined with its large bias toward retail banking, should help build a stable low risk profile and resilient profit generation, in line with 'AA-' rated peers, over the cycle. The ratings of Swedbank reflect its focus on risk management and controls, sound earnings generation from its strong domestic franchise, solid capitalisation, and resilient asset quality. These factors outweigh risks related to Swedbank's reliance on wholesale funding, a now more limited exposure to the Baltics, and its high exposure to the Swedish economy, in particular to the real estate market. Swedbank's capitalisation is robust and compares well with peers, both on a risk-weighted and un-weighted basis. At end-March 2014, its common equity Tier 1 ratio was 18.3%, and its Fitch- adjusted leverage ratio (excluding unfunded assets) was 5.6%. Asset quality is solid. Fitch expects a continued fall in the level of impaired loans, a trend in place since 2009. The agency views residential mortgage lending as low risk and expects the performance of the book to remain very strong, even in adverse economic conditions. Swedbank's corporate lending is smaller than at most of its peers', reflecting a stronger historical bias towards retail banking. Nevertheless, the bank has a high exposure to real estate management, although around half relates to residential properties and housing associations; Fitch views the latter as fairly low-risk. Loan impairment charges have been low, benefiting from releases of provisions in the Baltic countries and generally well-performing Nordic countries. Like its Nordic peers, Swedbank relies on wholesale funding, driven by a structural shortage of deposits in Sweden. This reliance is, however, mitigated by prudent liquidity management and a strong focus on covered bonds, with a sizeable portion placed with a domestic captive investor base consisting of large Swedish insurance and pension funds. Swedbank's senior unsecured debt issuance is more limited. RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT An upgrade may result from continuous strong performance underpinning a track record of high internal capital generation and providing the bank with financial flexibility to absorb unexpected shocks. The ratings are sensitive to a setback in the positive momentum seen in the bank's improved risk appetite and risk profile. Fitch expects Swedbank's financial metrics to outperform most peers', offsetting the bank's reliance on its domestic market. While unexpected, a downgrade could also result from a prolonged inability to competitively access 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 rating-negative. Fitch expects Swedbank to maintain a large liquidity buffer and minimise maturity gaps to mitigate funding risks. The agency expects the bank to continue to have strong access to debt capital markets. Given Swedbank's high exposure to Sweden, 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 wider losses in both Swedbank's mortgage and corporate portfolios. This, however, is not Fitch's central scenario. 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. 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. As an EU member country, Sweden is subject to the requirements of Bank Recovery and Resolution Directive (BRRD). However, the country was notable in its desire for flexibility in the application of BRRD, in part because of its experience of cleaning up banks in its 1990s crisis, but also because it has a concentrated, largely homogenous banking sector that relies on attracting international and foreign currency funding. For this reason, prudential requirements for its banks are very high. In maintaining control over supervision and resolution decisions, Sweden has more flexibility to interpret and apply BRRD than Banking Union member countries, for example. However, Sweden is bound by EU state aid rules, meaning it does not have full control over support decisions. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are primarily sensitive to the progress made in implementing a resolution regime in Sweden. As outlined in its report 'Sovereign Support for Banks: Rating Path Expectations' released on 27 March 2014, Fitch believes that support for systemically important Swedish banks, while likely to be less certain within the next one to two years, is still likely to be highly probable. This means that Swedbank's Support Rating and Support Rating Floor are likely to be downgraded to '2' from '1' and revised to 'BBB-' from 'A-' respectively. The Support Rating and Support Rating Floor are also sensitive to a change in Fitch's assumptions about the ability of the Swedish state (AAA/Stable) to provide timely support to the bank, if required. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT Subordinated debt issued by Swedbank is notched off the bank's VR. Therefore, its rating has been affirmed and is sensitive to a 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 the above-average loss severity of this type of debt. The rating actions are as follows: Swedbank AB Long-Term IDR: affirmed at 'A+'; Outlook changed to Positive from Stable 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' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Fitch France S.A.S 60 Rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9 131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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