Swedbank AB. Update Following Macro Profile Change. CREDIT OPINION 7 September Update

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1 CREDIT OPINION 7 September 17 Swedbank AB Update Following Macro Profile Change Update Summary We assign an a baseline credit assessment (BCA) and long-term deposits and senior unsecured debt ratings to Swedbank AB (Swedbank). We also assign a long-term and shortterm counterparty risk assessment (CRA) of Aa(cr)/Prime(cr) to the bank. RATINGS Swedbank AB Domicile Sweden Long Term Debt Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. On 1 September 17, we affirmed Swedbank's ratings as we expect the bank to be broadly resilient to the elevated risks in the residential housing market and household sector in Sweden (as reflected in our lowering of the Macro Profile for Swedish banks). Swedbank's a BCA reflects the bank s strong credit quality, solid regulatory capital and stable earnings, underpinned by its established franchise in Sweden (Aaa stable) and the Baltic countries. However, similarly to many Nordic peers, the BCA is constrained by the bank s high reliance on market funding, which renders it vulnerable to changes in investor sentiment and market conditions. Swedbank's long-term deposit and senior debt ratings include a two-notch uplift resulting from our advanced Loss Given Failure (LGF) analysis, reflecting our view that the bank s junior depositors and senior unsecured creditors face a very low loss given failure. In addition, our moderate assessment of government support translates into a further notch uplift included in the relevant ratings. Exhibit 1 Contacts Rating Scorecard - Key Financial Ratios Swedbank AB (BCA: a) Aleksandar Hristov Associate Analyst aleksandar.hristov@moodys.com Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion MD-Financial Institutions sean.marion@moodys.com Median a-rated banks 5% 4% % 5% % 5% 5% % % 15% 15% 1% 1% 5%.6% 9.6% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS).8% Profitability: Net Income/ Tangible Assets 6.% 18.% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) Source: Moody's Financial Metrics THIS REPORT WAS REPUBLISHED ON 11 SEPTEMBER 17 WITH A CORRECTED PROFITABILITY SCORE IN THE BCA SCORECARD. Liquidity Factors Niclas Boheman AVP-Analyst niclas.boheman@moodys.com Solvency Factors Louise Lundberg VP-Sr Credit Officer louise.lundberg@moodys.com

2 Credit Strengths Leading retail & SME and good corporate banking market positions in Sweden and the Baltic countries Strong credit quality and solid regulatory capitalisation Cost discipline, strong market position in mortgage lending and asset management support profitability Our advanced LGF analysis indicates a very low loss given failure for junior depositors and senior unsecured creditors, resulting in a two-notch uplift in the relevant ratings, from the firm s a adjusted BCA The long-term deposit and senior unsecured debt ratings incorporate one notch of government support uplift Credit Challenges Elevated risks in the residential housing market and household sector in Sweden, although broadly contained by underwriting standards, high wealth levels and a very strong repayment culture High reliance on confidence-sensitive market funding, which is partly mitigated by proven access to debt markets, a resilient domestic covered bond market, and strong liquidity Rating Outlook The ratings outlook on Swedbank is stable, as we expect the bank to continue to be able to offset negative profitability pressures in the prolonged low interest rate environment, over the next 18 months. Factors that Could Lead to an Upgrade The BCA could be upgraded if the bank significantly (1) reduces its reliance on market funding, () improves its profitability, and/or () increases its liquidity position. A higher BCA would likely lead to a ratings upgrade. Factors that Could Lead to a Downgrade The ratings could be downgraded if the bank s (1) operating environment deteriorates beyond our current expectations, and/or () asset risk increases more than we anticipate, for example due a stark weakening in credit quality or an increase in risk appetite, leading to riskier lending. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 7 September 17

3 Key Indicators Exhibit Swedbank AB (Consolidated Financials) [1] Total Assets (SEK million) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (SEK million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,97,985 49,7 84,5 1,4 1,499 14, ,117,895 1,8,1 16,78 1,189 1, ,19,4,14 5, ,71 1,66 1, ,57,9 17,48 6,88 1,989 1,87 1, CAGR/Avg.4 1,781,797 1,4 77,46 96,1 1,85 14, [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Detailed Credit Considerations Swedbank's BCA is supported by its 'Strong+' Macro Profile Swedbank has the bulk of its operations in Sweden, which accounted for 86% of its gross lending as of June 17. As such, its 'strong +' Macro Profile is in line with that of Sweden. Swedish banks benefit from a diverse and competitive economy, robust public institutions and a stable political environment that supports consensus-oriented policy making. However, we view Swedish household debt levels and the multi-year growth of household debt, as key vulnerabilities to the financial system, as reflected in our Macro Profile. Leading retail, SME and good corporate banking positions in Sweden and the Baltic countries provide stable and recurring earnings We expect Swedbank's solid customer base and local brand recognition to continue to support its stable earnings generation capacity. Swedbank's good franchise is underpinned by large, sustainable market shares in its core markets of Sweden and the three Baltic countries, Estonia (A1 stable), Latvia (A stable) and Lithuania (A stable). As the largest retail bank in Sweden and the Baltic countries, it has substantial market shares in domestic mortgages, cards, retail deposits and fund management (through its franchise Robur, unrated). The bank has a co-operation agreement with 58 Swedish savings banks, which extends the domestic distribution network of Swedbank who in return provides central clearing service and IT solutions to the member savings banks. Currently, around % of Swedbank's total domestic product sales are conducted through the savings banks. During H1 17, the largest contributor for the financial results of Swedbank was the Swedish business segment (covering Swedish retail and SMEs) which accounted for 67% of pre-tax income and 55% of total assets. The combined Baltic operations of Swedbank, which is the key international exposure of the group, accounted for 19% of pre-tax income but only 8% of total assets, while the Large Corporates & Institutions (LC&I) segment accounted for 11.5% of pre-tax profit and % of total assets. We believe that Swedbank's strong credit quality and stable earnings, which are underpinned by its strong franchise in Sweden and the Baltic countries, position the bank well to manage challenges in its operating environment. These include a prolonged period of low interest rates, combined with the intensifying competition from mobile and digital banking solutions and asset managers (which has historically been very profitable). 7 September 17

4 Strong credit quality and solid regulatory capitalisation Swedbank has a strong credit quality and solid regulatory capitalisation relative to global peers, reflecting conservative underwriting standards, effective risk management and good internal capital generation. As of June 17, the bank's problem loan ratio (for its continuing operations and including impaired loans plus 6+ day overdue loans that were not impaired) was.6%, broadly in line with end-16. Our asset risk assessment, which leads to an assigned score of, also takes into account the bank's concentration to the property management sector and the relatively low problem loans coverage ratio (5% as of June 17), which is somewhat mitigated by the collateral available to the bank against these exposures. Swedbank's strong credit quality in its domestic loan portfolio is underpinned by a relatively diversified loan book with around 6% of lending to private individuals as of June 17, as well as strong macroeconomic fundamentals. The riskier portions of the bank's loan portfolio relate to its Swedish corporate and Baltic loan books. Non-retail exposures are concentrated on the Swedish property management sector which we see as a cyclical sector, making it more prone to volatility and swings in asset quality in an economic downturn. As of June 17, loans to the property management sector accounted for about 4% of Swedbank's corporate book, and 14% of all loans to the public. Around 1% of these loans are to Swedish residential properties (housing cooperatives), which have had very low default rates compared to commercial real estate subsectors. Baltic lending remains limited in a historical comparison, at around 9.4% of total lending as of June 17. Nonetheless, despite the economic recovery which has been observed in the Baltic region in recent years, we continue to view this banking book as higher risk as the operating environment is less stable, mortgages have high LTVs and financial buffers are lower (lower levels of household wealth, for instance). Swedbank s regulatory capitalisation is strong, as evidenced by its Common Equity Tier 1 (CET1) ratio and Tier 1 capital ratio under Basel III/CRDIV of 4.6% and 7.8% as of June 17, respectively. We calculate a tangible common equity to risk weighted assets of 9.6% as of the same date. Swedbank's tangible common equity stood at 5.4% of tangible banking assets as of June 17. Swedbank already meets its increased capital requirement, resulting from the conclusion of the bank's annual supervisory and evaluation process (SREP), which includes a Pillar capital surcharge for increased risk weights for corporate exposures and the introduction of a maturity floor for these exposures, based on the Swedish FSA's preliminary calculations. Once validated, the higher risk weights for corporate exposures will be transitioned to the bank's Pillar 1 capital requirement from Pillar. We note that a substantial part of Swedbank's loan book is composed of residential mortgages (around 55% of total lending as of endjune 17), carrying comparatively low risk weights. In line with other Swedish banks, Swedbank's capital ratios look comparatively higher as the SFSA prefer to put additional capital guidance within pillar II. Our assigned capital score of considers the lower density of RWAs compared to rated European peers. Cost discipline and profitable fund management operations support profitability, which continues to be under pressure in the prolonged low interest environment The ba assigned score for profitability in our BCA scorecard reflects Swedbank's consistent good level of profitability, which compares well with its Nordic peer group, and which the bank has achieved despite the prolonged low interest-rate environment. Since early 14, the Swedish central bank has been lowering the key policy rate, which is currently in negative territory. Swedbank and the other domestic banks have so far been able to mitigate the low interest rate environment pressures by not fully transferring the interest rate reduction to their clients. In addition, market funding rates have also declined which has been supportive to earnings. Swedbank, being one of the two largest mortgage lenders in Sweden, is one of the most reliant on net interest income (see Exhibit ), which makes its income more sensitive to changes in mortgage margins than peers. 4 7 September 17

5 Exhibit Net Interest Income Represents The Bulk Of Swedbank's Income Swedbank: Income breakdown Net interest income Net Fees and commissions Other non interest income 1% 9% 8% 7% 6% 5% 4% % % 1% % Q 17 Source: Moody's Financial Metrics Swedbank has implemented cost rationalisation initiatives to offset profitability pressures, which have proven effective so far. In addition, the bank has maintained a large and stable commission income stream (average of 9% of net revenues over the last three years), which provides a good degree of diversification to its earnings. Swedbank s leading fund management franchise Robur had a large market share of 1% in Sweden as of June 17. High reliance on confidence-sensitive market funding which is partially mitigated by proven access to capital markets, a resilient domestic covered bond market and strong liquidity Swedbank maintains broad access to capital markets and has a large liquidity buffer, mitigating its high reliance on market funding, which in our view remains one of its key credit weaknesses. Although this is a common feature among the large Nordic banks, it exposes the banks to changes in market conditions, and renders them more sensitive to swings in investor confidence than some of their international peers. As of June 17, market funding accounted for 8% of tangible banking assets. Like the other large Swedish banks, Swedbank's wholesale funding is diversified and includes covered bonds (5%), senior unsecured debt (18%), commercial paper/certificates of deposit (15%), interbank funding (14%) and subordinated debt (%). As indicated in our banks methodology, we reflect the greater stability of covered bonds compared to unsecured market funding through a standard adjustment to the funding structure ratio. Given the long history of the Swedish covered bond markets, local currency and deep domestic investor base, we make additional (positive) adjustments for local currency (LC) denominated covered bonds issued in this market. Swedbank s high reliance on wholesale funding is mitigated by its strong liquidity position. As of June 17, liquid resources covered all market funding maturing over the following 18 months (see Exhibit 4 for long-term debt maturity and liquidity reserves). Swedbank s liquidity pool (SEK559 billion, or % of total assets at the same date) consisted of balances with central banks (78%), sovereign and municipal securities (1%) and covered bonds (11%). As of June 17, Swedbank had an overall Liquidity Coverage Ratio (LCR) of 11% overall under the CRR definition of LCR. Its Net Stable Funding Ratio (NSFR) was 11% as at the same reporting date, which is evidence of its strong funding and liquidity positions. 5 7 September 17

6 Exhibit 4 Swedbank: Liquidity Pool Versus Maturity debt As of YE16 Cumulative maturing debt New maturing long-term debt Maturing Short-term debt Liquidity Reserve 1,1 9 SEK Billion H Source: Company reports Notching Considerations Loss Given Failure We apply our advanced Loss Given Failure (LGF) analysis to Swedbank because it is incorporated in Sweden, which we consider to be an operational resolution regime because it is subject to the EU Bank Recovery and Resolution Directive (BRRD). For this analysis we assume that equity and losses stand at % and 8%, respectively, of tangible banking assets in a failure scenario. We also assume a 5% run-off of junior wholesale deposits and a 5% run-off in preferred deposits. Moreover, we assign a 5% probability to junior deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. We apply a standard assumption for European banks that 6% of deposits are junior. Our advanced LGF analysis is applied to Swedbank's domestic perimeter (i.e. excluding its Baltic operations) and includes a forwardlooking approach on the bank's near term bail-in-able debt issuance and indicates that a very low loss given failure for junior depositors and senior unsecured creditors, resulting in a two-notch uplift in the relevant ratings, from the firm s a adjusted BCA. For junior securities issued by Swedbank, our LGF analysis confirms a high loss-given-failure, given the small volume of debt and limited protection from more subordinated instruments and residual equity. We also incorporate additional notching for junior subordinated and preference share instruments reflecting the coupon features. Government Support We assess a moderate probability of government support for Swedbank s long-term depositors and senior unsecured creditors, resulting in a one-notch uplift incorporate in the relevant ratings. For other junior securities, we continue to believe that potential government support is low and these ratings do not include any related uplift. 6 7 September 17

7 Rating Methodology and Scorecard Factors Exhibit 5 Swedbank AB Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans.6% aa Sector concentration Capital TCE / RWA 9.6% a Risk-weighted capitalisation Profitability Net Income / Tangible Assets.8% ba ba Return on assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 6.% ba baa Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets aa 18.% baa baa Stock of liquid assets b Balance Sheet in-scope (SEK million) 989,47 7,8 54,14 19, ,68 1,475 59,877 1,995,88 7 September 17 Key driver # a Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 7 1% baa a Aaa a-ba a a % in-scope 49.6% 6.8% 7.% 9.6% 9.6% 1.1%.% 1% at-failure (SEK million) 1,6, , ,86 14,91 191,68 1,475 59,877 1,995,88 % at-failure 5.%.% 5.8% 7.% 9.6% 1.1%.% 1%

8 Debt class De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA Counterparty Risk Assessment.8%.8%.8%.8% aa (cr) Deposits.8% 4.1%.8% 1.7% Senior unsecured bank debt.8% 4.1% 1.7% 4.1% 1 Dated subordinated bank debt 4.1%.% 4.1%.% ba Cumulative bank preference shares.%.%.%.% - baa (hyb) Non-cumulative bank preference shares.%.%.%.% - baa (hyb) Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Cumulative bank preference shares Non-cumulative bank preference shares Loss Given Failure notching Additional Preliminary Rating Notching Assessment - - aa (cr) ba baa (hyb) baa (hyb) Government Support notching Local Currency Rating Aa (cr) -Baa (hyb) -- Foreign Currency Rating - Ba -Baa (hyb) Source: Moody's Financial Metrics Ratings Exhibit 6 Category SWEDBANK AB Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Subordinate Pref. Stock -Dom Curr Pref. Stock Non-cumulative Commercial Paper Other Short Term Moody's Rating Stable /P a a Aa(cr)/P(cr) Ba Baa (hyb) Baa (hyb) P (P)P SWEDBANK MORTGAGE AB Outlook Counterparty Risk Assessment Issuer Rating Bkd Sr Unsec MTN Bkd Commercial Paper Bkd Other Short Term Stable Aa(cr)/P(cr) (P) P (P)P Source: Moody's Investors Service 8 7 September 17

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10 CLIENT SERVICES 1 Americas Asia Pacific Japan EMEA September 17