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Swedbank Q1 Drop on Lower Income, Higher Costs, Provisions Driven by COVID-19 and Oil Price Decline

Swedbank AB (Swedbank or the Bank) reported a net loss of SEK -1.7 billion in Q1 2020, down from a net profit of SEK 4.4 billion in Q4 2019 and SEK 5.3 billion in Q1 2019. The drop largely reflects the impact of the AML (Anti-Money Laundering) -related fine of SEK 4 billion imposed by the Swedish authority, as well as the Coronavirus (COVID-19) outbreak impact on revenues and loan provisions, and lastly the decline in the oil price.

Excluding the one-off fine, Swedbank’s underlying net profit was 56% down to SEK 2.3 billion compared to Q1 2019, driven by lower income mainly as a result of COVID-19, higher costs to address AML controls, and higher provisions related to COVID-19 but also the decline in the oil price.

Total income was down 10%, mostly driven by a drop in gains and losses on financial items both negatively impacted by COVID-19 (in particular with significant negative valuation effects on derivatives and shareholdings). However, NII was up 4% to SEK 6.7 billion compared to Q1 2019 driven by higher volumes, higher interest rates, and lower resolution fund fee.

On an underlying basis, excluding the one-off fine, operating expenses were 19% up YoY, largely reflecting AML controls measures. Swedbank's underlying cost-to-income ratio was 52%, up from 46% in Q4 2019 and 40% in Q1 2019.

The COVID-19 crisis impacted Swedbank's provisions levels, along with the decline in oil price. Credit impairments went up significantly to SEK 2.1 billion in Q1 2020 from SEK 0.2 billion in Q1 2019, due to expected credit impairments reflecting a deterioration in the outlook driven by the COVID-19 outbreak, as well as credit weakness in the oil and gas, shipping and off-shore portfolio due to the recent sharp declines in oil prices. As a result, credit impairments represented 44% of the Bank’s underlying income before provisions and taxes (IBPT) in Q1 2020, up from 3% in Q1 2019. About 41% of the provisions (SEK 0.9 billion) were allocated to oil-related sectors (Large Corporates and Institutions), while the reserve builds also reflect forecasted credit deterioration due to COVID-19 on potentially affected sectors such as manufacturing, retail, hotels and restaurants, and shipping/offshore.

Despite the additional provisioning, asset quality remains solid with Gross Stage 3 loans accounting for 0.79% of total gross loans at end-Q1 2020 (0.67% in Q1 2019, and 0.82% in Q4 2019). Total stage 3 coverage ratio went up to 44% (from 36% in Q1 2019 and Q4 2019).

Swedbank has experienced growing deposits in Q1 2020, supported by both individuals and corporates. This was primarily due to lower consumption as well as the companies’ enhanced drawing down of credit facilities to strengthen their liquidity reserves. The Bank’s liquidity position remained strong, underpinned by a liquidity reserve of SEK 484 billion as of end-March 2020, which favourably compares with remaining SEK 124 billion maturities due over the rest of 2020. Swedbank could be out from the funding markets for more than a year without any liquidity issue, according to the Bank’s management. LCR and NSFR ratios were also sound at 162% and 116%, respectively.

We continue to view Swedbank as having a strong capital position. The Bank reported a CET1 ratio of 16.1% at end-March 2020. Although this is down from 17.0% at end-FY19, it represented a 300 bps capital cushion above the regulatory minimum of 13.1% or approximately SEK 21 billion [REA of SEK 691.1 billion]. The payment of dividends has been put on hold until the consequences of COVID-19 are clearer.