EUR 850.00 For Business Accounts Only

Morningstar | Raising Swedbank Uncertainty Rating, Lowering Stewardship Rating

We still like Swedbank's consistent profitability and commitment to cost management, which have resulted in a stellar cost/income ratio and higher returns on equity than those of peers. As it stands, we have adjusted our cost estimate for 2018-19 in line with management guidance (it is aiming to keep costs around/below SEK 17 billion), in light of increased restructuring mainly targeted at further accelerating the firm's digitalisation and automation efforts. Having said that, when compared with peers, we do not expect Swedbank's superior cost/income position to change. Swedbank intends to continue its investments in the areas of saving, lending, and digital banking. Under our base case, while we expect a lower interest-rate environment to persist for the foreseeable future, we forecast its net interest margin to follow a stable trend, as it has for the past eight years, enabling the bank to post returns on equity of slightly above 15% during 2018-22, above peer averages. While our base- and downside-case scenarios do not posit recession for the foreseeable future, given Swedbank's high exposure to Sweden, this could be a primary risk for the bank in terms of capital and asset quality, as well as profitability. Having said that, we believe the Swedish Financial Supervisory Authority has taken the necessary steps to cool mortgage lending; hence, in the event of a downturn, the financial system should sustain itself.While it is hard to predict the general direction of this market--which could pose a downside risk to earnings in a rapid downturn--regulators and banks have been more selective regarding both commercial and residential real estate lending and underwriting. Swedbank has a leading position in the Swedish mortgage market, with 25% share and close to 80% of its loans composed of private mortgages or lent to housing cooperatives or property management companies. We expect this market to continue growing, albeit at a somewhat slower pace, mainly following the introduction of the amortisation requirement (borrowers paying on the principal amount) in the Swedish housing market, a measure to curb the risks associated with household indebtedness.