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Morningstar | Swedbank Reports In-Line 1H 2019 Results and Increases Solvency Buffer Target

Narrow-moat Swedbank posted first-half 2019 results largely in line with our full-year expectations. Operating profits increased marginally to SEK 13.2 billion from SEK 13 billion in the same period of 2018, excluding the divestment of UC. The stable performance comes as a result of healthy income generation more than offsetting higher expenses, which were mainly related to higher anti-money laundering, or AML, staff and compliance costs. Swedbank also announced new solvency targets in light of its AML issues. It now aims to build capital buffers between 100 and 300 basis points above regulatory requirements. The dividend policy was also revised as a result. The group now aims to pay out 50% of net income versus 75% previously. We plan to update our model with new capital targets but do not anticipate a material change to our fair value estimate of SEK 210.

Swedbank’s new solvency buffer decision refers to continued loan-volume growth, Sweden’s higher counter-cyclical buffer starts in September 2019, a defined benefit pension obligation affected by market rates, and uncertainty about its AML issues. While we acknowledge all the above are considerations when setting capital targets, we think AML issues are likely the driving factor behind the increase. With a return on equity of about 16% we do not foresee any issues in achieving the new capital targets, however. Currently, the bank has SEK 658 billion in risk-weighted assets and a common equity Tier 1 ratio of 16.1% compared with a minimum requirement of 14.6%. Increasing the current buffer of 150 basis points to 300 basis points would therefore require about SEK 10 billion or about half of Swedbank’s 2019 expected net profit.