Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings Affirmed At 'A+/A-1'

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1 Research Update: Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings Primary Credit Analyst: Alexander Ekbom, Stockholm (46) ; Secondary Contact: Sean Cotten, Stockholm (46) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 25,

2 Research Update: Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings Overview In our view, Sweden-based Swedbank AB has worked to deliver high and recurrent revenue streams with a strong focus on cost efficiency, capitalizing on its market-leading position in Sweden's retail banking sector. Over the last few years, it has shown superior efficiency and earnings metrics compared with peers domestically and internationally. We are revising Swedbank's stand-alone credit profile to 'a+' from 'a' to reflect its improved business position, but we also apply a negative transition notch, which takes into account the likelihood of diminishing extraordinary government support available to senior unsecured bondholders by end We are therefore revising our outlook on Swedbank to stable from negative and affirming our 'A+/A-1' long- and short-term counterparty credit ratings. The stable outlook reflects that we are likely to remove both the downward transitional notch and our one notch of government support by year-end 2015 (thereby keeping the ratings at their current level). Rating Action On June 25, 2015, Standard & Poor's Ratings Services revised its outlook on Swedbank AB to stable from negative. At the same time, we affirmed our 'A+/A-1' long- and short-term counterparty credit ratings. We also raised our issue ratings on the subordinated debt instruments to 'A-' from 'BBB+' and the junior subordinated debt instruments to 'BBB' from 'BBB-' as a result of our improved assessment of Swedbank's stand-alone credit profile (SACP) to 'a+' from 'a'. Rationale The rating actions reflect our view that Swedbank has continued to strengthen its domestic business position in terms of its revenues and efficiency metrics. It has also outperformed peers. We believe these positive factors compensate for its slightly less diversified revenue base than peers. Swedbank has, in our view, delivered stable margin growth and is one of the most efficiently run banks in Europe. This has enabled the bank to report a JUNE 25,

3 Research Update: Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings three-year average return on equity of just below 13%, which compares positively to any banking group in Europe. We view Swedbank's earning base as stable, deriving mainly from a market-leading position in the Swedish retail banking sector, from which the bank sources 58% of its revenues. The business mix is dominated by net interest income and recurring fees. The latter are largely based on its leading position in the asset management, card processing, and payment areas, resulting in more stability than peers. Swedbank's presence in more volatile areas, such as investment banking and market-related activities, is limited. Despite its mass-market approach, Swedbank is one of Europe's most efficient banks, with a cost-to-income ratio of 45% in 2014 (three-year average: 46%). We expect this to decrease further as the bank is on target to achieve an annual Swedish krona 16 billion cost base. This compares favorably with many international peers, indicating a higher resilience to eventual credit losses--a cornerstone of a bank's creditworthiness. Swedbank's efficiency is further demonstrated by our calculation of its earnings buffer (our measure of risk-adjusted returns) of around 175 basis points, suggesting strong outperformance compared to peers. Swedbank's management team has remained largely intact since the reshuffling that followed the high losses incurred in the Baltic region in 2008 and Management has structurally reformed the bank, in our view, taking it from a relatively weak position to becoming one of the best performers in the system. Preprovision income has grown by 57% compared to 2010, despite interest rates significantly decreasing over the same period. In addition, we believe that Swedbank's currently high profitability and strict cost focus enables it to undertake long-term strategic IT investments, while many European peers are still restructuring their businesses. Compared with peers, we see Swedbank as having more concentrated exposure to the Swedish market and depending more heavily on general domestic economic development. That said, we rate the sovereign 'AAA/A-1+' with a stable outlook and we view the economic and industry risks in the banking system to be low and currently stable. Outlook The stable outlook reflects that we are likely to remove both the downward transitional notch and our one notch of government support by year-end 2015 (thereby keeping the ratings at their current level) if we believe there is a greater likelihood that senior unsecured creditors could incur losses if the bank fails. We could lower the rating on Swedbank if the bank increases its use of short-term funding for long-term assets, leading to a material deterioration in funding and liquidity metrics. We could revise Swedbank's SACP downward if, contrary to our current expectation, the bank is unable to maintain a JUNE 25,

4 Research Update: Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings risk-adjusted capital ratio sustainably above 10%, our threshold for a strong capital and earnings assessment. We consider a positive rating action remote at this stage, but it could materialize if the bank were to take steps to mitigate bail-in risk to senior unsecured creditors--such as building a large buffer of subordinated instruments eligible for inclusion in our additional loss-absorbing capacity measure. Ratings Score Snapshot To From Issuer Credit Rating A+/Stable/A-1 A+/Negative/A-1 SACP a+ a Anchor a- Business Position Strong (+1) Adequate (0) Capital and Earnings Strong (+1) Strong (+1) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support GRE Support 0 0 Group Support 0 0 Sovereign Support Additional Factors -1 0 Related Criteria And Research Related Criteria Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 Group Rating Methodology, Nov. 19, 2013 Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Banks: Bank Capital Methodology And Assumptions, Dec. 6, 2010 Methodology For Mapping Short- And Long-Term Issuer Credit Ratings For Banks, May 4, 2010 Use Of CreditWatch And Outlooks, Sept. 14, JUNE 25,

5 Research Update: Swedbank Outlook Revised To Stable From Negative On Improved Business Position; Ratings Related Research Banking Industry Country Risk Assessment: Sweden, Jan. 19, 2015 Ratings List Ratings Affirmed; Outlook Action To From Swedbank AB Swedbank Mortgage AB Counterparty Credit Rating A+/Stable/A-1 A+/Negative/A-1 Swedbank AB Senior Unsecured A+ Certificate Of Deposit A-1 Commercial Paper A-1 Swedbank Mortgage AB Commercial Paper A-1 Upgraded To From Swedbank AB Subordinated A- BBB+ Junior Subordinated BBB BBB- Additional Contact: Financial Institutions Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JUNE 25,

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