Swedbank AB Downgraded To 'A+/A-1' On Regulators Finding Anti-Money-Laundering Deficiencies; Outlook Stable

  • The Swedish and Estonian Financial Supervision and Resolution Authorities have completed a parallel investigation that found serious anti-money-laundering (AML) deficiencies and regulatory misconduct at Swedbank between 2015 and the first quarter of 2019, and they have issued a warning, guidelines, and a Swedish krona 4 billion fine.
  • The law firm the bank appointed to conduct an independent investigation also presented its results, and it concluded that Swedbank's management failed to establish a clear and effective AML risk framework in 2007-2019.
  • During 2019, Swedbank replaced much of its top management, limited the reputational impact on its franchise, and expressed its commitment to amend the deficiencies in control and governance. However, in our view, these changes will take time to implement and prove effective.
  • As a result, we are lowering our long- and short-term ratings on Swedbank AB and its subsidiary Swedbank Mortgage AB to 'A+/A-1' from 'AA-/A-1+'.
  • The outlook is stable reflecting our belief that the bank's solid franchise, profitability, and capital should shield it from current worsening economic conditions and the outcome of other pending investigations in Europe and the U.S.
MADRID (S&P Global Ratings) March 26, 2020--S&P Global Ratings today lowered its long- and short-term issuer credit ratings on Swedbank AB and its core subsidiary Swedbank Mortgage AB to 'A+/A-1' from 'AA-/A-1+'. The outlook is stable.
The downgrade follows the disclosure by the Swedish and Estonian FSAs of their parallel investigations into Swedbank's Baltic operations. Moreover, on Monday March 23, the bank disclosed the findings of the independent investigation carried out by the law firm it hired, Clifford Chance.
Although the fine imposed by the FSAs is manageable, totaling about 20% of 2019's net income, the findings regarding Swedbank's management hamper our view of its conservative risk management and effective corporate governance, and, in turn, compromise Swedbank's creditworthiness since management failed to live up to standards expected of one of the world's highest rated banks. The bank has taken several steps to address the deficiencies identified, but we think it will take time to improve risk management culture across the group, implement a complete overhaul of the practices, strengthen the organizational structure, and then demonstrate the effectiveness of these measures.
The stable outlook on Swedbank reflects our view that the bank will be able to deal with a short-term economic shock and maintain resilient earnings and solid capital, with the RAC ratio remaining around 12% in the next 18-24 months while the economic environment gradually recovers.
We also anticipate that Swedbank will continue to build considerable ALAC buffers in the coming years as it fulfils its MREL requirements, likely by replacing a large share of senior unsecured debt with senior subordinated debt instruments through 2022. As such, we believe that Swedbank's ALAC buffer will durably exceed 5% of our risk-weighted assets (RWAs) metric by 2021, which allows us to incorporate one notch of uplift for ALAC support into our long-term rating on Swedbank.
We could lower our rating if the worsening economic scenario meaningfully hampers the bank's capitalization, with the projected RAC ratio trending below 10%, or if the issuance of ALAC-eligible instruments proves difficult, totalling less than 5% of RWAs. Although unlikely at this stage, we could also downgrade the bank if the investigations still pending in Europe and in the U.S. were to affect its financial strength beyond our current expectations.
Although unlikely over the next 18-24 months, we could consider raising our rating on the bank if it were to successfully remediate its AML deficiencies and demonstrate a much improved risk-management culture and governance to superior standards able to withstand a higher rating.
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