Swedbank upgraded to ’AA-’ by S&P on solid performance

S&P Global Ratings has upgraded Swedbank AB and its core subsidiary Swedbank Mortgage AB to ’AA-/A-1+’ from ’A+/A-1’ with a stable outlook, citing decreasing residual risks from legacy financial crime investigations and significant improvements in governance and risk management. This upgrade reflects the bank's strong earnings capacity, robust capitalization, and the closure of the SEC investigation without enforcement, positioning its creditworthiness among the highest globally despite ongoing U.S. Department of Justice and New York Department of Financial Services probes, which S&P believes Swedbank can manage financially.

Analysis

S&P Global's upgrade of Swedbank AB to 'AA-' with a stable outlook marks a significant milestone, reflecting the rating agency's view that residual risks from legacy financial crime investigations are diminishing. This positive assessment is underpinned by Swedbank's substantial improvements in governance and risk management over the past six years, and is further supported by the SEC's recent decision to close its investigation without enforcement. Although probes by the U.S. Department of Justice and New York's Department of Financial Services remain active, S&P believes the bank's robust financial position can absorb any potential penalties. Swedbank's superior earnings capacity is a key factor, with projected risk-adjusted returns of 2.6% for 2026-2027, nearly double the 1.4% average for European peers. The bank's capitalization is also strong, with a risk-adjusted capital ratio of 16.6% at year-end 2024, which is expected to remain between 14.0% and 15.0% through 2027. Combined with a favorable macroeconomic outlook for Sweden and the Baltics, Swedbank is forecast to maintain very low nonperforming loan ratios of 0.5%-0.6% and achieve a return on equity between 14.0% and 15.5%, restoring its stand-alone credit profile to 'a+' and aligning its creditworthiness with top-tier global commercial banks.

Key Decisions for Investors

• The S&P credit rating upgrade serves as a significant de-risking event, suggesting that the worst of the legacy compliance issues are now priced in, which could warrant a re-evaluation of the bank's risk premium relative to its Nordic peers.
• Investors should closely monitor the progress and final resolution of the ongoing U.S. Department of Justice and New York DFS investigations, as any financial penalty significantly exceeding market expectations could present a key risk to the bullish thesis, despite S&P's confidence in the bank's ability to absorb it.
• Focus on the bank's ability to execute on its superior financial targets, specifically the projected 14.0%-15.5% return on equity and risk-adjusted returns of 2.6%, as meeting these metrics is critical to justifying a premium valuation over the broader European banking sector.