This action follows the conclusions of the Swedish Financial Supervisory Authorities' investigations and Swedbank's own investigation regarding anti-money laundering.
Stockholm, April 02, 2020 -- Moody's Investors Service (Moody's) has downgraded Swedbank AB's
(Swedbank) long-term deposit and senior unsecured debt ratings
to Aa3 from Aa2, junior senior unsecured debt ratings to Baa1 from
A3, subordinated debt ratings to Baa2 from Baa1, and Baseline
Credit Assessment (BCA) to baa1 from a3. The outlook on the long-term
deposits and senior unsecured ratings has been changed to stable from
negative.
The high-trigger Additional Tier 1 (AT1) rating is affirmed at
Ba1(hyb).
The rating action follows the conclusions from the Swedish Financial Supervisory
Authorities' (SFSA) investigations and the independent investigation
commissioned by Swedbank into anti-money laundering (AML) controls
at the bank which showed serious and systematic deficiencies in Swedbank's
management of money laundering risks, particularly in its Baltic
operations. According to the bank's own independent probe,
Swedbank's active pursuit of high-risk customers in the Baltics
may have facilitated significant amounts of suspicious money laundering
transactions. In addition, the bank may have breached US
sanctions.
Moody's considers that the underlying governance and risk management
deficiencies that were revealed are significant enough to have a material
bearing on the bank's overall risk profile, which is reflected
through the introduction of a negative adjustment to the BCA for Corporate
Behavior.
Swedbank is also subject of criminal investigations by the Estonian Prosecutor's
Office linked to money laundering through its Estonian subsidiary and
is being investigated by US authorities.
Whereas Swedbank has faced higher costs to strengthen its AML framework
along with moderately higher funding costs, the bank's financial
profile remains strong with robust asset quality, capitalization
and profitability remaining supportive of the bank's creditworthiness.
Moody's also recognizes that the bank has already taken steps to
tighten internal control functions and address any money laundering failures.
The stable outlook reflects Moody's view that additional financial
penalties arising from the continued US and Estonian investigations are
unlikely to materially impact the bank's creditworthiness.
More broadly, Moody's expects the bank's financial performance
to be relatively resilient in the midst of the current uncertainty and
slowdown in economic growth.
The full list of the affected ratings can be found at the end of this
press release.
RATINGS RATIONALE
ANTI-MONEY LAUNDERING GOVERNANCE AND CONTROL FAILURE DRIVE DOWNGRADE
The key driver for today's ratings downgrade of Swedbank's BCA to
baa1 from a3 is the recent conclusions of the SFSA's and Estonian
FSA's investigations[1] along with Swedbank's own investigation
conducted by the law firm Clifford Chance[2].
In addition to the bank facing increased regulatory and compliance costs
along with moderately higher funding costs, Moody's considers
that the governance and risk management deficiencies that were revealed
are significant enough to impact the bank's creditworthiness.
The SFSA issued a SEK 4 billion fine for serious and systematic deficiencies
in Swedbank's governance of AML work in its Baltic subsidiaries.
The SFSA concluded that the bank's awareness of the risk of money laundering
and its processes, routines and control systems were insufficient,
and that the Baltic operations were lacking adequate resources to combat
money laundering.
The investigation showed that Swedbank AB had been aware of suspected
money laundering activities in the Baltics, but despite several
internal and external reports pointing to the deficiencies in the Baltic
subsidiaries and the risk of money laundering, the bank did not
take proper and sufficient action.
The SFSA also found a number of examples of the bank withholding documentation
and information from the SFSA that in retrospect reveal the seriousness
of the situation, although the bank argues this was not intentional.
The SFSA considered these findings of such a nature that the authorities
considered revoking the bank's license. However, the
SFSA sees the fact that Swedbank have taken efforts to significantly enhance
the bank's AML framework and processes - demonstrating a
willingness to correct the deficiencies - as a mitigating factor.
The report conducted by the law firm Clifford Chance indicates that potential
suspicious (ingoing and outgoing) transactions of a total amount of €36.7
billion may have flowed through the bank's Baltic subsidiaries through
the years 2014-2019. Suspicious transactions may have been
at a high level also in the years before 2014. Suspicious flows
declined quickly after the bank decided to abandon its previous high-risk
non-resident business strategy.
Moody's considers that the governance and risk management deficiencies
that were revealed are significant enough to impact the bank's creditworthiness
and therefore introduced a negative qualitative adjustment to the BCA
reflecting the bank's Corporate Behavior.
Whereas the risk and control failures identified by Clifford Chance and
the authorities took place in the past, the withholding by the bank
of information from both the Swedish and the Estonian FSAs is recent and
suggest that these deficiencies have not yet been fully addressed.
The current CEO, Jens Henriksson, has also initiated a review
of Swedbank's corporate culture to see if there are shortcomings that
need to be addressed, but changes in corporate culture will likely
take a number of years to be fully embedded.
Swedbank is also subject of criminal investigations by the Estonian Prosecutor's
Office linked to money laundering through its Estonian subsidiary and
is being investigated by US authorities. As indicated by similar
cases in the past, Moody's considers that the prolonged and complex
nature of the investigation and remediation procedures will consume a
significant amount of bank resources and managerial focus.
While there is a high degree of uncertainty surrounding the magnitude
of any potential fines resulting from the investigations, an analysis
of past money laundering cases involving US authorities suggests that
while the financial penalties (i.e. excluding internal operational
and remediation costs) could represent a sizable figure relative to the
bank's annual net income. However, Moody's believes
that these are unlikely to result in a material impact on the bank's
financial profile.
Furthermore, Moody's recognises that the bank has already taken
a number of steps to address its governance and control and specifically
its money laundering process controls deficiencies. The bank is
implementing an action program which at year-end 2019 consisted
of 152 AML initiatives, out of which 67 had been completed whilst
68 were ongoing. These actions underpin the bank's baa1 BCA
along with its solid asset quality, robust capital and profitability.
We regard Swedbank's weakness in corporate governance and risk management
as a governance risk under our ESG framework, given its implications
for the management credibility and track record. Today's
action reflects the impact on Swedbank from the governance weakness,
and the deterioration in credit quality it has triggered.
SENIOR UNSECURED, DEPOSIT AND JUNIOR SENIOR UNSECURED DEBT RATINGS
ARE DOWNGRADED
The downgrade of the long-term deposit and senior unsecured debt
ratings follows the downgrade of the bank's Adjusted BCA. Moody's
Advanced Loss Given Failure (LGF) analysis is based on the group's current
balance sheet structure and its capital and funding plans up to the beginning
of January 2022, based on the subordination requirements for the
current Minimum Requirements for own funds and Eligible Liabilities (MREL).
This analysis indicates that Swedbank's depositors and senior creditors
are likely to face extremely low loss-given-failure,
due to the loss absorption provided by the senior non-preferred
issuance. This results in three notches of uplift for deposits
and senior unsecured debt ratings, which are further supported by
our view of "moderate" probability of government support, which
results in an additional uplift for these two rating classes, leading
to long-term deposit and senior unsecured ratings of Aa3.
Moody's does not incorporate government support in the Baa1 junior senior
unsecured ratings, as this debt class has been introduced by the
authorities to absorb losses.
HIGH-TRIGGER ADDITIONAL TIER 1 RATING IS AFFIRMED
The high-trigger Additional Tier 1 (AT1) rating is affirmed at
Ba1(hyb) as the AT1 rating is resilient to the downgrade of the bank's
Adjusted BCA as per Moody's High-trigger CoCo model.
This is because the slight increase in the probability that the bank might
fail, absent extraordinary support, as indicated by the lower
Adjusted BCA, means that there is a reduced amount of incremental
risk of loss to AT1 bondholders from a conversion following a breach of
the capital trigger. The combination of both considerations results
in an expected loss consistent with the Ba1(hyb) rating.
STABLE OUTLOOK
The stable outlook reflects Moody's view that additional financial
penalties arising from the continued US and Estonian investigations are
unlikely to materially impact on the bank's creditworthiness.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded were there: (i) further concerns
come to light regarding governance resulting in a sustained loss in clients,
business or investor confidence, exerting pressure on the bank's
financial profile, (ii) heightened risks of a significant fine or
operational constraint that would reduce the bank's earnings or capital,
or (iii) signs that funding becomes significantly more costly or access
to certain markets becomes more limited.
The long-term deposit and senior unsecured debt ratings could also
be downgraded if the Swedish subordination requirements under MREL were
to fall, for instance, due to harmonization with EU's
updated Bank Recovery and Resolution Directive (BRRD2).
The BCA and Adjusted BCA could be upgraded if the company demonstrates
it has fully addressed previous and ongoing governance, steering
and cultural shortcoming. In addition, associated risks need
to have dissipated without a negative impact on Swedbank's financial profile
or its franchise compared to the current positioning of the BCA.
LIST OF AFFECTED RATINGS
..Issuer: Swedbank Mortgage AB
Downgrades:
....Long-term Counterparty Risk Ratings,
Downgraded to Aa3 from Aa2
....Long-term Counterparty Risk Assessment,
Downgraded to Aa3(cr) from Aa2(cr)
....Long-term Issuer Rating,
Downgraded to Aa3 from Aa2, Oulook Changed to Stable from Negative
....Baseline Credit Assessment, Downgraded
to baa1 from a3
....Adjusted Baseline Credit Assessment,
Downgraded to baa1 from a3
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Aa3 from (P)Aa2
Affirmations:
....Short-term Counterparty Risk Ratings,
Affirmed P-1
....Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Other Short Term, Affirmed (P)P-1
Outlook Action:
....Outlook changed to Stable from Negative
..Issuer: Swedbank AB
Downgrades:
....Long-term Counterparty Risk Ratings,
Downgraded to Aa3 from Aa2
....Long-term Bank Deposits,
Downgraded to Aa3 from Aa2, Outlook Changed to Stable from Negative
....Long-term Deposit Note/ CD Program,
Downgraded to (P)Aa3 from (P)Aa2
....Long-term Counterparty Risk Assessment,
Downgraded to Aa3(cr) from Aa2(cr)
....Long-term Issuer Rating,
Downgraded to Aa3 from Aa2, Outlook Changed to Stable from Negative
....Baseline Credit Assessment, Downgraded
to baa1 from a3
....Adjusted Baseline Credit Assessment,
Downgraded to baa1 from a3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa3 from Aa2, Outlook Changed to Stable from Negative
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Aa3 from (P)Aa2
....Junior Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
....Junior Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Baa1 from (P)A3
....Subordinate Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
....Subordinate Medium-Term Note Program,
Downgraded to (P)Baa2 from (P)Baa1
Affirmations:
....Short-term Counterparty Risk Ratings,
Affirmed P-1
....Short-term Bank Deposits,
Affirmed P-1
....Short-term Deposit Note/CD Program,
Affirmed P-1
....Short-term Deposit Note/CD Program,
Affirmed (P)P-1
....Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Preferred Stock Non-cumulative,
Affirmed Ba1(hyb)
....Commercial Paper, Affirmed P-1
....Other Short Term, Affirmed (P)P-1
Outlook Action:
....Outlook changed to Stable from Negative
..Issuer: Swedbank AB, New York Branch
Downgrades:
....Long-term Deposit Note/CD Program
Takedown, Downgraded to Aa3 from Aa2, Outlook changed to Stable
from Negative
Outlook Action:
....Outlook changed to Stable from Negative
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
announced and described above.
REFERENCES/CITATIONS
[1] SFSA press release "Swedbank fined for serious deficiencies
in its measures to combat money laundering" on 19-Mar-2020
[2] Clifford Chance "Report of investigation on Swedbank AB
(publ)" on 23-Mar-2020
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Louise Lundberg
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
