Swedbank Performs in European Stress Test

Swedbank showed a solid performance in the 2021 European Central Bank stress test. In the adverse scenario, its common equity Tier 1 ratio declined from 17.5% in 2020 to 14.9% in 2021, which was the lowest point its capital ratio reached over the three-year stress horizon. This is comfortably ahead of the 12.4% minimum requirement that regulators believe is necessary to prepare the bank for economic hardship. Swedbank was the least-affected bank across the 18 banks under our coverage that participated in this year’s stress test. Its CET 1 ratio declined 14.7% versus an average drop of 30.2% across our coverage. Also, the composition of the ratio decline is promising. Its risk-weighted assets only increased 5.9% during the stress, suggesting that Swedbank’s internal risk models are robust, while its capital base shrank only 9.6%. In this scenario, Swedbank would only post a loss in one out of three years, driven primarily by a spike in credit losses. In the remaining years, Swedbank’s strong profitability was able to offset such loan losses. We maintain our SEK 192 fair value estimate and narrow moat rating.