OREANDA-NEWS. Fitch Ratings has assigned Swedbank's (Swedbank AB; A+/Positive/F1) issue of additional Tier 1 convertible notes a final rating of 'BBB-'.

The final rating is in line with the expected rating Fitch assigned to the notes on 6 February 2015 (see "Fitch Rates Swedbank's Additional Tier 1 Capital Instruments 'BBB-(EXP)''' at www.fitchratings.com).

KEY RATING DRIVERS
The notes will be CRD IV-compliant perpetual non-cumulative additional Tier 1 instruments. The notes are subject to automatic conversion if the consolidated Common Equity Tier 1 (CET1) ratio of Swedbank falls below 8%, and any coupon payments may be cancelled at the discretion of the bank.

The rating is five notches below Swedbank's Viability Rating (VR) of 'a+' in accordance with Fitch's criteria for assessing and rating bank subordinated and hybrid securities. The notching reflects the notes' higher expected loss severity relative to senior unsecured creditors (two notches) and higher non-performance risk (three notches).

The notching for non-performance risk reflects the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption, and a high level of distributable reserves in the form of retained earnings. Swedbank is subject to stringent capital requirements by the Swedish regulator, including an estimated Pillar 1 CET1 requirement of 10.6% based on end-September 2014 risk weights and an additional estimated 8.4% CET1 Pillar 2 buffer, taking the total estimated CET1 requirement to 19.0%.

Fitch expects the Swedish regulator to impose restrictions on interest payments on the notes should Swedbank's capital approach the estimated Pillar 1 limit of 10.6% CET1. Fitch does not believe that a breach of the Pillar 2 buffer would automatically trigger a coupon cancellation. In light of Swedbank's reported CET1 ratio of 21.2% at end-December 2014, as well as the bank's strong financial track-record, the notching for non-performance has been limited to three notches.

Given the securities are perpetual, their deep subordination, coupon flexibility and going concern mandatory conversion trigger, Fitch has assigned 100% equity credit.

RATING SENSITIVITIES
As the notes are notched down from Swedbank's VR, their rating is primarily sensitive to any change to the VR. The notes' rating is also sensitive to a wider notching if Fitch changes its assessment of the probability of the notes' non-performance risk relative to the risk captured in Swedbank's VR, including that of the impact of a possible breach of the Pillar 2 buffer.