Interview: Ulf Jakobsson, Swedbank

The Covered Bond Report’s Neil Day spoke to Ulf Jakobsson, head of funding at Swedbank, about its senior and covered bond issuance in dollars and euros, asset encumbrance, and more.

Swedbank just launched its first senior dollar benchmark — what was the rationale for that?

Due to the documentation issues around a 144A transaction the issuing window is fairly short. We had been following the market since mid-August, and with the market in very good shape and the basis swaps moving in the right direction, we decided to enter the market. We were very happy with the outcome and an order book of $2.6bn demonstrated the good demand for Nordic issuers.

You issued a covered bond into the US in March — what is your strategy towards dollar covered bond issuance?

During 2011 and 2012, we have done four US covered bond benchmarks and we expect to return to the US market once or twice a year. Both the euro and US dollar covered bond markets are important to us in terms of diversification.

You have not issued a euro covered bond benchmark this year — why is that?

In senior, we have been very active in the euro market, having issued three benchmark transactions which is quite a lot for us. The reason for that was that we wanted to build a senior curve, so we did five, four and three year deals, in that order. All in all we have been more active in the senior market than in covered so far this year.

Coming back to covered bonds, this year we have done one US covered bond and we haven’t so far done any euro transactions. We have done fewer benchmark covered bonds overall this year compared with what we have done in the last couple of years.

There are a couple of reasons for this, but the main one is that over the last couple of years we have been quite active in extending the maturity profile of Swedbank in order to build a really robust funding structure. The average duration of our outstanding covered bonds stands at 42 months at present.

We issued close to Skr250bn (Eu29.0bn/$37.4bn) of long term funding in each of 2010 and 2011, whereas this year we had a funding plan of Skr120bn — roughly half the size. During this period of high activity in the last couple of years, we have extended our maturity profile which means that we have fewer redemptions and less need for new funding. We now have the maturity profile in place that we would like to maintain and expect to issue around Skr125bn per year going forward.

Are you active in private placements such as registered covered bonds?

Yes, traditionally a large part of our total long term funding, both in terms of senior and covered bonds, has been generated in private placements.

How far progressed are you in the funding plan?

We had the Skr120bn target for the full year and the total now stands at Skr125bn, so in that respect we are done for the year. That doesn’t mean we will sit on our hands for the rest of the year, but we will probably be more opportunistic.

How are you addressing the issue of asset encumbrance?

Encumbrance is of course an interesting topic and we like to be as transparent as possible in terms of how the different parts of our balance sheet are funded. However, what we would like to stress is that in our case — and that’s the same for some of our peers here in Sweden — the mortgage business, lending to our retail clients, is quite a large part of our business model. That type of business will most likely be funded with covered bonds to a large extent, and if that is the dominant business line, the encumbrance level is going to be higher compared to institutions with another type of business model.

But we would very much like to point out that this is a natural consequence of the business model and asset encumbrance has to be put in the context of probability of default. The covered bond markets have tended to be a more stable source of funding during the financial crisis and the Swedish domestic market has been very reliable.

You were upgraded by Fitch in July — how has the bank improved its credit profile?

The main drivers behind the positive rating action have been the robust funding structure, high capitalisation, and our stable and improved profitability.

We were also upgraded by S&P in December and Swedbank was one of the few banks that did not get downgraded by Moody’s.

You have applied for the European Covered Bond Council Label — what benefits do you see in this?

It’s a good first step towards a strengthening of the covered bond product in light of the new upcoming liquidity regulations and the importance the asset class has won over the past two years. To further enhance the role of covered bonds there is in our view, however, a need to make the definitions narrower as to what type of assets can be included in the cover pools, and potentially also down the road to look at harmonising European legislation.