Swedbank's Dividend Sustainability Amid Declining Earnings and Rising Costs

Swedbank (OM:SWED A) has long been a magnet for income-focused investors, boasting a forward dividend yield of 8.15%—a figure that places it in the top quartile of Swedish equities [2]. Yet, beneath this alluring yield lies a complex interplay of earnings pressure, cost dynamics, and a payout ratio that now risks straining the bank’s financial flexibility. For investors, the critical question is whether Swedbank’s dividend remains a sustainable proposition in a tightening macroeconomic environment.

Dividend Payout Ratio: A Double-Edged Sword

Swedbank’s 2023 dividend payout ratio of 71.9% [6] already signaled a precarious balance between rewarding shareholders and retaining earnings for reinvestment. This ratio, while historically reasonable, has been exacerbated by recent volatility. For instance, the 2023 dividend of SEK 9.75 per share dropped 25% from 2022 [4], only to rebound sharply to SEK 21.70 in 2025 [3]. Such swings highlight the bank’s sensitivity to macroeconomic conditions and its willingness to adjust payouts to align with earnings. However, the proposed increase in the payout ratio to 60–70% of annual profit [2]—up from a previous 50%—raises red flags. With analysts forecasting a 16.9% decline in earnings per share over the next three years [1], this aggressive payout could strain liquidity, particularly if earnings growth falters.

Earnings Pressure: Interest Rates and Market Volatility

Swedbank’s Q2 2025 net profit of SEK 7.89 billion [1] may have exceeded forecasts, but it marked a 9.2% decline from the same period in 2024. This trend reflects broader challenges: falling interest rates have eroded net interest income, while reduced asset management activity has pressured net commission income [5]. The bank’s 12-month trailing net income of $3.271 billion [1]—a mere 0.91% increase year-over-year—underscores the fragility of its earnings base. For a bank relying on stable income streams to fund its high-yield dividend, such marginal growth is a warning sign.

Cost Management: A Shield Against Earnings Erosion

Amid these headwinds, Swedbank has demonstrated operational discipline. Q2 2025 operating expenses of SEK 6.12 billion [1] were 6% below forecasts, driven by reduced staff and marketing costs. The cost-to-income ratio of 36% [5] remains a bright spot, reflecting efficiency gains. However, this progress is offset by the fact that operating expenses for the 12 months ending June 2025 totaled $7.621 billion [5], a 10.78% year-over-year decline. While cost cuts have temporarily bolstered profitability, they cannot indefinitely compensate for shrinking revenue.

Future Outlook: Capital Buffers and Strategic Risks

Swedbank’s capital position offers some reassurance. A Common Equity Tier 1 ratio of 19.7% [2] and a 4.5 percentage point capital buffer [1] provide a cushion against downturns. The bank’s pivot to sustainable finance—such as expanding its energy transition credit portfolio [1]—also aligns with long-term trends. However, these strengths are tempered by external risks. The lack of clarity around U.S. regulatory investigations [3] and the absence of detailed forward guidance for 2026 [4] introduce uncertainty. Additionally, the projected rise in the payout ratio to 79% [1] could force the bank to prioritize dividends over capital preservation if earnings stagnate.

Conclusion: A High-Yield Gamble?

Swedbank’s dividend appears sustainable in the near term, supported by cost efficiency and a robust capital position. However, the combination of a high payout ratio, earnings volatility, and macroeconomic headwinds creates a fragile foundation. For investors, the key risk is that the bank’s dividend growth—once averaging 6.7% annually [1]—may reverse course if interest rates or market conditions deteriorate further. While the 8.15% yield is tempting, it demands a premium for the associated risk.

Source:
[1] Swedbank AB (SWDBY) Q2 FY2025 earnings call transcript [https://finance.yahoo.com/quote/SWDBY/earnings/SWDBY-Q2-2025-earnings_call-237086.html]
[2] Swedbank (OM:SWED A) Dividend Yield, History and Growth [https://simplywall.st/stocks/se/banks/sto-swed-a/swedbank-shares/dividend]
[3] Swedbank changes dividend policy [https://www.swedbank.com/newsroom/press-releases.details.swedbank-changes-dividend-policy.AB4BE724CD8B4CA2.html]
[4] Swedbank AB Operating Expenses 2010-2025 [https://macrotrends.net/stocks/charts/SWDBY/swedbank-ab/operating-expenses]