Swedbank’s main source of income is the interest paid on the money we lend. Lending must be financed, however, through deposits from businesses and private customers and through funding from the capital market. Net interest income, the bank’s most important profit variable, is the difference between the interest income on deposits and funding expenses.
To contribute to the stability of the financial system, we have to understand and correctly price risk. It is also crucial to our survival. The margin we earn on our lending has to be high enough to cover any credit impairments for borrowers who fail to pay interest or amortise their loans. It must also cover administrative expenses and provide a return on shareholders’ equity.
It is important for us that the money we lend contributes to sustainable development. This is manifested in many ways. In 2017, for example, we established a green asset framework that provides a foundation for the issuance of green bonds, two of which have already been issued. The money is used to finance sustainable investments in real estate and renewable energy sources that reduce carbon emissions. Net interest income and credit impairments are strongly tied to the real economy and are affected by factors such as economic growth, interest rates and unemployment. To limit the impact of a severe recession and continue to support our customers regardless of economic conditions, we also maintain capital for unforeseen losses. The size of this buffer, which largely consists of the capital our shareholders have invested, is determined by various regulators and depends in part on how risky the assets are considered to be.