DBRS Confirms SEB at AA (low) with Stable Trend, Following Earnings and Rights Issue Announcements

DBRS has today confirmed all ratings for Skandinaviska Enskilda Banken AB (SEB or the Bank), including SEB’s AA (low) Senior Unsecured Debt & Deposits rating and its Short-Term Debt & Deposits rating of R-1 (middle). The trend on all ratings remains Stable.

Today’s ratings confirmation follows SEB’s announcement of full-year 2008 results and of plans to raise SEK 15 billion through a fully underwritten rights issue. The confirmation reflects SEB’s solid franchise, resilient operating performance in 2008 and its sound financial profile. While SEB’s wholesale-oriented business mix and reliance on market funding expose it to the ongoing financial crisis, DBRS recognises that SEB is taking appropriate and prudent action to strengthen capital and protect its liquidity.

DBRS views as a concern the rising credit costs SEB is sustaining in the Baltic region, although a large portion of the sharply increased credit costs in Q4 2008 consists of reserve additions rather than write-offs. DBRS expects that the global economic slowdown will likely cause further credit quality deterioration across SEB’s footprint. Credit quality in the Bank’s Nordic and German operations, which has been resilient so far, is expected to deteriorate, thereby weighing on profitability.

The Bank’s current ratings are underpinned by its solid financial profile, which will benefit from the announced capital measures. SEB’s capital resources will be bolstered by the SEK 15 billion rights issue and the proposed 2008 dividend cancellation, which would add another SEK 4.5 billion in retained earnings. The rights issue is fully underwritten by SEB’s existing shareholders and the underwriting consortium. SEB’s largest shareholders, including Investor AB, have committed to subscribe for and to guarantee 51% of the rights issue, which DBRS views as an important statement of support. Following these capital measures, SEB projects a Tier 1 capital ratio of 12.1% under Basel II rules without taking into account transition floor rules.

DBRS views SEB’s operating performance in 2008 and in Q4 2008 as solid, given the challenging environment. The Bank reported operating profit before credit provisions of SEK 5.7 billion for Q4 2008, almost two times the level of Q3 2008. Solid volume growth and improved margins drove a strong rise in net interest income, with higher client-driven foreign exchange trading and some other gains also boosting income. Despite higher credit losses, Q4 2008 net profit of SEK 3.5 billion was up 86% from the prior quarter. Full-year 2008 profit of SEK 10.1 billion was down 26% from 2007, which compares favourably with similarly-rated financial institutions.

As discussed above, credit quality deterioration could become a rating concern, if it exceeds DBRS’s tolerance levels over the coming quarters. In Q4 2008, SEB recorded net credit losses of SEK 1.7 billion, up 138% from low Q3 2008 levels and up 40% from the year-ago quarter. SEB’s lending operations in the Baltic region were negatively affected in Q4 2008 by the economic downturn in the region. Impaired loans in the Baltics, where SEB has over SEK 180 billion in credit exposure, almost doubled, from 1.5% of credit exposure in September to 2.8% in December 2008. As the recession in the Baltic region deepens, loan impairments may rise further, in DBRS’s view.

Going forward, DBRS sees a risk that loan defaults may also increase in the Nordic region and Germany, which have so far remained stable. Sixty percent of SEB’s total credit exposure of SEK 1,934 billion in December 2008 is located in the Nordic region, with another 25% in Germany. As of December, impaired loans in the Nordic region remained at a low 0.3% of credit exposures, but were up from 0.2% as of September 2008. Loan impairments in Germany decreased in 2008, but are likely to rise in DBRS’s view, as the German economy has slipped into recession.

DBRS will continue to monitor SEB’s performance over the coming quarters. Rising credit losses could lead to downward ratings pressure, as could reduced underlying earnings or indications that SEB’s franchise is weakening. Current ratings are likely to be maintained, if SEB continues to absorb loan losses out of current operating earnings and still remains solidly profitable, while also maintaining its solid financial profile and the strength of its franchise.

Notes:
The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.