DBRS Comments on SEB’s Q2 2009 Results – Ratings Remain Under Review-Negative

DBRS has today commented on the Q2 2009 results of Skandinaviska Enskilda Banken AB (SEB or the Bank). SEB’s ratings remain Under Review with Negative implications, where they were placed on 29 April 2009. DBRS maintains Senior Unsecured Debt & Deposits ratings of AA (low) and Short-Term Debt & Deposits ratings of R-1 (middle) for SEB.

SEB recorded an after-tax loss of SEK 170 million for Q2 2009, compared to net profit of SEK 1.0 billion in the prior quarter. Net income for the quarter was negatively impacted by rising credit costs, the SEK 4.2 billion write-down of goodwill, and an elevated tax charge of SEK 792 million, as the non-deductibility of goodwill write-downs increased the quarterly tax rate. Credit provisions increased 49% quarter-over-quarter to SEK 3.6 billion. Importantly, the Bank generated solid pre-provision, pre-tax earnings of SEK 4.2 billion in the quarter ended 30 June 2009. Excluding the one-off items, such as the goodwill write-downs related to Baltic and Russian operations, currency effects, charges for the Swedish stability fund and SEK 1.3 billion gains on the repurchase of subordinated debt, underlying income before provisions and taxes was SEK 5.2 billion. This was down 6% from the adjusted Q1 2009 pre-provision earnings. Net interest income declined 9% from the prior quarter, as low interest rates pressured deposit margins and reduced margins on SEB’s bond portfolio. Fees, net financial income, life insurance income and other income all rose on a linked-quarter basis, as SEB took advantage of favourable market conditions. In DBRS’s view, SEB’s solid pre-provision income generation demonstrates the strength and diversity of its franchise, which is a key factor underpinning the ratings.

DBRS views SEB’s capitalisation as solid, which underpins the ratings. The repurchase of subordinated bonds during Q2 2009 and a slight decrease in risk-weighted assets strengthened the Bank’s tier 1 regulatory capital ratio, to 13.1% at 30 June 2009 (excluding Basel II transition rules). SEB has built up a substantial capital buffer to enable the Bank to withstand a range of stress scenarios. However, DBRS notes that as credit quality continues to deteriorate, the risk grows that even more adverse scenarios may materialise which could undermine SEB’s franchise strength and earnings ability.

DBRS views SEB’s credit exposure to the Baltic region as a concern, given the severe economic weakness in this region and the resulting increase credit costs. The Bank had SEK 184 billion in loans and commitments in the Baltics as of 30 June 2009, comprising 10% of total credit exposure. Impaired loans in the Baltics increased by 56% during the quarter, to SEK 8.1 billion or 5.1% of Baltic credit exposure. SEB’s credit quality outside the Baltic region has so far remained relatively stable. In the Nordic region, where SEK 1.2 trillion or 66% of SEB’s total credit exposure is located, impaired loans and commitments increased marginally to 0.3% as of 30 June 2009. In Germany, where SEK 428 billion or 24% of SEB’s credit exposure is domiciled, the impaired loans ratio declined slightly to 1.4% at quarter-end, as the Bank continued to work down German legacy loans. On a Group-wide basis, impaired loans rose to SEK 16.7 billion or 1.1% of total credit exposures as of 30 June 2009, up 29% from the prior quarter. Going forward, DBRS expects that loan impairments will likely rise further, as most economies where SEB operates are in recession.

SEB’s liquidity position strengthened during the quarter, as the Bank placed several long-term debt issuances. SEB reported that its projected cash in- and outflows allowed it to remain funded for approximately 12 months at quarter-end, compared to six to eight months at the end of Q1 2009. SEB has been approved to issue debt under the Swedish debt guarantee scheme, opening another stable source of funding, which the Bank has not tapped to date. Still, SEB’s above-average reliance on wholesale funding exposes it to the risk of renewed market disruption, as only 63% of the Bank’s customer lending was covered by customer deposits as of 30 June 2009.

The ratings remain under review with Negative implications. DBRS’s ratings review will focus on the overall impact of the deteriorating economic environment on SEB’s credit costs and its earnings generation ability. Ultimately, the review will focus on SEB’s ability to absorb the impact of the current cycle, while protecting its overall solid franchise. Moreover, the review will look to the extent that SEB’s business lines are able to generate income to withstand the deepening recession and the ongoing capital market disruptions. Negative ratings actions would result should DBRS see indications that SEB’s underlying earnings ability was impaired or should credit quality deteriorate beyond DBRS’s tolerance levels.

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.