DBRS Confirms SEB at AA (low), Trend Now Negative

DBRS has today confirmed its ratings for Skandinaviska Enskilda Banken AB (SEB or the Bank), including the Bank’s Senior Unsecured Debt & Deposit ratings of AA (low) and its Short-Term Debt & Deposits ratings of R-1 (middle). The trend on SEB’s long-term ratings is now Negative, while the trend on the short-term ratings is Stable. Concurrently, all ratings have been removed from Under Review with Negative Implications where they were placed on 29 April 2009.

The rating confirmation and the resolution of the review consider SEB’s rather resilient underlying earnings generation ability, its solid franchise, improved liquidity position and its bolstered capitalisation. Given the aforementioned, and the improving general operating conditions, DBRS sees SEB as better positioned to manage through the prevailing environment. While the Baltic region remains under significant economic stress, the economic environment across SEB’s key markets outside the Baltics (Sweden, other Nordic countries and Germany) has begun to stabilize and in some areas, improved. While DBRS believes that SEB has the ability to absorb a large level of credit losses from the Baltics, the potential of significant extreme losses, currency devaluations, and changes in the legal structure in these counties add negative pressure on the ratings, which is reflected in the Negative trend. SEB’s Baltics exposure is SEK 167 billion or circa 10% of the lending book.

Generating SEK 3.7 billion of income before provisions and taxes (IBPT) this quarter, SEB continues to demonstrate the strength of its earnings generation ability, which speaks to its overall franchise strength. Although pre-provision income was down 11% from the very strong Q2 2009 level, importantly, IBPT was 15% higher than a year ago. Removing one-time items, which include losses from securities sales and negative currency effects, a partial provision recovery in the life insurance business and a valuation gain, underlying pre-provision earnings were SEK 4.0 billion. Year-to-date, IBPT at SEK 12.1 billion remains very respectable, given the current operating environment. DBRS looks to a bank’s ability to generate stable and predictable IBPT through various economic cycles, as earnings are the first line of defence for loss absorption.

SEB’s net income was significantly impacted by high net credit losses and high tax charges. SEB generated a small net profit of SEK 37 million in Q3 2009. Although DBRS views this as far below the Bank’s ability and its historic levels, the result was indeed higher than that of the prior quarter.

The Bank generates resilient net interest income and solid net fees and commissions, which adds to a level of predictability to revenue generation. Net interest income at SEK 4.5 billion, although down from the prior quarter level, was almost unchanged (-1%) from the prior year. Rising lending margins helped offset the impact of lower deposit margins, low rates and reduced lending volumes. Net fee and commissions declined 6% from the prior quarter partly owed to the seasonal slowdown in capital markets, but also reflected solid custody, payments and lending fees.

Credit losses remained elevated in Q3 2009, although were lower than the prior quarter’s level. Net credit losses for the quarter were SEK 3.3 billion, impacted by the ongoing weakness in the Baltic region. Impaired loans at SEB rose to 1.3% of lending at 30 September 2009, up from 1.1% at 30 June 2009, mainly due to the Baltics. However, non-performing loan (NPL) formation in the Baltics slowed, rising SEK 2.6 billion, as compared to a SEK 4.3 billion rise in the prior quarter. Although this decline in growth in NPLs is an encouraging indication, DBRS remains extremely cautious as this region remains under significant economic stress. At 7.0% of lending, NPLs in the Baltics remain high. Outside the Baltic region, SEB’s asset quality remains relatively stable, with very low NPLs in Sweden, where 56% of SEB’s lending is located. The stabilising economic environment in the Nordic region and Germany reduces the risk of a broad systemic crisis that could impair the Bank’s franchise.

SEB strengthened its liquidity profile in Q3 2009 by raising long-term debt, primarily unsecured bonds. This helped the Bank to lengthen the period for which it can operate without raising new market funding to over 15 months at 30 September 2009. Although DBRS recognises the positive development in the Bank’s liquidity and funding profile, SEB remains reliant on wholesale funding.

DBRS views SEB’s robust capitalisation as a key strength. The Bank reported a further-strengthened Tier 1 capital ratio of 13.5%, with a core Tier 1 ratio excluding hybrids of 11.8%. Capitalisation has benefited from the Bank’s rights issue and from reduced risk-weighted assets, which partly reflects lower lending volumes. Total lending to the public declined 7.5% during Q3 2009, as SEB continued to focus on risk reduction, with Baltic lending falling even faster, by 9%, which partly reflects currency effects.

As discussed above, the Negative trend reflects primarily the high level of uncertainty about the outlook for SEB’s Baltic operations. While SEB’s strengthened capital and liquidity profile should enable it to withstand a significant level of additional stress in the Baltics, the still-evolving economic situation presents noteworthy event risk which could negatively impact the ratings.

Notes:
All figures are in Swedish Krona (SEK), unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies. This is a Corporate (Financial Institutions) rating.

This is a Corporate (Financial Institutions) rating.