DBRS Comments on SEB’s 3Q12 Results – AA (low) Rating Unaffected, Trend Stable

DBRS Ratings Limited (DBRS) has today commented that its ratings for Skandinaviska Enskilda Banken AB (SEB or the Bank), including the AA (low) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposits rating, are unaffected by the Bank’s recently announced 3Q12 results. The trend on all ratings remains Stable. The quarter was highlighted by sustained positive franchise momentum, solid asset quality metrics, prudent pre-funding of future debt maturities, and strengthened regulatory capital ratios.

The Bank reported an operating profit of SEK 3.9 billion, down slightly from 2Q12 but up 6% from 3Q11. With net interest income and net financial income flat quarter-over-quarter (QoQ), a marginally larger QoQ decline in net fee and commission income was largely offset by reduced net credit losses, as well as seasonally lower expenses. Stable net interest income, at SEK 4.5 billion for 3Q12, was supported by higher lending margins which offset the impact of lower short-term market interest rates. Despite reduced client activity during the quarter, net financial income, at SEK 1.1 billion for 3Q12 benefitted from the higher market values associated with SEB’s fixed income holdings in its liquidity portfolio. However, net fee and commission income fell 7% QoQ to SEK 3.2 billion. This was driven by a decline in client activity which impacted fees for mutual funds, securities, payments, and lending commissions. Positively, results were supported by a 31% QoQ decline in net credit losses to SEK 186 million for 3Q12, supporting the sound credit performance reported across SEB’s business segments.

SEB has made continued efforts to further enhance its franchise and add clients. Growing business volumes within its Retail Banking segment, for example, supported operating profit of SEK 1.0 billion for 3Q12, supported by stable performance in Retail Sweden and in the Cards business. Although flat QoQ, DBRS views the result positively given downside risks to growth in the Scandinavian macroeconomic landscape. However, the economic environment did impact the Merchant Banking segment, for which operating profit fell 20% QoQ to SEK 1.7 billion.

Reflecting the customer flow-driven orientation of the Trading and Capital Markets, Corporate Banking, and Global Transaction Services segments, lower client activity contributed to reduced operating profits. In parallel, the Wealth Management segment saw a 28% QoQ decline in operating profit to SEK 263 million for 3Q12, pressured by lower average asset values adversely affecting both portfolio performance and transaction fees. Conversely, the Life segment, backed by its market-leading Swedish life insurance operations, reported a 13% QoQ increase in operating profit to SEK 504 million for 3Q12 driven by higher demand for SEB’s offerings. Additionally, operating profits at SEB’s Baltic segment grew 15% QoQ to SEK 264 million reflecting resilient income, controlled expenses, and low net credit losses stemming from the improving economic climate in the Baltic markets.

SEB’s results support ongoing solid asset quality. Bank-wide net credit losses amounted to SEK 186 million for 3Q12, or 0.11% of total lending, and SEK 661 million for 9M12, or 0.07% of total lending. Credit losses in the Nordic operations, which represent 75% of lending, remained very low at 0.06% for 9M12. Within the Baltics, which account for 9% of lending, credit losses were 0.25% for 9M12 reflecting continuing normalisation of provisioning levels following several quarters of provision releases. Bank-wide non-performing loans (NPLs) declined 26%from 30 September 2011 to SEK 14.6 billion at the end of 3Q12 and, importantly, have declined for eleven consecutive quarters. The reduction reflects improved asset quality of the lending book as well as the effect of the sale of the Ukrainian retail operations. At 30 September 2012, NPLs represented 1.1% of total Bank lending down from 1.4% at year-end 2011. DBRS views the improvement in credit performance as reflecting the impact of SEB’s actions taken over the last three years to limit exposures to more volatile areas such as the Baltics, as well as generally supportive conditions in core Nordic operations.

DBRS views SEB’s well-managed funding profile as benefiting from its diverse range of funding sources. SEB continues to enjoy good market access despite challenging capital market conditions. During 9M12, SEB raised SEK 84 billion in long-term debt (SEK 23 billion in 3Q12), of which covered bonds accounted for SEK 58 billion. As a result, SEB is continuing its pre-funding strategy with year-to-date issuance exceeding SEK 70 billion in 2012 maturities. At 30 September 2012, wholesale sourced funding as calculated by DBRS accounted for 52.4% of the total funding base, a large portion of which is linked to the relatively more stable Swedish covered bond market. DBRS standard calculation for wholesale funds includes total unadjusted amounts owed to credit institutions, issued debt securities and subordinated liabilities. Excluding the covered bond portion of issued debt securities, wholesale funding reliance is a more moderate 36.2%. Nonetheless, corporate deposits, which typically reflect the strength of SEB’s business profile, declined during the period and contributed to a decline in total deposits (ex. Repos) of 6% QoQ to SEK 799 billion. SEB’s liquidity profile is complemented by a core liquidity reserve of SEK 352 billion (excluding trading assets and unutilised collateral in the cover pool). SEB estimates its Basel III Liquidity Coverage Ratio to be 154% at 30 September 2012.

Capitalisation remains solid with a Basel II Tier 1 capital ratio of 18.9% and Core Tier 1 capital ratio of 16.5% at 30 September 2012, up from 17.5% and 15.3% a quarter earlier, respectively. The improvement largely reflected an SEK 41 billion QoQ reduction in RWAs to SEK 591 billion driven by the approval of an IRB model to calculate non-retail real estate and shipping RWAs by the Swedish FSA, as well as the appreciation of the Swedish krona and lower market and operational risks. Importantly, in DBRS’s view, SEB’s capital position is supported by its resilient earnings generation ability and solid credit performance. As a result, DBRS perceives SEB to be well-positioned to meet stringent Swedish regulatory capital requirements.

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following the disclosure.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Approver: Roger Lister
Initial Rating Date: 14 December 2006
Most Recent Rating Update: 11 May 2012

For additional information on this rating, please refer to the linking document under Related Research.