DBRS Confirms Skandinaviska Enskilda Banken AB at AA (low), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of 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. The trend on all ratings is Stable. DBRS maintains a Support Assessment of SA-2 for SEB. This reflects DBRS’s expectation that some form of timely systemic support would be provided to the Bank, if needed, and as a result the AA (low) senior ratings are positioned one-notch above the A (high) intrinsic assessment.

The ratings reflect the Bank's solid Swedish franchise, its operations in the Baltic countries and in Germany, as well as its sound earnings generation ability, the improving risk profile and the solid capital position. SEB’s diverse operations combine strong merchant banking and corporate lending operations with retail banking, asset management, private banking, and life insurance.

In the domestic Swedish market, SEB is particularly strong in corporate and private banking, reflecting SEB’s traditional role as a premier Nordic investment bank and wealth manager. The diverse domestic franchise also comprises strong positions in unit-linked life insurance and mutual funds. Through acquisitions and organic growth, the Bank has expanded its franchise into Germany and the Baltic region, where SEB is the second-largest financial services provider. In total, SEB has 2,800 large corporate and institutional customers, 400,000 small- and medium-sized enterprise (SME) customers and 4 million private customers. The Merchant Banking and Retail Banking segments are the largest profit contributors, based on the strong domestic franchise and the operations in Germany, and DBRS notes positively the growth in importance of the Retail segment in recent years, given its lower risk profile and dependable earnings. Importantly the turnaround in the performance of the Baltic segment is also a key rating factor. This division was severely affected by the deep recession in the Baltic region. However the region is now recovering and with the exception of one quarter in 2012 the division has been profitable since Q310.

SEB’s solid underlying earnings generation ability is a key factor underpinning the ratings. In 9M13 the Bank reported income before provisions and taxes (IBPT) of SEK 13.9 billion, up 15% on the same period of 2012, and the Bank has been consistently profitable through recent years, despite large provisioning requirements in 2009, primarily driven by the Baltic exposure. Since then the provisioning requirements have reduced considerably and in 2011 the Bank actually recorded net recoveries. Efficiency is also improving, with the Bank reporting a cost-income ratio, for continuing operations, of 53% in Q313 and SEB has committed to keeping operating expenses in both 2013 and 2014 below SEK 22.5 billion.

SEB’s well-managed funding profile benefits from its diverse range of funding sources, including retail and corporate deposits, unsecured short- and long-term debt, and covered bonds. DBRS notes, however, that SEB’s funding profile continues to rely on capital markets to a higher degree than many European peers, although the level of covered bond usage is lower than some domestic peers. The deposit base, consisting of corporate, retail, and public entity deposits, accounted for 48% of total funding at end-September 2013 and DBRS sees the deposit base as providing a stable foundation to its funding profile given its position in the Swedish corporate market. Although SEB does have a significant portion of funding provided by short-term instruments, there has been a substantial improvement in the Bank’s liquidity and funding profile. DBRS continues to view the tendency towards wholesale source funding as a potential vulnerability, although DBRS does recognise the strength of the covered bond market in Sweden. Further strengthening of the funding profile would be viewed positively.

DBRS views SEB’s risk profile as having improved in recent years as the Baltic region has recovered and the core Swedish book has remained strong. At end-September 2013 the largest part of the Bank’s loan portfolio was the residential mortgage portfolio that accounted for 36%, with the well diversified corporate loan book accounting for a further 34%, and the property management portfolio for 22%. Lending in the Baltic countries accounted for 9% of the loan book at end-September 2013 and while the performance in the Baltics has greatly improved, DBRS still views the region as the largest credit risk for SEB. However, with the ongoing recovery in the book, DBRS no longer views this as a significant negative to the rating. For the consolidated Bank as of end-September 2013 total non-performing loans (NPLs) were SEK 10.2 billion (excluding SEK 371 million of restructured mortgage loans in the Baltic region), or 0.7% of lending, a substantial improvement on the SEK 19.9 billion, or 1.4% of lending at end-September 2011. In addition, the NPL coverage ratio has also improved and at end-September 2013 stood at 69%. The low level of the consolidated NPL ratio reflects the strong performance in the Bank’s core Swedish market where NPLs accounted for only 0.2% of total lending at end-September 2013.

SEB’s capital position has continued to improve and at end-September 2013 the Bank estimated its common equity tier 1 (CET1) ratio under Basel III to be 15% (based on SEB's interpretation of future regulation), up from an estimate of 13.1% at year-end 2012. Under Basel II the core tier 1 ratio was 17.4%, up from 15.1% at year-end 2012. DBRS notes that although the Bank benefits from the low risk-weighting of mortgage assets it is well placed to cope with a potential increase in the risk weighting of mortgages to 25%, under Pillar 2, as currently being discussed by the Swedish authorities.

Given the already high rating level any further upward pressure would require a substantial reduction in the level of wholesale funding, while maintaining (i) low levels of credit losses, (ii) solid and predictable underlying profitability, and (iii) continued sound capital management. Negative pressure on the ratings would likely be driven by any signs of deterioration in the Bank’s core franchises, a substantial increase in the Bank’s risk profile, or indications that the Bank’s underlying earnings generation ability has deteriorated. In addition, substantial further encumbering of the balance sheet may lead to negative rating pressure.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All can be found on the DBRS website under Methodologies.

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: December 14, 2006
Most Recent Rating Update: May 11, 2012

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