DBRS: SEB Reports Solid Results in Q1 2014

Summary:
• Solid quarterly performance with revenues up 9% and net profit up 29% on Q1 2013
• Merchant Banking income supported by increased capital markets activity in the Nordic region
• DBRS rates SEB at AA (low) with a Stable trend for Senior Unsecured Debt & Deposits

DBRS Ratings Limited (DBRS) views Skandinaviska Enskilda Banken AB’s (SEB or the Bank) Q1 2014 results as solid, in line with prior trends. Net profit increased 29% on Q1 2013 driven by a 9% increase in revenues and a 4% reduction in operating expenses, although compared to Q4 2013 net profit was down 8% primarily due to a 5% reduction in revenues. At SEK 5.3 billion the lower expenses in the quarter evidences the focus on costs, and provides the Bank with some flexibility as the cost cap the Bank has in place for 2014 and 2015 is SEK 22.5 billion, albeit the Bank noted that operating expenses are seasonally lower in the first quarter.

The stable performance of the Merchant Banking division was supported by the increased capital markets activity, in particular in the equity capital markets business, where an increased number of initial public offerings took place. This helped the division, which is the largest contributor to the Bank’s profit, to improve its operating profit by 40% compared to Q1 2013. Compared to the recent high result of Q4 2013 operating profit was down 3%. DBRS will continue to monitor whether the elevated risks stemming from the ongoing issues in Ukraine and Russia will impact on markets and lead to slowdown in corporate activity.

Asset quality continues to be strong with the Bank reporting a further decrease in the level of impaired loans in Q1 2014. As of end-March 2014, non-performing loans (NPLs) accounted for 0.6% of total lending, down from 0.9% at end-March 2013. Due to the improved level of NPLs in the Baltics, DBRS would not expect to see a substantial further improvement in the Bank’s overall NPL ratio. At end-March 2014 the Bank’s NPL ratio in the Baltics was 5% of total lending, down from over 13% in 2010. SEB has operations in both Ukraine and Russia, focused primarily on lending from the Bank’s local subsidiaries to local subsidiaries of the Bank’s core Nordic and German clients. DBRS views these exposures as manageable given that they total, at end-March 2014, SEK 2.1 billion, net of external guarantees. This compares to consolidated common equity tier 1 capital of SEK 92 billion.

At end-March 2014 the Bank reported a Common Equity Tier 1 ratio (according to Basel 3) of 15.7%, up from 13.4% at end-March 2013. The Swedish authorities are currently proposing to increase the risk weight floor for residential mortgages, within the Pillar 2 calculation to 25%, from the current 15%. DBRS notes that if this was included in the Pillar 1 calculation, SEB would still maintain a strong Basel 3 Common Equity Tier 1 ratio. As a result, and due to the Bank’s strong internal capital generation DBRS views the Bank as well placed to manage the impact of the evolving regulatory environment.

DBRS rates SEB at AA (low) with a Stable trend for Senior Unsecured Debt & Deposits.

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