DBRS: Strong F&C Income Drives SEB’s Good Q2 2014 Results

Summary:
• Q2 2014 net profit up by 10% compared to Q2 2013, helped by strong fee and commission income
• Merchant Banking income up 17% on Q2 2013 supported by increased business volumes
• Asset quality and capital remain strong
• 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) Q2 2014 results as robust. Operating profit for Q2 2014 increased 10% on Q2 2013 driven by a 6% increase in total operating income. Of particular note was the 12% rise in fee and commission income, reflecting a higher level of activity in general, as well as some seasonal effects from the card business and securities lending. Operating expenses were down 1% compared to the same quarter of 2013, although compared to Q1 2014 they increased 3% due to seasonality effects. The Bank remains confident that operating expenses, which totaled SEK 10.9 billion for H1 2014, will remain below its SEK 22.5 billion target both for the current year and for 2015.

Improved business confidence, evidenced by higher activity volumes, helped the Merchant Banking division, which is the largest contributor to the Bank’s profit, increase its operating profit by 17%, compared to Q2 2013. The Banks’ result was also complemented by a strong performance in the Retail Banking division, especially within the Card business. DBRS views positively the increase in the number of clients, which demonstrates the Bank’s ability to further expand its customer base.

Asset quality remains strong and the Bank reported a further decrease in the level of impaired loans in Q2 2014. At end-June 2014, non-performing loans (NPLs) accounted for 0.6% of total lending, the same as in Q1 2014, but down from 1.3% at end-June 2012. DBRS notes that the level of NPLs in the Baltics fell further to 4.5% of total lending, down from 13.8% at Q2 2010. However, following the improved level of NPLs in the Baltics, DBRS would not expect to see a further major improvement in the Bank’s overall NPL ratio. SEB has operations in Ukraine and Russia, focused on lending from its local subsidiaries to the Bank’s core Nordic and German clients. The total exposure reduced in the quarter by SEK 0.3 billion to SEK 1.8 billion, net of external guarantees. This compares with the Bank’s consolidated Common Equity Tier 1 Capital of SEK 96 billion and DBRS therefore views this exposure as manageable.

At end-June 2014, SEB reported a Common Equity Tier 1 ratio (according to Basel 3) of 16%, up from 15.7% at end-March 2014 and 14.2% at end-June 2013. In May 2014 the Swedish Financial Supervisory Authority (FSA) announced details on the proposed structure of how capital requirements for Swedish banks will be devised in the future. These include an increase in the risk weight floor for residential mortgages to 25%, a systemic risk buffer of 3% of risk weighted assets (RWAs) and a 2% buffer requirement within the Pillar 2 framework, both are to be met with common equity tier 1 capital. In addition a decision on the likely activation and final level of the counter‐cyclical capital buffer is expected in the autumn of 2014. Given the Bank’s strong internal capital generation and its current capital base 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.