DBRS: SEB Reports a Solid Quarter in 3Q14

Summary:
• 3Q14 net profit up by 31% on 2Q14, including one-off capital gain on Mastercard shares
• Retail Banking performing well with increased customer numbers and higher margins
• 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) 3Q14 results as solid as demonstrated by the 18% increase in operating profit on 3Q13, excluding the significant one-off capital gain from the sale of shares in MasterCard Inc. Including the gain from the Mastercard transaction net profit in 3Q14 was up 31% on 2Q14 and 46% on 3Q13. The 9% year on year (yoy) increase in net interest income, mainly reflected higher lending volumes, M&A related financing, and better loan margins. Operating expenses were flat on 2Q14, and 2% lower than the previous year for the first nine months. The Bank notes that operating expenses, which totaled SEK 16.6 billion for 9M14, are in line with its SEK 22.5 billion cost cap.

Operating profit for the Merchant Banking division remained flat compared to 3Q13 due to a single large credit loss in Denmark which had misrepresented accounts. This fully offset an improvement in core underlying operations within Merchant Banking which benefitted from increased client activity, mainly from IPOs and M&A deals. The Bank’s Retail Banking division continued to perform well, supported by the strong corporate franchise, the growth in the Swedish residential mortgages and improved overall margins. DBRS views positively SEB’s higher client numbers reported for the quarter, which demonstrates the Bank’s ability to expand its targeted customer base.

Asset quality remains strong, despite the slight increase in the number of impaired loans during the quarter. At end-3Q14, non-performing loans (NPLs) accounted for 0.6% of total lending, remaining stable for the third consecutive quarter, but down from 1.1% at end-3Q12. DBRS notes that the level of NPLs in the Baltics fell further to 4.1% of total lending, down from 9.7% at 3Q12 and 14.0% at 3Q10. However, following the improved level of NPLs in the Baltics, DBRS does not expect material further improvement in the Bank’s overall NPL ratio. SEB’s operations in Ukraine and Russia which are focused on lending from its local subsidiaries to the Bank’s core Nordic and German clients, was reduced by a further SEK 0.2 billion and amounted to SEK 1.6 billion, net of external guarantees, at end-3Q14. This compares with the Bank’s consolidated Common Equity Tier 1 Capital of nearly SEK 97 billion and is thus viewed as manageable. DBRS will, however, continue to monitor whether the elevated risks stemming from geopolitical developments in Ukraine and Russia will impact SEB’s operations in the Baltic countries.

SEB’s capital adequacy levels improved further and at end-3Q14 the Bank reported a Common Equity Tier 1 (CET1) ratio (according to Basel 3) of 16.2%, up from 16.0% at end-1Q14 and 15.0% at end-3Q13. The Swedish FSA has now finalised the capital requirements for the four major banks beyond the EU minimum level of 7% CET1. These include (i) a systemic risk buffer of 5% (3% within Pillar 1 and 2% within Pillar 2) of risk weighted assets (RWAs), to be met with CET1 capital; (ii) a risk weight floor of 25% on Swedish mortgages, within Pillar 2; and (iii) a 1% countercyclical buffer from September 2015. 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 also notes that the Bank successfully passed the EBA stress test with, at end-2016, a fully-loaded CET1 ratio of 15.0% in the baseline scenario and 13.0% in the adverse scenario.

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.