DBRS: SEB Reports Solid FY14 Results

Summary:
• Solid FY14 results, with 4Q14 performance supported by increased net fee and commission income and a one-off capital gain
• Asset quality and capital levels 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) FY14 results as solid. For the full year 2014, net profit from continuing operations was SEK 19.2 billion, 30% higher than in 2013. On a quarterly basis, 4Q14 operating income of SEK 12.8 billion, was up 1% on 3Q14 and up 16% on 4Q13. However, excluding the SEK 1.7 billion gain from the divestment of Euroline AB, operating profit decreased 8% quarter-on-quarter.

Net interest income in 4Q14 was slightly down on 3Q14, however, it increased 6% on a full year basis, thanks to strong corporate and household and lending demand as well as higher structured and M&A related financing and improved lending margins. Positively, net fee and commission income was up 19% quarter-on-quarter and 11% year-on-year, mainly due to increased capital markets activities and income from wealth management.

Operating expenses in 4Q14 were 5% higher on 3Q14, however, SEB managed to be within their targeted SEK 22.5 billion cost cap as operating expenses totaled SEK 22.1 billion for the full year. The cost/income ratio for 2014 was 47%, 7% lower than in 2013, due to both higher operating income and reduced operating expenses. DBRS notes that the SEK 22.5 billion cost cap has been extended to 2016.

Asset quality in the Bank remains sound, despite an increase in the number of impaired loans during the quarter. At end-2014, non-performing loans (NPLs) accounted for 0.8% of total lending, up slightly from 0.7% at end-2013. DBRS notes positively that the levels of NPLs in the Baltics continued a downward trend and reached 4.0% of total lending at end-2014, down from 5.0% at end-2013 and 9.2% at end-2012. The Bank’s total impairment charge for 2014 was SEK 604 million impacted by one specific case in Denmark, which had misrepresented accounts. SEB’s lending exposure in Ukraine and Russia, where the Bank’s operations are focused on lending from its local subsidiaries to the Bank’s core Nordic and German clients, reduced during the quarter and amounted to approximately SEK 1 billion, net of external guarantees, at end-4Q14. This compares with the Bank’s consolidated Common Equity Tier 1 (CET1) Capital of nearly SEK 101 billion and is thus viewed as manageable. Given the ongoing uncertainty in the area DBRS will continue to monitor SEB’s exposure.

SEB’s capital adequacy levels improved further and at end-4Q14 the Bank reported a Basel 3 CET1 ratio of 16.3%, up from 16.0% at end-2Q14 and 15.0% at end-4Q13. SEB plans to maintain a CET1 ratio of around 150 basis points above the minimum requirement of the Swedish Financial Supervisory Authority suggesting a ratio of around 17% and DBRS continues to view the Bank as well placed to meet this given its strong earnings generation capacity.

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.