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 reflecting the Bank’s systemic importance in Sweden. As a result DBRS would expect that some form of timely systemic support would be provided to the Bank, if needed, and therefore 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 strong 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.

SEB’s solid underlying earnings generation continues to underpin the ratings. In 2014 the Bank reported income before provisions and taxes (IBPT) of SEK 24.8 billion, up 29% on 2013, and the Bank has been consistently profitable through recent years, despite large provisioning requirements in 2009 that were primarily driven by the Baltic exposure. Efficiency continues to be good, with the Bank reporting a cost-income ratio of 47% in 2014. SEB’s total operating expenses for 2014 totalled SEK 22.1 billion, well within the targeted cost cap of SEK 22.5 billion for the year. DBRS notes positively the commitment to manage expenses and that the SEK 22.5 billion cost cap has been extended to 2016.

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. The deposit base, consisting of corporate, retail, and public entity deposits, accounted for 52% of total funding at end-2014 and DBRS sees the deposit base as providing a stable foundation to its funding profile given its position in the Swedish corporate market. 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. 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.

SEB’s risk profile remains relatively low given the strong performance of the core Swedish operations and the recovery in the Baltic region. At end-2014 the residential mortgage portfolio accounted for 36% of the loan book and was the largest part of the loan portfolio, while the well-diversified corporate portfolio accounted for 30% and the property management portfolio for 21%. Lending in the Baltic countries accounted for 9% of the loan book at end-2014. At end-2014 non-performing loans (NPLs) remained low with total NPLs accounting for 0.8% of lending, with a coverage ratio of 59%. The low level of the consolidated NPL ratio reflects the strong performance in the Bank’s core Swedish market where NPLs accounted for only 0.47% of total lending at end-2014. The Bank’s exposure to property management does, however, remain notable totalling SEK 265 million at end-2014, with Sweden accounting for 76% of the portfolio and Germany for 17%. Given the large, more “lumpy” nature of commitments and the sector’s cyclicality, this book adds a level of risk however the low level of impaired loans suggests that the risk within the book is contained and well-managed.

DBRS views SEB’s capitalisation as strong and notes positively the improvement in both capital levels and regulatory ratios. At end-2014 the Bank reported a Basel III Common Equity Tier 1 (CET1) ratio of 16.3%, up from 15.0% at end-2013. 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.

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 applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/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: Elisabeth Rudman
Initial Rating Date: December 14, 2006
Most Recent Rating Update: July 15, 2014

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

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