DBRS Confirms Skandinaviska Enskilda Banken AB at A (high), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Skandinaviska Enskilda Banken AB (SEB or the Bank), including the A (high) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposit rating. The trend on all ratings is Stable. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the final senior debt rating is positioned in line with the A (high) Intrinsic Assessment (IA).

The ratings reflect the Bank’s strong franchise in Sweden, the operations in the Baltics and Germany, as well as the solid earnings generation capacity, the low level and improving risk profile evidenced by lower levels of non-performing loans, and the strong capital levels. The rating also reflects the relatively high reliance on wholesale funding and the ongoing challenges in the regulatory environment.

SEB’s diverse franchise combines strong merchant banking with retail banking, wealth management activities and life insurance. In the domestic Swedish market, SEB has a particular strength in corporate and private banking, reflecting its traditional role as a leading Nordic investment bank and wealth manager. The diverse domestic franchise comprises also strong positions in SME banking, asset management and unit-linked insurance. Through acquisitions and strategic growth the Bank has expanded its footprint in Germany and the Baltic countries, where SEB is the second largest financial services provider.

SEB’s solid earnings generation capacity, with strong growth in net interest income and non-interest income, is a key factor underpinning the ratings. In 2015 the Bank reported income before provisions and taxes (IBPT) of SEK 44.1 billion. This is down from the SEK 46.9 billion reported in 2014, however, the 2014 results were positively affected by the sale of Euroline and MasterCard while the 2015 results were negatively impacted by the Swiss Supreme Court denial for a withholding tax refund. On an underlying basis, IBPT was up 5% year-on-year (yoy). Efficiency continues to be good with a cost/income ratio of 50%. The Bank’s total operating expenses in 2015 totalled SEK 22.1 billion, well below SEB’s cost cap of SEK 22.5 billion that will remain in place through 2017. DBRS views positively the management’s commitment to constrain expenses.

SEB maintains a relatively low risk profile due to the strong performance of the Swedish operations, the ongoing recovery of the Baltic region and the good performance of the loan book in Germany. At end-2015, both the household mortgage portfolio and the corporate lending portfolio each accounted for 36% of the total loan book, while the property management portfolio accounted for 21%. The Baltic region accounted for 8.3%. At end-2015, total non-performing loans (NPLs, calculated as individually assessed impaired loans, portfolio assessed loans past due more than 60 days and restructured portfolio assessed loans) totalled SEK 8.027 billion, or 0.60% of total gross loans. The low level of the consolidated NPL ratio reflects the strong performance in the Bank’s core Swedish market where NPLs accounted for only 0.28% of total lending at end-2015. SEB’s exposure to property management remains sizeable at SEK 268 billion at end-2015. The relatively large commitments, along with the sector’s cyclicality add a level of risk to the overall portfolio. Nonetheless, the relatively low impairment levels historically suggest that the risk is well-managed.

SEB’s funding profile is viewed as sound and well-managed. The Bank benefits from a diverse funding profile, including corporate and private deposits, unsecured short- and long-term debt and covered bonds. The deposit base, consisting of corporate, private and public entity deposits accounted for 52% of SEB’s total funding and DBRS views the deposit base as providing a solid foundation to the funding profile, given the Bank’s position in the Swedish corporate and retail markets. 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. DBRS continues to view the reliance on 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.

DBRS views SEB’s capitalisation as strong and notes the improvement in both capital levels and regulatory ratios. At end-2015 the Bank reported a Basel III Common Equity Tier 1 (CET1) ratio of 18.8%, up from 16.3% at end-2014. SEB plans to maintain a CET1 ratio of around 150 basis points above the minimum requirement of the Swedish Financial Supervisory Authority, which is currently estimated at 16%. On a leverage ratio basis, SEB demonstrated further improvement, with a leverage ratio of 4.9% at end-2015, up from 4.8% at end-2014 and 4.2% at end-2013. 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 Krona (SEK) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

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: Peter Burbank
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 14, 2006
Most Recent Rating Update: September 29, 2016

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