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

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Skandinaviska Enskilda Banken AB (SEB or the Bank), including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (high). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects the Bank’s strong universal franchise in its domestic Swedish market, where SEB is particularly strong in corporate banking and in the Baltics, as well as the Bank’s solid earnings generation, disciplined cost control, sound asset quality, strong capital position, and despite the uncertainty caused by the coronavirus (COVID-19) outbreak and the significant relief measures being taken by governments and regulators. Conversely, the ratings also incorporate SEB’s relatively high reliance on wholesale funding, when compared to European peers, but we believe this is partially mitigated by a good liquidity position and sound access to very stable Nordic covered bond markets.

RATING DRIVERS
DBRS Morningstar views the Bank as well-placed at its current level. Any positive pressure on the Long-Term Issuer Rating would require a strengthened funding profile with lower reliance on wholesale and institutional funding, whilst continuing to demonstrate very strong profitability and asset quality.

Negative pressure to the Long-Term Issuer Rating would likely be driven by a substantial deterioration in the Bank’s risk profile and asset quality. Negative pressure could also arise by a severe economic deterioration in the Baltics, or if the Bank were to face any major challenges accessing wholesale funding markets.

RATING RATIONALE
SEB is one of the leading Swedish banks and is particularly strong in corporate and private banking in its home market of Sweden. The Bank is also the second largest provider of financial services in the Baltic region, while it maintains a predominantly corporate footprint in Denmark, Finland, Norway, Germany and the UK.

DBRS Morningstar views SEB as demonstrating solid earning generation ability and a good revenue mix, with net interest income (NII) accounting for 46% and net fee and commission income for 37% of total operating income in 2019. In 2019, SEB reported a net profit of SEK 20,177 million, down 13% compared to SEK 23,134 million one year earlier. However, 2018 included non-recurring gains of SEK 4,528 million from the sale of SEB Pension and UC AB. Excluding one-offs, SEB´s net profit would have increased by 8% year-on-year (yoy) primarily as a result of higher revenue generation among almost all the business segments. Net interest income (NII) was up 9% yoy in 2019, mainly driven by new lending volumes, repo rate hikes, reduced regulatory fees and some positive FX effects, whilst suffering from lower lending margins in the Swedish mortgage sector. Net fee and commission income increased 2% yoy, largely due to good development in in advisory services, lending and payment business units. The cost-to-income ratio remained sound at 46% in 2019 compared with 48% in 2018, in spite of higher operating expense partly due to increased Anti-Money Laundering (AML)-related costs.

DBRS Morningstar views SEB as having a relatively low risk profile and a well-diversified loan book by industry. Asset quality remains strong with gross Stage 3 loans accounting for 0.67% of total gross loans at end-2019 even though the economic environment in Sweden has slowed down . Exposure to the Baltic countries, that negatively impacted asset quality in the past, represented approximately 10% of the loan book at end-2019. SEB’s exposure to property management, primarily in Sweden, however, remains sizeable at 17% of total gross loans at end-2019, which along with the sector’s cyclicality adds a level of risk to the overall portfolio. DBRS Morningstar also continues to monitor the Bank´s measures implemented to improve its operational risk framework, following the recent investigations around financial crime and AML activities. In this regard, the outcome of the sanction will be communicated in April 2020. Although it is still early stage, we will also closely monitor the potential negative impact of the Covid-19 outbreak on the Bank’s asset quality.

DBRS Morningstar considers SEB as having a sound and well-managed funding profile and a strong liquidity position. Customer deposits, comprised of corporate, private and public entity deposits accounted for 58% of SEB’s total funding at end-2019. Given SEB’s corporate oriented nature, the proportion of deposits from corporates and SMEs is somewhat higher than seen in a pure retail bank, which could be vulnerable if SMEs and Corporates have a material shortening of liquidity. Wholesale funding, primarily covered bonds, accounts for the remainder, which represents a higher proportion of wholesale funding than at most European peers. Whilst DBRS considers the Nordic covered bonds’ markets to be very stable and similar to its Nordic peers, DBRS views the Bank’s usage of wholesale funding and foreign currency funding as a potential vulnerability . However, SEB’s liquid assets amounted to SEK 470 billion at end-2019, thus exceeding the short-term wholesale funding by approximately 1.2x, according to DBRS Morningstar´s estimates.

DBRS Morningstar views SEB as having a strong capital position, supported by its strong and recurrent ability to generate capital through retained earnings. At end-2019, the Bank had a Common Equity Tier 1 (CET1) ratio of 17.6%, unchanged yoy. This was comfortably above its minimum regulatory requirement of 15.1%. SEB’s leverage ratio remained stable yoy at 5.1% at end-2019. We also note countercyclical buffer requirements were recently reduced to 0% in Sweden (from 2.5%) providing additional room to manoeuvre the challenging environment in 2020.

The Grid Summary Grades for SEB are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong/ Good; Funding & Liquidity – Strong/Good; Capitalisation- Strong.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Company Documents, Finansinspektionen (Swedish FSA), Riksgalden (Swedish National Debt Office) and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings
Initial Rating Date: December 14, 2006
Last Rating Date: March 21, 2019

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