SEB Q1: Results Hit by COVID-19 and Oil Price Decline

Skandinaviska Enskilda Banken AB (SEB or the Bank) reported a net profit of SEK 2.4 billion in Q1 2020, down 60% Quarter-on-Quarter (QoQ) and 50% Year-on-Year (YoY). The Bank's latest quarterly results were largely affected by negative net financial income and higher credit losses, driven by the COVID-19 outbreak impact on financial markets as well as by the oil price decline.

In Q1 2020, total income decreased by 15% year-on-year (YoY), mainly as a result of declining equity markets and widening credit spreads. However, underlying revenue generation was robust with net interest income up 16% YoY and net fee and commission income up 8% YoY, on the back of higher volumes, lower resolution fund fees and higher interest rates, as well as positive developments in lending fees and asset management businesses.

SEB has maintained good cost discipline. Operating expenses were stable in Q1 2020 YoY at around SEK 5.6 billion. However, the cost-income ratio increased to 56% from 47% in Q1 2019, driven by lower revenues. We note that the Swedish FSA decided to postpone its sanction evaluation process around the Bank´s control and governance framework in the Baltics to June from April 2020, as a result of the spread of COVID-19.

The COVID-19 global pandemic and oil price decline impacted SEB's loan loss provisions (LLPs), however, the Bank's cost of risk remains low. LLPs increased to SEK 1.5 billion from SEK 422 million in Q1 2019. We note that SEK 1.1 billion was due to model overlay on the portfolio-level approach, of which SEK 500 million related to oil exposure. In Q1 2020, LLPs accounted for 33.6% of the Bank's profit before credit losses and its cost of risk was 25 bps, which remains low.

Between end-February and mid-April, the Bank has experienced a significant increase in credit demand within its Large Corporate & Financial Institutions business division, following the spread of COVID-19. The total amount was SEK 133 billion, including SEK 83 billion in the pipeline, representing an increase of 14% since end-February. In addition, the Bank has also granted grace period on lending and pension solutions to around 19,000 clients. In this context, SEB's asset quality remains solid with Gross Stage 3 loans below 1%, accounting for 0.71% of total gross loans at end-Q1 2020 (0.67% at end-2019). Furthermore, the Bank's exposure to mining, oil and gas extraction sector remains, in our view, relatively moderate at 2.6% of the total credit portfolio, or 1.7% of the total lending portfolio.

In DBRS Morningstar's view, SEB's capital position remains strong. The Bank reported a CET1 ratio of 16.8% at end-March 2020, albeit down from 17.6% at end-2019 due to higher lending volumes impacting RWAs. Nonetheless, the Bank's CET1 capital cushion strengthened by 60 bps during the quarter to 310 bps, mainly on the back of the reduction or cancellation of countercyclical capital buffer requirements in the Bank's markets. Dividend distribution for 2020 will be assessed in due course over the year, based on the magnitude of support requested from the Bank's customers.

We expect the economic fallout resulting from the coronavirus pandemic will likely translate in 2020 into weaker revenue generation as well as higher loan loss provisions. Nevertheless, DBRS Morningstar views SEB's robust track record in earnings generation ability, also supported by the Bank's leading market position and disciplined cost control, coupled with the Bank's solid asset quality profile, as adequate mitigating factors to the negative impact of this crisis on its credit fundamentals.