Morningstar DBRS Upgrades SEB’s Long-Term Issuer Rating to AA (low), Trend Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded the Long-Term Issuer Rating of Skandinaviska Enskilda Banken AB (SEB or the Bank) to AA (low) from A (high), the Long Term Critical Obligations Rating to AA (high) from AA and Dated Subordinated Debt to A from A (low). Morningstar DBRS has also confirmed the Short-Term credit ratings on SEB at R-1 (low) and the Short Term Critical Obligations Rating at R-1 (high). All credit ratings have a Stable Trend. The Bank’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment at SA3. See the full list of credit ratings in the table at the end of this press release.

CREDIT RATING DRIVERS

The upgrade of SEB’s Long-Term credit ratings reflects the Bank’s enhanced profitability on the back of higher interest rates and the fact that Morningstar DBRS expects this improvement in profitability to be partially sustained going forward on the basis of a more normalized interest rate environment, the Bank’s balance sheet rate sensitivity, its well-diversified revenue sources and long track record of high operating efficiency. The upgrade of SEB’s long-term credit ratings also take into account the Bank’s strong risk profile underpinned by its sound risk management practices, its diversified loan book and very strong asset quality metrics, both in terms of non-performing loans (NPLs) volumes and coverage ratio, despite the challenging macroeconomic environment, especially in Sweden which entered into a recession in Q3 2023. Nevertheless, Morningstar DBRS expects some moderate deterioration in asset quality going forward, driven by the impact of tighter financial conditions on borrowers, which usually comes with a delay, and the still uncertain global economic conditions amid high geopolitical risk.

In addition, SEB’s credit ratings also incorporate the Bank’s improved funding and liquidity profile as the Bank has been able to substantially increase its customer deposit base to SEK 1,566 billion at end-2023 since end-2019 (9.4% CAGR) driven by higher saving rates due to the pandemic. This has translated into an improved net loan to deposit ratio (excluding repos) of 120% at end-2023, down from 147% at end-2019. Nevertheless, Morningstar DBRS notes that the Bank still has a higher reliance than European peers on wholesale funding, however, we note that it is mainly covered bonds issued in the Swedish covered bond market, which have proven to be very stable and resilient throughout the years. Finally, the credit ratings also consider the Bank’s very strong capital position, with ample cushions over total minimum regulatory requirements, as well as its robust and well-diversified franchise in Sweden and the Baltics, with a significant corporate banking franchise in the Nordic area, Germany and the United Kingdom.

CREDIT RATING RATIONALE

Given the current upgrade, a future upgrade action would be possible in the medium term if profitability and the funding profile improve whilst maintaining a strong risk profile and capitalization.

A downgrade of the Long-Term Issuer Rating would be triggered by a significant deterioration in SEB’s asset quality, materially weakening the Bank’s profitability and/or a deterioration in the Bank’s funding and liquidity profile.

Franchise Combined Building Block (BB) Assessment: Strong
SEB is the largest bank in Sweden with SEK 3,608 billion of total assets at end-2023 (c. EUR 332 billion or USD 349 billion). The Bank has leading franchises in Sweden and the Baltic countries, where it offers a wide range of commercial, investment and retail banking services to corporate and retail customers with robust market shares. In addition, SEB enjoys a meaningful corporate footprint in Denmark, Finland, Norway, Germany and the UK and is currently targeting large corporates in the Netherlands, Austria and Switzerland. As part of its 2030 Strategy and in order to expand the Group’s corporate and card franchise, SEB entered into an agreement with Lufthansa Group in 2023 to acquire Lufthansa AirPlus Servicekarten GmbH (AirPlus), a leading corporate payment services company in Europe, with very strong franchise in the DACH region, that will provide SEB with additional scale and innovative IT platform to further grow in Europe.

Earnings Combined Building Block (BB) Assessment: Strong/Good
SEB reported an exceptionally profitable year in 2023 underpinned by the higher interest rate environment. Going forward, Morningstar DBRS expects these profitability levels to partially continue in a more normalized interest rate environment, as a result of the Bank’s well diversified revenue streams, positive operating leverage with strong efficiency ratios and well-contained cost of risk despite some expected deterioration in asset quality. SEB reported a net attributable profit of SEK 38.1 billion in FY23, up 41% Year on Year (YoY) mostly driven by a large increase in net interest income (NII), which was generated by the improved deposit margin in Sweden and the Baltics as well as the positive impact from lending to credit institutions and central banks. Loan loss provisions (LLPs) were also significantly lower as a result of macroeconomic model updates and the management of portfolio overlays. The Bank’s Return on Equity (ROE), as calculated by Morningstar DBRS, increased to 17.9% in FY23, up from 13.6% in 2022.

Risk Combined Building Block (BB) Assessment: Very Strong/Strong
SEB has a very strong risk profile underpinned by its sound risk management practices and very solid asset quality metrics. The Bank’s total NPLs grew by 11% YoY at end-2023 to SEK 7.6 billion, driven in Q4 by a single exposure in the business and household services industry. The Bank’s gross loans to commercial real estate (CRE), excluding off-balance sheet exposures, stood at SEK 185 billion at end-2023, representing 9.1% of its total loan book, with 97% located in the Nordic and Baltic countries and no exposures to CRE in the United States. The Bank’s NPLs in this portfolio decreased 15% YoY and the NPL ratio remained at a very low level of 0.06% of total CRE gross loans. Morningstar DBRS views SEB’s prudent and conservative underwriting criteria based on cash-flows in addition to strong coverage ratios and conservative LTV levels, to be key mitigants in case of a broader additional deterioration in the sector, as the market outlook remains uncertain.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS considers SEB's funding profile as good and well-managed and improved over the recent years as a result of the higher savings accumulated during the pandemic. Albeit, in the current scenario of tighter financial conditions and higher cost of living, Morningstar DBRS expects the stock of savings to gradually decline, Morningstar DBRS believes they should remain above pre-Covid levels. In 2023, customer deposits remained flat at SEK 1,565 billion and the Bank’s net loan to deposit ratio (excluding repos) remained at 120%. SEB’s reliance on wholesale funding is higher than its European peers, but in line with Nordic peers, who are very active in the covered bond markets that have proven to be very stable and resilient over time. The Bank reported a Liquidity Coverage Ratio of 140% and a Net Stable Funding Ratio of 112% at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
SEB’s capital position is robust and underpinned by its strong internal capital generation capacity as well as its consistent access to capital markets, which results in ample capital cushions over minimum regulatory requirements. The Bank reported a regulatory Common Equity Tier 1 (CET1) capital ratio of 19.1% at end-2023, up 10 bps YoY, driven by the positive impact of retained earnings, which offset the negative impact of the dividend distribution and share buyback programs as well as the regulatory adjustments that occurred in 2023. SEB’s capital buffer over minimum regulatory requirements remained very strong at 440 bps, but Morningstar DBRS expects this to gradually reduce towards SEB’s target of c. 100-300 bps capital buffer over time. The Bank’s total MREL ratio stood at 42.5% at end-2023, comfortably above its 2024 requirement of 35.7%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/429256.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, SEB Annual and Sustainability Report 2023, SEB quarterly Investor Presentations, Fact Books and Reports in 2022 and 2023, SEB 2023 Capital Adequacy & Risk Management Report – Pillar 3 as well as European Bank Authority, Single Resolution Board and European Central Bank data and reports. Morningstar DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/429258.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: María Jesús Parra Chiclano, Vice President, European Financial Institution
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Head of Financial Institutions
Initial Rating Date: 14 December 2006
Last Rating Date: March 15, 2023

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