Morningstar DBRS Confirms SEB's Long-Term Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Skandinaviska Enskilda Banken AB (SEB or the Bank), including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The trend on all credit ratings is Stable. Morningstar DBRS has also maintained the Intrinsic Assessment (IA) at AA (low) and the Support Assessment at SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of SEB's credit ratings takes into account SEB's robust and well-diversified franchise in Sweden and the Baltics, as well as its significant corporate banking footprint in the Nordic area, Germany, and the UK. The credit ratings also reflect the Bank's solid profitability, which has been bolstered by the higher rate environment. However, Morningstar DBRS expects the improvement to be partially sustained going forward, helped by the Bank's well-diversified revenue sources, investments in growing the business, and continuous efforts to enhance the already good operating efficiency. The Bank's risk profile is strong, demonstrated by its very strong asset quality metrics, despite the challenging macroeconomic environment, especially in Sweden. This underscores SEB's sound risk management practices. Given the more optimistic economic outlook in SEB's home markets, Morningstar DBRS expects credit quality to remain broadly stable but notes the heightened geopolitical risk. SEB's credit ratings also incorporate the Bank's sound funding and liquidity profile, which benefits from the Bank's large corporate deposit base, supplemented by term funding in the covered bonds market, which has proven to be very stable, and the unsecured market. Finally, the credit ratings also consider the Bank's strong capital position, with an ample cushion over total minimum regulatory requirements.

The Bank's IA of AA (low) has been assigned at the lower end of the IA Range. This mostly reflects the Bank's more limited franchise and revenue streams compared with banks intrinsically assessed at the midpoint of the IA Range.

CREDIT RATING DRIVERS
Given that the IA is at the lower end of the IA range an upgrade of SEB's credit ratings over the near- to medium term is unlikely. An upgrade would require a further prudent build-out of SEB's franchise, resulting in a significantly higher degree of diversification and further improvement in profitability while maintaining a strong risk profile and capitalisation. An upgrade would also require a further strengthening of the funding profile, particularly the development of a strong retail deposit franchise.

A downgrade of SEB's credit ratings would be triggered by a significant deterioration in asset quality or a material weakening in profitability. A deterioration in the Bank's funding and liquidity profile, specifically a rapid decline in liquidity or reduced access to capital markets, would also lead to a downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Strong
SEB is the largest bank in Sweden with SEK 3,759 billion total assets at the end of 2024 (about EUR 314 billion or USD 326 billion). The Bank offers a wide range of commercial, investment, and retail banking services to its corporate and retail customers. SEB has a leading market position in the corporate and investment banking segment as well as in wealth management and insurance. SEB also has a strong market position in the Baltics, where it offers universal banking services to corporates and retail customers, and it enjoys market shares of more than 20% for lending and deposits. In addition, SEB maintains a meaningful corporate footprint in Denmark, Finland, Norway, Germany, and the UK, and is currently targeting large corporates in the Netherlands, Austria, and Switzerland.

Earnings Combined Building Block Assessment: Strong/Good
SEB's profitability is sound, with a return on equity (ROE) in the mid-teens and a cost-to-income ratio in the low 40% range. Following exceptionally strong results in 2023, SEB reported a somewhat lower profit in 2024, as expenses increased more than revenues partly because of the integration costs of AirPlus. The resulting ROE was 16.2% compared with 17.8% in 2023. Total operating income increased by 2% year over year (YOY) as a decline in net interest income (NII) was offset by growth in fees & commissions and in net financial income. Both segments benefitted from strong capital markets. Operating expenses increased by 13% YOY, partly driven by the AirPlus integration, while cost of risk (COR) remained benign at 5 basis points (bps). Going forward, Morningstar DBRS expects NII to remain under pressure albeit from high levels, while fee income should benefit from an improving economy and the full-year contribution of AirPlus. Morningstar DBRS further expects expenses to moderate and COR to remain low.

Risk Combined Building Block Assessment: Very Strong/Strong
We consider SEB's risk profile as very strong, underpinned by its sound risk management practices and very solid asset quality metrics. The Bank has a concentration on corporate loans and commercial real estate, but this has not had any adverse effect on asset quality despite the most recent weakness of the overall economy and commercial real estate in particular. The Stage 3 ratio of 0.47% at YE2024 is consistently among the strongest in Morningstar DBRS banking universe. Morningstar DBRS also notes that SEB has a relatively high proportion of fee income, which also helps offset potential risks from lending. Given the decline in policy rates in Europe and the improved economic outlook in countries where SEB mainly operates, Morningstar DBRS does not expect credit quality to deteriorate, notwithstanding a small lag effect. Morningstar DBRS notes; however, the high degree of geopolitical uncertainty that could adversely affect asset quality. However, in such a situation, SEB would benefit from its strong revenue generation capacity to absorb any unforeseen increase in COR.

Funding and Liquidity Combined Building Block Assessment: Strong/Good
We view SEB's funding profile as well managed and improved over recent years as deposit balances increased. The Bank's reliance on wholesale funding is higher than most of its European peers but lower compared with its Nordic peers. Morningstar DBRS notes 37% of wholesale funding came from covered bonds in 2024, an instrument that has proven to be very stable and resilient throughout the years. SEB's unsecured wholesale funding is well diversified through short-term and long-term programmes in various markets and in different currencies as well as adequately distributed in terms of maturity profile. The net loan to deposit ratio (excluding repos) was 118% at YE2024 and has not changed much in recent years. SEB's liquidity position remained solid at YE2024 with a Liquidity Coverage Ratio of 160% and a Net Stable Funding Ratio of 112%.

Capitalisation Combined Building Block Assessment: Very Strong/Strong
SEB's capital position is robust, underpinned by its strong internal capital generation capacity as well as consistent access to capital markets, which results in ample capital cushions over minimum regulatory requirements. At YE2024, the Bank reported a CET1 capital ratio of 17.6% down from 19.1% a year earlier. This was a deliberate move facilitated by share buy backs and a special dividend in order to lower the capital cushion above minimum requirements to the Bank's target range of 100 bps to 300 bps, from 440 bps at YE2023. At YE2024, the capital cushion stood at 290 bps. Morningstar DBRS notes that SEB is currently subject to a 100-bps temporary capital add-on imposed by the Swedish FSA to incentivise banks to finalise the review of internal risk models. This add-on will be lifted once the review is complete, but Morningstar DBRS expects that it will be partly offset by higher capital requirements related to the model reviews.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/449729.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factor(s) 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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Swedish krona unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024 https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar, Inc. and company documents. Other sources include SEB quarterly investor presentations, fact books, and reports in 2023 and 2024. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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's trends and credit 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 credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/449731.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Senior Vice President
Rating Committee Chair: Vitaline Yeterian, Senior Vice President, Sector Lead
Initial Rating Date: 14 December 2006
Last Rating Date: 13 March 2024

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