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

DBRS Ratings Limited (DBRS) 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, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support and as a result, the final senior debt rating is positioned in line with the A (high) Intrinsic Assessment (IA).

SEB’s ratings reflect the Bank’s strong universal franchise in Sweden and the Baltics, its corporate franchise in Germany and the UK, as well as its solid earnings generation capacity, low risk profile, and strong capital levels. The rating also reflects the relatively high reliance on wholesale funding, when compared to European peers, and the ongoing challenges in the regulatory environment.

SEB’s diverse franchise combines a variety of products and services to large corporates & financial institutions, corporate and private customers, as well as life insurance and investment management activities. 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 also comprises strong positions in SME banking, asset management and unit-linked insurance. Through acquisitions and strategic growth the Bank has established a presence in Germany, the UK and the Baltic countries, where SEB is the second largest financial services provider.

SEB’s solid earnings generation capacity is a key factor underpinning the ratings. In 2017, SEB reported underlying profit before credit losses (IBPT) of SEK 23,672 million, up 10% on 2016. The strong result primarily reflected improved levels of net interest income, due to higher lending volumes and improved lending margins, as well as increased fee and commission income. At the same time, DBRS notes that, excluding items affecting comparability (those primarily related to costs associated with the transfer of the German business to the German branch of the Swedish entity and the impairment of IT assets in 2017, and to the reorganisation of the business segments in 2016), the average quarterly IBPT for 2017 stood at SEK 5.9 billion, compared to SEK 5.4 billion in 2016 and SEK 3.4 billion in 2010. DBRS generally views positively management’s commitment to constrain expenses and notes that the SEK 22 billion cost cap remains in place for 2018 as well. In 2017, SEB maintained a cost/income ratio below 50% (48% in 2017, 50% in 2016) supporting a good capacity to generate earnings.

SEB maintains a relatively low risk profile due to the strong performance of the Swedish operations, which represent the majority of the loan book. At end-2017, the household mortgage portfolio accounted for 34% of the total loan book, while the corporate lending portfolio accounted for 37% and property management portfolio accounted for 16%.The Baltic region accounted for less than 10% of the exposure. At end-2017, 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 8.3 billion at end-2017 (vs. 7.6 billion at end-2016), or only 0.50% of total gross loans, stable compared to 2016. The low level of the consolidated NPL ratio reflects the strong performance in the Nordics as well as in Germany while NPLs in the Baltics continue to reduce. SEB’s exposure to property management remains sizeable at SEK 246 billion at end-2017.The relatively large amount of this book’s 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.

Whilst wholesale funding accounts for a higher proportion of total funding than most EU peers, DBRS views SEB to have a sound and well managed funding profile. 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 56% of SEB’s total funding and DBRS views the deposit base as providing a solid foundation to the funding profile, given the Bank’s well established position in the Swedish corporate and retail markets. Nordic banks make significant usage of wholesale funding due to limited amount of deposits (a significant amount of wealth is in the form of pension savings and equities/asset management) along with a lack of government bonds that results in pension funds and insurance companies investing in bank debt instead. DBRS considers the Nordic covered bonds’ markets to be very stable, and views the covered bonds as well aligned with mortgage loans. However, DBRS also views the exposure to short-term wholesale funding and foreign currency funding as a potential vulnerability.

DBRS views SEB’s capitalisation as strong given its strong earnings generation capacity. At end-2017, the Bank reported a Basel III Common Equity Tier 1 (CET1) ratio of 19.4% at end-2017, up from 18.8% at end-2016.On a leverage ratio basis, SEB demonstrated further improvement, with a leverage ratio of 5.2% at end-2017, up from 5.1% at end-2016.DBRS notes that by January 1, 2022 at the latest, the MREL requirement will need to be met with subordinated liabilities only and SEB estimates to build up MREL-eligible subordinated debt of SEK 90 billion. This is in the context of a total of SEK 146.2 billion of maturing long-term unsecured bank debt between 2019 and 2022, which indicates room for meeting MREL requirements.

RATING DRIVERS
There could be positive pressure on the IA (i) if the Bank is to strengthen its wholesale funding profile by reducing reliance on wholesale and institutional funding, and (ii) if the Bank continues to demonstrate its ability to generate very strong level of earnings while maintaining a strong credit profile through the cycle.

Negative pressure on the ratings would likely be driven by (i) a substantial deterioration in the Bank’s risk profile prompted by a severe fall in price in the Swedish residential and commercial property markets, or (ii) any severe deterioration in the Baltics, or (iii) a reduction in investors’ confidence triggering liquidity concerns.

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

Notes:
All figures are in SEK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company reports and Finansinspektionen. DBRS 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 had no access to relevant internal documents for the rated entity or a related third party.

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 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, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: December 14, 2006
Last Rating Date: July 14, 2017

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