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

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 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, along with its strong universal franchise position in the Baltics. The ratings also consider the Bank’s strong capital position, which is supported by solid earnings generation, disciplined cost control, and sound asset quality. Conversely, the ratings also incorporate SEB’s relatively high reliance on wholesale funding, when compared to European peers, that is partially mitigated by a good liquidity position.

RATING DRIVERS
DBRS views the Bank as well-placed at its current level. Any positive pressure on the Long-Term Issuer Rating would require strengthening of the Bank’s 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, potentially prompted by a severe price decline in the Swedish residential and commercial property markets. 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 due to a reduction in investor confidence.

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 views SEB as having a solid earnings generation ability and a good revenue mix, with net interest income (NII) accounting for 46% and net fee and commission income for 40% of total operating income in 2018. In 2018, the Bank continued to report strong underlying profitability with income before provisions of taxes (IBPT) marginally up 1.3% year-on-year (yoy), supported by the growth of both net interest income (NII) and commissions as well as good cost control. NII was up 6% yoy in 2018 largely driven by new lending volumes and stable lending margins. Despite the negative interest rate environment in Sweden, SEB’s net interest margin (NIM) has remained relatively stable at around 0.8% (as calculated by DBRS) in recent years, helped by new lending volume growth. Net fees and commissions increased 4% yoy as a result of lending and payments/cards business growth. In 2018, operating expenses remained flat yoy, and the efficiency ratio was a sound 48%.

DBRS views SEB as having a relatively low risk profile, good loan diversification by industry and strong asset quality. Asset quality remains strong with an impaired loans ratio of 0.50% at end-2018, partially supported by the good performance of the Nordic exposures, which represent a majority of the Bank’s lending. Exposure to the Baltic countries, that have negatively impacted asset quality in the past, represented less than 10% of the loan book at end-2018. SEB’s exposure to property management, primarily in Sweden, however, remains sizeable at 16% of total gross loans at end-2018, which along with the sector’s cyclicality adds a level of risk to the overall portfolio.

DBRS views 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 62% of SEB’s total funding at end-2018. Wholesale funding, primarily covered bonds, accounts for the remainder, which represents a higher proportion of wholesale funding than at most European peers. Nordic banks make significant use of wholesale funding due to a 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. 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 if there were to be a sudden change in investor sentiment.

DBRS views SEB as having a strong capital position, supported by its strong and recurrent ability to generate capital through retained earnings. At end-2018, the Bank had a Common Equity Tier 1 (CET1) ratio of 17.6%, which is comfortably above its minimum regulatory requirement of 14.7% and in line with the Bank’s decision to maintain a cushion of around 150 basis points over the regulator’s requirement. However, the CET1 ratio was down from 19.4% at end-2017 due to a 17% increase of SEB’s risk weighted assets, predominantly reflecting that the Swedish FSA moved the risk weight floor for Swedish mortgages from Pillar 2 to Pillar 1 as of December 31, 2018. Similarly, the Swedish FSA also lowered SEB’s capital requirements to 14.7% at end-2018 from 17.2% at end-2017. SEB’s leverage ratio was 5.1% at end-2018.

Concurrently, DBRS has discontinued the rating on SEB’s Undated Subordinated Debt and Capital Contribution Securities to reflect that all of these instruments have been repaid.

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 (July 2018). 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, Finansinspektionen (Swedish FSA), Riksgalden (Swedish National Debt Office) and company reports. 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: Maria Rivas, Senior Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Credit Practices Group
Initial Rating Date: December 14, 2006
Last Rating Date: March 23, 2018

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