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

DBRS Ratings GmbH (DBRS Morningstar) 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 remains 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 robust franchise in its domestic market (Sweden) and dominant position in the Baltics as well as its strong footprint in corporate banking in the Nordic area. SEB has a very robust capital position supported by historically high earnings generation. SEB has demonstrated a good ability to absorb credit losses in times of stress. Asset quality has been sound overall, despite credit deterioration in the oil-related portfolio, however uncertainty remains regarding the impact of COVID-19 economic disruptions. The ratings also incorporate SEB’s relatively high reliance on wholesale funding compared to European peers, that is mitigated by ample liquidity available and steady access to the very stable Swedish covered bond markets.

RATING DRIVERS
DBRS Morningstar views SEB as well-placed at its current rating level. An upgrade of the Long-Term Issuer rating would require strengthening of the franchise together with lower usage of wholesale and institutional funding over time, while showing no signs of meaningful deterioration of asset quality metrics and maintaining strong earnings.

A downgrade of the Long-Term Issuer rating could be driven by a substantial deterioration of the Bank’s risk profile potentially in segments such as commercial real estate and oil-related industries, and/or a significant deterioration of the Bank's revenue generation and ability to absorb credit losses.

RATING RATIONALE
SEB is the second largest bank in Sweden, benefiting from a leading market position in its domestic market mainly in the corporate and investment banking segment, as well as wealth management and insurance. Outside Sweden, SEB has a dominant market position in the Baltic area where it is the second banking group by lending and deposits and maintains a meaningful corporate footprint in Denmark, Finland, Norway, Germany and the UK.

DBRS Morningstar views the Bank's earning generation capacity as strong despite being affected by oil-market volatility, the economic consequences of the COVID-19 pandemic and also misconduct issues in 2020. In 2020, SEB reported a net profit of SEK 15,746 million, down 22% from 2019, or SEK 16,746 million excluding the one-off SEK 1 billion fine imposed by the Swedish FSA in June 2020 over money-laundering issues in the Baltics. Excluding this one-off fine, SEB’s Return-on-Equity (ROE) was 10.3% in 2020, below the 13.8% reported in 2019 but still above most European peers. SEB reported loan loss provisions (LLPs) of SEK 6,118 million in 2020, significantly higher than SEK 2,294 million in 2019 mainly related to counterparty specific credit provisions against oil/offshore business exposures and the deterioration of macroeconomic indicators due to the COVID-19 pandemic. However, SEB’s ability to absorb credit losses has remained strong, with LLPs only absorbing 23% of IBPT thanks to resilient revenue generation and disciplined cost control.

SEB has maintained good asset quality metrics thanks to a well-diversified loan book by client segment and industry. The gross NPL ratio increased to 0.87% at end-2020, from 0.67% at end-2019. SEB’s coverage ratio remained strong, improving to 64% at end-2020 from 61% at end-2019. The negative effect of the COVID-19 economic downturn on Stage 3 loans has been delayed thanks to government support measures implemented in the Nordic and Baltic countries. It remains difficult to assess the impact of the pandemic on the borrowers’ payment capacity once the government support is lifted. DBRS Morningstar notes that the mining oil and gas extraction portfolio, which is higher risk, accounted for 3.1% of total corporate lending portfolio on a net basis (1.2% of total lending). SEB also has a sizeable exposure towards the real estate management industry representing 17% of total lending at end-2020, however this sector is performing well to date and Loan to Values (LTVs) are relatively low.

DBRS Morningstar continues to view SEB's funding profile as stable and well-managed. In line with other Nordic peers, reliance on wholesale funding, mainly in the form of mortgage covered bonds, is higher compared to other European banks. While DBRS Morningstar considers Swedish covered bonds as very stable despite the challenging operating environment, high exposure towards wholesale funding is a potential vulnerability. Nonetheless, SEB's reliance on covered bonds is lower than other Nordic peers because of its corporate franchise and lower concentration in the household mortgage segment.
Thanks to the combined effect of higher savings due to restricted economic activity, ample liquidity and risk-adverse customer preferences during the COVID-19 pandemic, SEB's customer deposits increased to SEK 1,371 billion at end-2020, up 18% vs. end-2019. As a result, the loan-to-deposit ratio (excluding repos) improved to a record-low of 122% at end-2020 compared to 143% at end-2019. The Liquidity Coverage Ratio (LCR) was 163% at end-2020, lower than 218% at end-2019 but higher than 147% at end-2018.

DBRS Morningstar views SEB's capital position as very strong, supported by sound internal capital generation capacity. SEB reported a Common Equity Tier 1 (CET1) ratio of 21% at end-2020, improving from 17.6% at end-2019. This corresponded to an overall capital buffer above the minimum regulatory requirement of 840 basis points at end-2020 up from 250 basis points at end-2019. The Bank's capital ratios and capital buffers benefited from a number of relief measures taken by governments and regulators following the COVID-19 outbreak. This includes restrictions to dividend distribution and reduction of countercyclical buffer requirements to 0% in Sweden and Denmark, and to 1% in Norway.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

Notes:
All figures are in SEK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include SEB Annual and Sustainability Report 2020, SEB Investor Presentation 4Q20/FY20, SEB Fact Book 4Q20/FY20, SEB Capital Adequacy & Risk Management Report – Pillar 3 2020, Finansinspektionen (Swedish FSA) and S&P Global Market Intelligence. DBRS Morningstar 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.

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

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375480

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European & Global FIG
Initial Rating Date: December 14, 2006
Last Rating Date: March 23, 2020

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