DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Skandinaviska Enskilda Banken AB (SEB or the Bank), including the Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). The trend on all ratings remains Stable. The Bank’s Intrinsic Assessment was confirmed at A (high) and the support assessment remains SA3. See full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings takes into account SEB’s robust franchise in Sweden and the Baltics as well as its significant footprint in corporate banking in the Nordic area. The ratings also reflect the Bank's sound earnings generation which returned to pre-COVID levels in 2021, benefiting from an exceptionally low cost of risk. SEB’s capital position has remained robust although upcoming regulatory changes are expected to reduce the very high capital cushion against the minimum requirement. Credit deterioration generated by the COVID-19 pandemic has been very limited, and the Bank has been able to maintain its sound asset quality metrics. However, credit quality could be adversely affected by a macroeconomic deterioration as a result of the invasion of Ukraine by Russia, with its implications for supply chains, energy prices, inflation and interest rates. The ratings also incorporate SEB’s relatively high, albeit decreasing, reliance on wholesale funding, although this is mitigated by ample liquidity and the access to the Swedish covered bonds market which DBRS Morningstar considers to be a stable source of funding.
An upgrade of the Long-Term Issuer Rating would require evidence of a sustained improvement of the funding profile over time while maintaining the current level of asset quality and profitability.
A downgrade of the Long-Term Issuer Rating would be driven by a substantial deterioration of the Bank’s risk profile and/or a significant deterioration of the Bank's revenue generation and ability to absorb credit losses.
Franchise Combined Building Block (BB) Assessment: Strong
SEB is one of the largest banks in Sweden where it has a leading market position in the corporate and investment banking segment as well as in wealth management and insurance. The Bank also has a substantial position in retail banking. Outside Sweden SEB also has a strong market position in the Baltic area where it is the second largest banking group by lending and deposit market shares. SEB maintains a meaningful corporate footprint in Denmark, Finland, Norway, Germany and the UK. The Bank is also targeting large corporate clients in the Netherlands, Austria and Switzerland.
Earnings Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar continues to view SEB’s earning generation capacity as robust, as evidenced by the solid track record of profitability. Although at this point it remains unclear how the implications of Russia’s invasion of Ukraine might affect the performance of the Bank’s Baltic division under a severe scenario, we note that SEB continues to have a high loss absorption capacity. In 2021, SEB’s profitability rebounded supported by significantly lower loan loss provisions compared to 2020. In 2021, SEB reported a net profit of SEK 25,423 million, up 61% from 2020 which led to a return-on-equity (ROE) of 13.9%, significantly higher than the 9.7% recoded in 2020 and in line with pre-pandemic levels (13.8% in 2019). The Bank has a long-term ROE aspiration of 15%. DBRS Morningstar also notes that SEB's high level of efficiency compared to many European peers continued with a cost-to-income ratio of 43% in 2021, down from to 46% in 2020. Loss provisions (LLPs) decreased to SEK 510 million in 2021, significantly lower than SEK 6,118 million in 2020, translating into a cost of risk of 2 basis points at end-2021 compared to 26 basis points at end-2020.
Risk Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views SEB as maintaining a relatively low risk profile. Credit deterioration related to the effects of the COVID-19 pandemic has been limited to date and SEB’s asset quality metrics remain strong. The Bank’s gross NPL ratio decreased to 0.53% at end-2021 compared to 0.87% at end-2020 and 0.67% at end-2019. This was mostly driven by a reduction of Stage 3 loans within the mining, oil and gas portfolio which benefited from write-offs and restructuring. We note that the mining, oil and gas portfolio accounted for 2% of the total corporate lending (0.8% of total lending) at end-2021 which is a reduction from 4% (1.3% of total lending) at end-2020. SEB’s lending exposure to the real estate management sector remained sizeable at 16% of the total loan book at end-2021, however, the average loan-to-value (LTV) for the real estate portfolio was a low 46.4% at end-2021. DBRS Morningstar notes that there is still some uncertainty over the full impact of the COVID-19 pandemic on the Bank’s asset quality, and will continue to closely monitor any potential macroeconomic deterioration as a result of the invasion of Ukraine by Russia, with its implications for supply chains, energy prices, inflation and interest rates.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar considers SEB’s funding profile as well-managed. In line with its Nordic peers, SEB’s reliance on wholesale funding is higher compared to the European average, albeit this has reduced during the pandemic as a result of the growth in deposits. A large share of wholesale funding is accessed through the Swedish covered bonds market, which DBRS Morningstar considers very stable, even though it also increases the level of encumbered assets. SEB’s customer deposits continued to increase in 2021, up by 16% compared to end-2020, with the largest increase being in the corporate deposits book (up 17% YoY). As a result, SEB’s loan-to-deposit (LTD) ratio improved to 115% at end-2021, compared to 124% at end-2020. DBRS Morningstar views this improvement positively but will continue to monitor if this change is permanent. Liquidity remains ample with total liquid assets of SEK 672 billion, and a Liquidity Coverage Ratio (LCR) of 145% at end-2021. SEB’s net stable funding ratio (NSFR) was 111% at end-2021, stable YoY.
Capitalisation Combined Building Block (BB) Assessment: Strong
SEB’s capitalisation remains high, supported by sound recurring internal capital generation. The Bank reported a Common Equity Tier 1 (CET1) ratio of 19.7% at end-2021, which corresponds to a 590 basis point cushion above the minimum regulatory requirement of 13.8% and remains comfortably above the management target of 100-300 bps above the minimum requirement. Nevertheless, we expect SEB’s capital buffer to decrease due to additional excess capital distributions and regulatory changes. This includes the overhaul of the internal ratings based model (IRB) which could lead to an increase of RWAs in 2022 as well as the Swedish FSA announcement of an increase in the countercyclical capital buffer (CCYB) to 1%, starting from 30 September 2022. The Swedish FSA is expected to gradually increase the CCYB by a further 1.5% to the original level of 2.5% but the timing remains unknown.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/393845
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.
All figures are in SEK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/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.
The sources of information used for this rating include Morningstar Inc. and Company Documents, SEB FY21 Annual and Sustainability Report, SEB Q421 Interim Report, SEB FY21 Factbook, SEB FY21 Investor Presentation, SEB FY21 Pillar 3 Report, and Svenska Finansinspektionen. DBRS Morningstar 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
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/393844
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: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: 12/14/2006
Last Rating Date: 3/19/2021
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