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 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. It also considers its solid profitability, operating efficiency, and ample liquidity position. The ratings also take into account the Bank’s conservative risk profile, robust asset quality and strong capital position. However, the challenging global and domestic economic environment (Sweden’s GDP is expected to decline 0.8% in 2023) could precipitate a decline in the Bank’s asset quality and require additional provisions. Currently, however, there have not been any significant signs of deterioration. The ratings also incorporate SEB’s high reliance on wholesale funding which could be a potential vulnerability during periods of market turmoil. Nonetheless, long term wholesale funding reliance is mainly through covered bonds issued in the Swedish covered bond market, which DBRS Morningstar considers to be a resilient and stable source of funding.
An upgrade of the Long-Term Issuer Rating would require maintaining a good funding and liquidity profile despite the current challenging bank environment and the QT started by central banks while maintaining robust asset quality, profitability and capitalization.
A downgrade of the Long-Term Issuer Rating would be driven by a substantial deterioration in the Bank's asset quality and/or profitability, materially weakening its capital position.
Franchise Combined Building Block (BB) Assessment: Strong
SEB is the largest bank in Sweden by assets with SEK 3,532 billion total assets at year-end-2022 (c. EUR 332 billion or USD 349 billion) where it 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 Baltic area where it offers universal banking services to corporates and retail customers and enjoys market shares over 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 (BB) Assessment: Strong/Good
DBRS Morningstar views SEB’s profitability as robust, benefitting from a strong revenue generation capacity that has led to a very efficient cost-to-income ratio. The Bank has a high loss absorption capacity, as well as a very low cost of risk due to its sound asset quality metrics. In 2022, SEB’s profitability benefitted from rising interest rates and high customer activity within foreign exchange and commodities business as a result of the global financial turmoil provoked by the Russian-Ukraine war, high inflation and macroeconomic uncertainty. SEB reported net profit of SEK 27 billion in 2022, up 6% year-on-year (YoY). However, profitability was negatively affected by an impairment on SEB’s operations in Russia for a total amount of SEK 1,399 million (representing 20% of Group’s total assets in Russia). Excluding this one-off, SEB’s operating profit before taxes was up 14% YoY. The Bank reported a return-on-equity (ROE) of 14.5% in 2022, excluding one-offs, the highest since 2014, and which is broadly in line with its long term aspiration ROE of 15%. DBRS Morningstar also considers SEB’s efficiency which is robust when compared with European peers, with a cost-to-income ratio of 39% in 2022, down from to 42% in 2021, as well as its low cost of risk of 7 basis points (bps) in 2022 versus the European average of 48 bps.
Risk Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views SEB’s risk profile as very conservative thanks to its well-diversified loan book by client and industry. In addition, asset quality remains robust. In 2022, SEB reported a historically low NPL ratio of 0.33% as a result of a reduction of Stage 3 loans within the mining, oil and gas portfolio which benefited from write-offs and restructuring. However, Stage 2 loans increased by 11.7% YoY reflecting the weaker economic outlook, although they represent a modest 3.4% of total gross loans at end-FY22. SEB’s lending exposure to the real estate management sector remained sizeable at 17% of the total gross loan book at end-FY22. However, the average loan-to-value (LTV) for the real estate portfolio was still below 46% despite the strong drop in house prices in Sweden and NPL ratios remained very low at 0.07% for Residential Real Estate companies and 0.02% for Commercial Real Estate companies.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar sees SEB's funding profile as adequate and well-managed. In 2022, customer deposits continued to increase and amounted SEK 1,570 billion (excluding repos) at year-end, up 4.7% YoY, to represent 67% of SEB's total funding compared to 68% at end-2021 and 63% at end-2020. Corporate deposits, unsecured and more volatile than retail, represented 65% of total deposits and 44% of non-equity funding in 2022. Total liquid assets of SEK 695 billion represented 68% of total corporate deposits. The Bank’s net loan-to-deposit ratio (excluding repos) stood at 120% at end-2022, reflecting the Bank’s reliance on wholesale funding, higher than most European peers. Nonetheless, a large share of wholesale funding is accessed through the Swedish covered bond market, which DBRS Morningstar considers very stable. However, current quantitative tightening driven by central banks to fight inflation might flood the debt market with high quality securities and pose a challenge to SEB to place its new debt. The Bank reported a Liquidity Coverage Ratio of 143% and a Net Stable Funding Ratio of 109% at end-2022.
Capitalisation Combined Building Block (BB) Assessment: Very Strong/Strong
DBRS Morningstar views SEB's capital position as sound, supported by robust internal capital generation capacity that results in ample capital cushions over minimum regulatory requirements. The Bank reported a Common Equity Tier 1 (CET1) ratio of 19% at end-FY22, corresponding to a 470 basis point cushion above the minimum regulatory requirement of 14.3%. However, upcoming regulatory changes are expected to reduce its high capital cushion against the minimum requirement. DBRS Morningstar expects SEB’s capital buffer to gradually converge towards the management target of 100-300 bps above regulatory requirement by 2024. This will be driven by additional capital distribution as well as regulatory changes including the overhaul of the internal ratings based model (IRB - currently pending) and expected increases in most of the countercyclical buffers throughout 2023.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410871
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)
All figures are in SEK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, SEB Annual and Sustainability Report 2022, SEB Investor Presentation Fourth Quarter and Full Year 2022, SEB Fact Book January – December 2022, SEB 2022 Capital Adequacy & Risk Management Report – Pillar 3. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/410872
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Maria Jesus Parra, Vice President, European FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 14 December 2006
Last Rating Date: 17 March 2022
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