Fitch Revises SEB's Outlook to Positive; Affirms 'A+' Rating

Tue Jun 24, 2014 10:54am EDT

(The following statement was released by the rating agency) LONDON/PARIS, June 24 (Fitch) Fitch Ratings has revised the Outlook on Skandinaviska Enskilda Banken AB's (SEB) Long-Term Issuer Default Rating (IDR) to Positive from Stable. At the same time, Fitch has affirmed SEB's IDR at 'A+', its Viability Rating (VR) at 'a+' and its Short-Term IDR at 'F1'. A full list of rating actions is available at the end of this commentary. The rating actions were part of a periodic review of large Swedish and Finnish banks. Fitch will issue a peer report shortly. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT The change of Outlook to Positive reflects Fitch's view that SEB's risk profile is increasingly in line with 'AA-' rated banks. This follows a continuing process in recent years of shifting the loan portfolio towards lower-risk segments, diversifying income towards more stable revenue sources and strengthening the bank's risk management framework. SEB's improving profitability, as well as its strategy of growing its Swedish retail franchise, also support the Outlook change. The ratings reflect SEB's strong domestic franchise, particularly in corporate banking, its solid capitalisation, its sound asset quality and its robust revenue generation. They also consider the bank's high dependence on merchant banking and a structural reliance on wholesale funding. SEB's business model is more geared towards corporate and merchant banking than its Nordic peers. The merchant bank is its largest profit contributor. This partly explains the one notch rating difference between SEB and the highest rated Nordic banks, as Fitch expects a corporate bank to experience more revenue volatility and asset quality deterioration in a crisis compared with a retail bank. However, Fitch notes that the bank is managing the risk well. Merchant bank revenue is well diversified and is increasingly focused on long-term relationship banking, with reduced reliance on market-driven income. Its loan book is weighted towards large export- orientated corporations with geographical diversification. Loans to small and medium sized businesses represent a small part of the group portfolio. Fitch expects SEB to maintain revenue growth and contain costs, strengthening pre-impairment operating profitability. Its strategy to expand retail banking enhances the bank's sources of recurring income. Asset quality should stay sound, driven by conservative underwriting, robust portfolio diversification and a growing retail book. The corporate loan book is of sound quality, and loan concentration is at acceptable levels. Commercial real estate lending represents just above 10% of total gross loans, but the bank targets mostly larger corporates with strong cash flows and often good access to equity and debt capital markets. Fitch expects the level of impaired loans in the Baltic operations to continue to decline from a high level, and believes that SEB could withstand an unexpected deterioration in the region. SEB's risk-weighted capital ratios, as well as its leverage, compare well with regional and international peers. At end-March 2014, SEB's common equity Tier 1 ratio was 15.7%, and its Fitch adjusted leverage ratio (excluding unfunded assets) was 4.8%. SEB is reliant on wholesale funding although, to a lesser extent, than its Nordic peers. Fitch expects continued good access to debt capital markets, driven by strong liquidity and a domestic captive investor base for covered bonds. Fitch also expects SEB to continue to lengthen its maturity profile. The group funds its corporate lending through corporate deposits. It closely monitors the stickiness of these deposits. These deposits have proven to be a reliable source of funding, driven by strong customer relationships. RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT Fitch could upgrade SEB by one notch over the next one to two years if the trends of de-risking and improving profitability continue. An upgrade is also contingent on the bank maintaining strong capital and leverage ratios, sound asset quality and a healthy funding and liquidity profile. Although not expected, pressure on the ratings could come from an adverse change in investor sentiment materially affecting SEB's access to debt capital markets, a shortened funding profile or reduced emphasis on liquidity. Larger-than-expected losses in corporate banking would also put pressure on the ratings. Given SEB's high exposure to Sweden, its ratings are inevitably sensitive to a severe downturn in Sweden. This would particularly be the case should a downturn lead to a significant correction in house prices and higher losses in both SEB's mortgage lending and corporate portfolios. This, however, is not Fitch's central scenario. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's expectation that there is an extremely high probability that support would be forthcoming from the Swedish authorities if required. This is driven by SEB's importance within the Swedish financial sector. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. As an EU member country, Sweden is subject to the requirements of Bank Recovery and Resolution Directive (BRRD). However, the country was notable in its desire for flexibility in the application of BRRD, in part because of its experience of cleaning up banks in its 1990s crisis, but also because it has a concentrated, largely homogenous banking sector that relies on attracting international and foreign currency funding. For this reason, prudential requirements for its banks are very high. In maintaining control over supervision and resolution decisions, Sweden has more flexibility to interpret and apply BRRD than Banking Union member countries, for example. However, Sweden is bound by EU state aid rules, meaning it does not have full control over support decisions. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are primarily sensitive to the progress made in implementing a resolution regime in Sweden. As outlined in its report 'Sovereign Support for Banks: Rating Path Expectations' released on 27 March 2014, Fitch believes that support for systemically important Swedish banks, while likely to be less certain within the next one to two years, is still likely to be highly probable. This means that SEB's Support Rating and Support Rating Floor are likely to be downgraded to '2' from '1' and revised to 'BBB-' from 'A-' respectively. The Support Rating and Support Rating Floor are also sensitive to a change in Fitch's assumptions about the ability of the Swedish state (AAA/Stable) to provide timely support to the bank, if required. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by SEB are all notched down from SEB's VR. Their ratings have been affirmed and are therefore broadly sensitive to the same considerations that affect the bank's VR. In accordance with Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities', lower Tier 2 debt is rated one notch below SEB's VR to reflect above-average loss severity of this type of debt relative to average recoveries. Upper Tier 2 debt and hybrid Tier 1 securities are rated three and four notches below SEB's VR, respectively, to reflect higher loss severity risk of these securities relative to average recoveries (one and two notches from the VR, respectively) as well as high risk of non-performance (an additional two notches). SUSBIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES SEB's German operation is conducted via SEB AG, its wholly owned subsidiary. Given the close integration, SEB AG's debt ratings are aligned with SEB's. As a result, Fitch does not assign the subsidiary a VR. SEB AG's ratings are sensitive to a change in SEB's VR and IDRs. The rating actions are as follows: Skandinaviska Enskilda Banken AB Long-term IDR: affirmed at 'A+'; Outlook changed to Positive from Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Senior debt: affirmed at 'A+' Commercial paper: affirmed at 'F1' Subordinated debt: affirmed at 'A' Upper Tier 2 instruments: affirmed at 'BBB+' Hybrid instruments: affirmed at 'BBB' SEB AG Long-term IDR: affirmed at 'A+'; Outlook changed to Positive from Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Fitch France S.A.S 60 Rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9 131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. 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