Credit Opinion: SEB Global Credit Research - 27 Mar 2015 Stockholm, Sweden Ratings Category Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Issuer Rating Senior Unsecured Subordinate Jr Subordinate MTN Pref. Stock Non-cumulative Commercial Paper Moody's Rating Rating(s) Under Review *A1/P-1 **baa1 **baa1 **A1 **A1 **Baa2 **(P)Baa3 **Ba1 (hyb) P-1 SEB AG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Rating(s) Under Review *Baa1/*P-2 **ba1 **baa1 * Rating(s) within this class was/were placed on review on March 17, 2015 ** Placed under review for possible upgrade on March 17, 2015 Contacts Analyst Kim Bergoe/London Oscar Heemskerk/London Sean Marion/London Forssen, Daniel/London Phone 44.20.7772.5454 Key Indicators SEB (Consolidated Financials) 12-14 12-13 12-12 12-11 12-10 2,364,733.02,343,297.02,285,184.02,359,381.02,175,779.0 Total Assets (SEK million) 249,639.3 264,780.2 266,440.0 265,123.6 241,244.0 Total Assets (EUR million) 302,076.8 364,851.8 351,272.2 344,168.9 323,639.4 Total Assets (USD million) 120,611.0 103,449.0 90,175.0 84,502.0 79,558.9 Tangible Common Equity (SEK million) 12,732.6 11,689.2 10,513.9 9,495.5 8,821.3 Tangible Common Equity (EUR million) 15,407.1 16,107.0 13,861.5 12,326.5 11,834.1 Tangible Common Equity (USD million) 0.8 0.7 1.1 1.5 2.2 Problem Loans / Gross Loans (%) 19.6 18.4 15.4 12.4 11.1 Tangible Common Equity / Risk Weighted Assets (%) Avg. 2.1 0.9 -1.7 11.0 9.6 6.8 1.3 19.6 Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Total Deposits (%) Source: Moody's 8.4 8.6 14.0 19.0 25.7 15.1 0.8 2.8 0.9 47.7 34.9 28.0 0.8 2.6 0.7 52.5 41.3 32.4 0.8 2.2 0.6 57.7 47.5 33.3 0.8 2.0 0.5 60.3 49.4 31.2 0.7 1.9 0.4 61.1 49.8 28.5 144.4 128.7 122.2 115.5 0.8 2.8 0.6 55.9 44.6 30.7 120.0126.2  All figures and ratios are adjusted using Moody's standard adjustments  Basel III - fully-loaded or transitional phase-in; IFRS  Basel II; IFRS  Compound Annual Growth Rate based on IFRS reporting periods  IFRS reporting periods have been used for average calculation  Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE On 17 March, we placed the following ratings for SEB AB under review for upgrade: standalone baseline credit assessment (BCA) of baa1, adjusted BCA of baa1, long-term deposit rating of A1, long-term senior unsecured debt and issuer rating of A1, senior subordinate ratings of Baa2, junior subordinate ratings of (P) Baa3 and Preference stock (cumulative) rating of Ba1 (hyb). The BCA review was prompted by the bank's strengthened standalone credit strength, driven primarily by improving reoccurring earnings, as captured by the implementation of the new methodology. The review on the bank's other ratings results from the BCA review, but also captures our advanced Loss Given Failure (LGF) analysis in combination with downward pressure on current government support assumptions. LGF takes into account the risks faced by the different debt and deposit classes across the liability structure, if the bank were to enter resolution. SEB'S BCA IS SUPPORTED BY ITS VERY STRONG- MACRO PROFILE With a loan book in Sweden accounting for 73% (part of which originated in other Nordic countries) of SEB's gross loans at end-December 2014, SEB's operating environment is primarily domestic and its Macro Profile is thus aligned with that of Sweden, at Very Strong-. Sweden's Macro Profile benefits from a competitive and diverse economy, robust public institutions and a stable political environment that supports consensus-orientated policy making. However, we view Swedish households' debt levels (half of which consists of mortgages) and the multi-year growth in household debt as key vulnerabilities to the financial system. Although the banking system is concentrated around four banks, we believe that competition in the Swedish banking industry is healthy. Swedish banks are structurally reliant on market funding and that exposes them to swings in investor sentiment. This risk is, however, partially mitigated because (1) Sweden has its own currency; and, (2) domestic investors hold over two thirds of the country's bonds. Rating Drivers -Strong asset quality, but focus on merchant banking adds cyclicality to earnings - Solid capital adequacy - Improving recurring earnings - Reliance on market funding - Large volume of deposits and junior debt likely resulting in deposit ratings benefiting from a very low loss-givenfailure rate and two notch uplift from the BCA - Moderate probability of government support likely resulting in an additional one-notch uplift for debt and deposits, from the BCA Rating Outlook SEB's ratings are under review. After the review process, SEB's ratings may have a stable outlook underpinned by its strong standalone fundamentals, and the current liability structure, which is likely to result in two notches of uplift reflecting LGF and one notch of systemic support in line with its Swedish peers. The review on SEB's BCA and long-term ratings was triggered by the introduction of our new methodology, and specifically our advanced LGF analysis, which applies to institutions subject to an operational resolution regime under the Bank Recovery and resolution Directive (BRRD). Our advanced LGF analysis on SEB's long and shortterm deposits led us to place the ratings on review for upgrade. The review will focus on the liability structure, in particular the amount of deposits, senior long-term debt outstanding and the amount of debt subordinated to it. Following the introduction of BRRD, we believe the probability of government support for SEB's long-term and deposits ratings to be moderate, likely translating into one notch of uplift from their unsupported rating level. Although we note that Sweden will likely aim to take advantage of the potential exception within BRRD for member states that establish resolution funds equivalent to 3% of insured deposits, we also recognise that the domestic resolution fund has yet to fully meet this target. What Could Change the Rating - Up SEB's BCA, long-term deposits and senior unsecured debt are on review for upgrade, as indicated under "Rating Outlook". What Could Change the Rating - Down Given the review for upgrade on SEB's BCA, long-term deposit ratings and senior unsecured debt ratings, we believe there is a very low likelihood for a downward change in BCA, ratings for deposits, senior unsecured debt and junior instruments (junior instruments are notched off the bank's BCA). DETAILED RATING CONSIDERATIONS Detailed considerations for SEB's currently assigned ratings are as follows: Bank Financial Strength Rating -STRONG ASSET QUALITY, BUT FOCUS ON MERCHANT BANKING ADDS CYCLICALITY TO EARNINGS SEB's asset quality and earnings profile are supported by the strength if its franchise. With total assets of SEK2.4 trillion (EUR 250 billion) at end-December 2014, SEB is one of the largest financial groups in the Nordic region. Its franchise value is underpinned by its solid position in Sweden as the third largest bank, with a strong position in commercial and retail banking, wealth management and a leading position in Nordic corporate and investment banking. Our Asset Risk assessment indicates that we consider asset risk a relative strength for SEB. The bank's problem loan ratio (impaired loans and 60 days overdue portfolio assessed loans / gross loans) was 0.78% at endDecember 2014, stable year-on-year (0.72% at end-December 2013), while the coverage ratio fell to 58% from 69%. Our Asset Risk assessment is negatively affected by SEB's focus on merchant banking, which adds a more cyclical element to asset quality and earning, relative to its Swedish banking peers. Nevertheless we acknowledge that SEB has over the years actively reduced more risky activities within Merchant banking and that the composition of merchant banking income has been stable over the last ten years. We expect SEB to continue to sustain strong asset quality in 2015-2016, particularly in the positive Swedish operating environment. SEB also holds a significant position in the Baltic states, which was the main driver of SEB's asset-quality deterioration during the global financial crisis, and has retained a small franchise in Germany through its wholly owned subsidiary SEB AG, which focuses on corporate banking, including commercial real estate and institutional real estate asset management sectors. SEB's loan book exhibits relatively high borrower concentrations, which stem from the bank's corporate profile, with a focus on large companies. Corporate and property-management exposures accounted for around 46% and 15% of SEB's total credit exposure respectively, at end-December 2014. However, those risks are partly mitigated by the fact that around 44% of the property-management exposure relates to multi-family properties and residential real-estate management, which we deem to be less risky, especially due to high structural demand for properties. Although SEB's high single-borrower concentrations result from the fact that the Swedish economy is dominated by a few large enterprises, we also recognise that sector concentration is generally more moderate as the economy is fairly diversified across industries. - SOLID CAPITAL ADEQUACY Our assigned Capital Score reflects the group's solid capital adequacy. At end-December 2014, SEB's CET1 capital and Tier 1 capital ratios under Basel III/CRDIV were 16.3% and 19.5% respectively, compared to 15.0% and 17.1% at end-2013. We view these capital levels as providing a solid buffer against risks related to SEB's significantly merchant banking profile. In 2015, the bank issued USD 1.1billion in high-trigger Additional Tier 1(AT1) securities which further strengthened the capital base. While SEB' leverage ratio exceeds that of Nordic peers and improved considerably following the issue of hightrigger AT1 securities, our Capital assessment reflects that leverage remains moderate and, below some international peers (4.8% as reported by the group at end-2014). -IMPROVING RECURRING EARNINGS In line with a progressive strengthening in SEB's recurring earnings in recent years, we expect that net profitability will remain strong in 2015 driven by strong net interest margins and fee income and continued cost controls. We consider that the bank has undergone several management actions over recent years which have de-risked the bank's operations, and these have all contributed to earnings stability. SEB demonstrates a good degree of revenue diversification across its main activities. Unlike most other large Nordic banking institutions, which are mainly retail-based, SEB's main business is merchant banking, which accounted for around 44% of pre-provision operating profit (excluding gain on sale of card operations) in 2014. Retail banking and life insurance contributed around 33% and 10% of 2014 pre-provision operating profits for the same period. During 2014, SEB increased net profitability, reflecting a combination of 6% higher income compared to 2013 (adjusted for SEK3 billion capital gain from sale of card operations) driven by both higher net-interest and commission income, while operating expenses reduced by 1%. Net credit losses increased by 15%, but still remained at a relatively low level at around 8 basis points of loans. During 2014, the Baltic division reported SEK 1.4 billion in operating profits (SEK1.3 billion in 2013) with SEK0.2 billion of provisions down from SEK0.4 billion in 2013. SEB's cost-to-income ratio has traditionally been higher than its Nordic peers, reflecting its business mix, which is heavily reliant on corporate and merchant banking activities, which typically are characterised by higher personnel costs that recognises the degree of employee specialisation. In recent years, however, SEB group has made significant efforts to improve its cost efficiency. In 2014, the cost-to-income ratio improved to 50.4% from 53.6% in 2013 - adjusted for non-recurring items. Total expenses of SEK22.1 billion for 2014 were below the target of SEK22.5 billion previously set for 2013-2014; this target has now been extended to 2015. Loan loss provisions worsened slightly in 2014 by SEK0.2 billion to SEK1.3 billion relative to 2013. RELIANCE ON MARKET FUNDING Average market funding accounted for just under 45% of average total funding at end - December 2014, but has reduced gradually in recent years from over 55% in 2008. Despite this reduction, the reliance on market funding remains a weakness for SEB relative to other BCA factors. In our view, SEB's overall liquidity profile remains adequate although, in common with its Nordic peers, our assessment of its liquidity is constrained by its high reliance on market funds. Funding mainly comes from deposits (around 50% of total funding, of which around 65% is from corporate deposits), interbank deposits (around 4%), mortgage covered bonds (19% of total funding) issued by SEB in Sweden and covered bonds from the German subsidiary, SEB AG (all figures at end-Dec 2014). However, SEB is more reliant on corporate deposits than its Nordic peers (DNB Bank in Norway has the most similarity), and we view corporate deposits as more volatile than traditional retail deposits. We note positively that SEB's corporate deposit base partly reflects a strong position in cash management and custody business, positively impacting the stability of the group's corporate deposits. At 31 December 2014, SEB recorded a Swedish FSA Liquidity Ratio of 115%. As reflected in our methodology, we reflect the relative stability of covered bonds compared to unsecured market funding through a standard adjustment in our scorecard. Given the long history of the Swedish and Danish covered bond markets, local currency and deep domestic investor base, we make further positive adjustments for covered bonds issued specifically in these markets. At end-December 2014, liquid assets accounted for around 25% of total assets. Our Liquid Resources score reflect our assessment that liquidity is a relative strength for SEB's stand-alone credit rating strength. Notching Considerations AFFILIATE SUPPORT SEB Group does not have an affiliate. LOSS GIVEN FAILURE AND ADDITIONAL NOTCHING SEB is subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. For SEB's long-term deposit ratings, our review will consider the likely impact on loss-given-failure of the combination of their own volume and the amount of debt subordinated to them. We expect this will result in a Preliminary Rating Assessment (PRA) of two notches above the BCA, reflecting very low loss-given-failure. This is supported by the combination of the substantial deposit volume (we estimate junior deposits to make up just over 8% of the bank's tangible banking assets at failure), and the subordination of 5% of tangible banking assets (and just over 14% in the event of deposits being preferred to senior debt). We believe SEB's senior unsecured debt is likely to face very low loss-given-failure, because of the loss absorption provided by the volume of senior unsecured debt (just over 9% of tangible banking assets in failure based on end-2014 figures) and the volume of subordination (5%). This indicates a Preliminary Rating Assessment (PRA) two notches above from the BCA. For junior securities issued by SEB, our initial LGF analysis confirms a high loss-given-failure, given the small volume of debt and limited protection from more subordinated instruments and residual equity. We also incorporate additional notching for junior subordinated and preferred securities, to reflect the coupon features. The resulting PRAs are set out in the table below. GOVERNMENT SUPPORT The implementation of the BRRD has prompted us to reconsider the potential for government support to benefit certain creditors. Although we note that Sweden will likely aim to take advantage of the potential exception within BRRD for member states that establish resolution funds equivalent to 3% of insured deposits, we also recognise that the domestic resolution fund has yet to fully meet this target. In line with its three largest Swedish peers, we now expect a moderate probability of government support for SEB for deposits and senior unsecured debt, likely resulting in one notch of uplift from the PRA. Foreign Currency Deposit Rating The A1 foreign currency deposit ratings of SEB are unconstrained, given that Sweden has a country ceiling of Aaa. Foreign Currency Debt Rating The A1 foreign currency debt ratings of SEB are unconstrained, given that Sweden has a country ceiling of Aaa. ABOUT MOODY'S BANK RATINGS About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors SEB Macro Factors Weighted Macro Profile Very Strong Financial Profile Factor Historic Ratio Macro Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 0.9% aa2 ←→ a2 Capital market risk Sector concentration 19.6% aa1 ←→ aa3 Nominal leverage 0.7% baa2 ←→ baa2 Return on assets Solvency Asset Risk Problem Loans / Gross Loans Capital TCE / RWA Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets aa3 a2 34.9% baa3 ←→ baa3 Market funding quality 28.0% a2 ←→ a2 Stock of liquid assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score Financial Profile baa1 baa1 a3 Qualitative Adjustments Adjustment Business Diversification Opacity and Complexity Corporate Behavior 0 Total Qualitative Adjustments 0 Sovereign or Affiliate constraint 0 0 Aaa Deposit quality a2 - baa1 Scorecard Calculated BCA range Assigned BCA baa1 Possible Upgrade -- Affiliate Support notching Adjusted BCA Instrument Class baa1 Possible Upgrade Loss Given Additional Preliminary Failure notching Rating notching Assessment Government Support notching Local Currency rating Foreign Currency rating A1 RUR Possible Upgrade A1 RUR Possible Upgrade A1 RUR Possible Upgrade A1 RUR Possible Upgrade Baa2 RUR Possible Upgrade (P)Baa3 RUR Possible Upgrade Ba1(hyb) RUR Possible Upgrade Deposits -- -- -- -- Senior unsecured bank debt -- -- -- -- Dated subordinated bank debt -- -- -- -- Junior subordinated bank debt -- -- -- -- Non-cumulative bank preference shares -- -- -- -- This publication does not announce a credit rating action. 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