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)[1]
[2]12-14 [3]12-13 [3]12-12 [3]12-11 [3]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.
[4]2.1
[4]0.9
[4]-1.7
[4]11.0
[4]9.6
[4]6.8
[5]1.3
[6]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 [5]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
[5]0.8
[6]2.8
[5]0.6
[5]55.9
[5]44.6
[5]30.7
120.0[5]126.2
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional
phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS
reporting periods have been used for average calculation [6] 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. For any credit ratings referenced in this publication,
please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating
action information and rating history.
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