Skandinaviska Enskilda Banken AB (publ)

Transcription

1 Skandinaviska Enskilda Banken AB (publ) Primary Credit Analyst: Sean Cotten, Stockholm (46) ; Secondary Contact: Alexander Ekbom, Stockholm (46) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research AUGUST 29,

2 SACP a- + Support +2 + Additional Factors 0 Anchor a- Business Position Adequate 0 GRE Support 0 Issuer Credit Rating Capital and Earnings Adequate 0 Risk Position Adequate 0 Group Support 0 A+/Negative/A-1 Funding Liquidity Average Adequate 0 Sovereign Support +2 Major Rating Factors Strengths: Well-diversified revenue base by geography and business area. Entrenched Nordic franchise in core business areas, particularly merchant banking. Stable earnings from Swedish retail and merchant banking business. Weaknesses: Concentration of comparably large single-name exposures. Improving but still relatively low cost efficiency compared with peers. Outlook Standard & Poor's Ratings Services' outlook on Sweden-based Skandinaviska Enskilda Banken AB (publ) (SEB) is negative, indicating that we could lower the ratings on SEB by year-end 2015 if we believe there is a greater likelihood that senior unsecured creditors could incur losses if the bank fails. Specifically, we could lower the long-term counterparty credit rating by up to two notches if we consider that extraordinary government support is less predictable under the new EU legislative framework. We could revise the outlook to stable if we consider that potential extraordinary government support for SEB's senior unsecured creditors is unchanged in practice, despite the introduction of bail-in powers and international efforts to increase banks' resolvability; or if we believe that other rating factors, such as a large buffer of subordinated instruments, would provide substantial additional flexibility to absorb losses while the bank remains a going concern. We will pay particular attention to the bank's ability to use a Swedish krona (SEK) 50 billion stability fund managed by AUGUST 29,

3 the national debt office to support senior creditors in our assessment of available government support for SEB. Rationale Our ratings on SEB reflect its 'a-' anchor and our assessment of its business position, capital and earnings, risk position, and liquidity as "adequate," and funding as "average," as our criteria define these terms. The ratings also factor in the bank's "high" systemic importance in the Kingdom of Sweden (AAA/Stable/A-1+). Anchor: 'a-', reflecting Swedish headquarters and geographic lending portfolio Our bank criteria use our Banking Industry Country Risk Assessment's (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for SEB is 'a-', reflecting the bank's regulatory base in Sweden and its combination of credit exposure to Sweden, other Nordic countries, Germany, and the Baltics states of Estonia, Latvia, and Lithuania. The anchor is derived from a weighted economic risk score of '2' and an industry risk score of '3'. We view Sweden as a highly competitive and diverse economy, with high household debt levels and a history of appreciating housing prices. Despite relatively high economic imbalances, we believe the private sector represents low credit risk. In terms of industry risk, the Swedish banking sector benefits, in our view, from its institutional framework, relatively conservative regulatory environment, and a high level of industry stability. A low degree of deposit funding and a high degree of reliance on cross-border funding are partly offset by a deep domestic debt capital market and the authorities' capacity and propensity to provide support to the domestic covered bond market. Table 1 Skandinaviska Enskilda Banken AB (publ) Key Figures --Year-ended Dec (Mil. SEK) 2014* Adjusted assets 2,294, ,152, ,157, ,074, ,898,001.0 Customer loans (gross) 1,275, ,212, ,155, ,112, ,022,375.0 Adjusted common equity 101, , , , ,389.1 Operating revenues 21, , , , ,893.0 Noninterest expenses 10, , , , ,941.0 Core earnings 8, , , , ,584.0 *Data as of June 30. SEK--Swedish krona. Business position: Universal bank with leading Nordic merchant banking franchise We assess SEB's business position as adequate, reflecting its broad business activities, strong position among large Nordic corporates, and anticipated stable revenues from its merchant banking and retail operations. SEB continues to demonstrate stable revenues due to its diverse revenue and business lines. The bank's expanded Nordic and German merchant banking business has supported increasing revenues despite low growth and corporate investment in most of its markets. SEB has also made use of additional scale and cost controls to improve the efficiency of the retail operations closer to that of the bank's more efficient Nordic peers. If these trends continue, we could consider revising upward our assessment of the bank's business position over the next two years, which could fully or partly offset any AUGUST 29,

4 reduction of government support. SEB's revenue sources are diverse and it continues to generate a larger share of its revenues from fees than most Nordic peers. The bank earns just over 40% of its pre-provision profits from merchant banking, above 30% from retail banking, and the remaining 25%-30% spread evenly between wealth management, life insurance, and the Baltic division. Since 2013, SEB has been reaping larger returns from a three-year effort to improve its Nordic and German merchant banking units and should continue to benefit from these opportunities, given the resurgence of corporate investment and increase in capital market activity. SEB continues to demonstrate stable non-interest income despite volatile markets, reflecting its large share of recurring fee-based income, especially from lending activities, custody, mutual funds, payments, and cards. SEB does not operate a proprietary trading desk, so most of its trading income is dependent on customer flows, in particular foreign exchange flows, rather than more volatile trading results. Despite its traditional merchant banking roots, the bank has increased its focus on the domestic retail market in recent years. As of June 2014, SEB had a domestic mortgage market share of 16%, placing it ahead of Nordea Bank AB as the third-largest mortgage lender in Sweden. The development of household deposits has been somewhat slow given much higher deposit rates offered by SBAB Bank AB, Landshypotek Bank AB, and other smaller players. Similarly, SEB is making greater efforts to expand in the Swedish small and midsize enterprise (SME) market more than in the past, which has contributed to improving the efficiency of the bank's retail operations. SEB's management team has remained largely intact since before the recent financial crisis and has increased its emphasis on core operations, improved the stability of its revenues and its balance sheet, prioritized cost efficiency, and improved penetration of its existing markets. Despite significant improvements in cost efficiency and the improved scale of its retail business, the bank remains a step behind its domestic peers in this respect (see chart 1). AUGUST 29,

5 Chart 1 Table 2 Skandinaviska Enskilda Banken AB (publ) Business Position --Year-ended Dec (%) 2014* Loan market share in country of domicile Deposit market share in country of domicile Total revenues from business line (currency in millions) 21, , , , ,893.0 Commercial banking/total revenues from business line Retail banking/total revenues from business line Commercial & retail banking/total revenues from business line Insurance activities/total revenues from business line Asset management/total revenues from business line Other revenues/total revenues from business line (2.5) (2.9) (1.6) Return on equity Capital and earnings: Adequate capital levels supported by stable earnings We view SEB's capital and earnings as adequate. We expect SEB's capital generation of basis points (bps) per annum remain somewhat slower than that of its large Nordic peers, leading to an expected risk-adjusted capital (RAC) AUGUST 29,

6 ratio approaching 9% over the next months. We do not include any hybrid capital in our total adjusted capital or capital projections for SEB. We expect the Swedish regulator to finalize its requirements for additional Tier 1 instruments and related buffers in 2014, after which we expect SEB to issue some hybrid capital, which in turn could improve its RAC ratio towards 10%. At year-end 2013, SEB's RAC ratio was 8.3% excluding diversification and concentration adjustments, a strong improvement over 7.8% at end-2012, particularly considering the bank's dividend of 59% of net profit. We expect the bank to continue to pay out at least 50% of profits, which should provide room for risk-weighted asset growth approaching 4% per annum while improving existing capital ratios by bps per year. We expect the bank to continue to focus on cost reduction and to improve its cost-to-income ratio to below 50%, a significant improvement from our previous expectations and a reduction from over 60% in This development should be supported by upward pressure on domestic mortgage margins following the Swedish regulator's expected implementation of a 25% risk weight floor. SEB's three-year average earnings buffer, our measure of the capacity of a bank's earnings to cover normalized losses, is expected to improve to bps. This reflects SEB's ability to generate capital even if losses approach our modeled, risk-based expected loss level of 35 bps, given the bank's geographic and business line credit portfolio. Table 3 Skandinaviska Enskilda Banken AB (publ) Capital And Earnings --Year-ended Dec (%) 2014* Tier 1 capital ratio S&P RAC ratio before diversification N.M S&P RAC ratio after diversification N.M Adjusted common equity/total adjusted capital Double leverage Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets *Data as of June 30. Table 4 Skandinaviska Enskilda Banken AB (publ) Risk-Adjusted Capital Framework Data (Mil. SEK) Exposure* Basel II RWA Average Basel II RW (%) Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 358,411 4, ,069 4 Institutions 138,188 24, , Corporate 807, , , AUGUST 29,

7 Table 4 Skandinaviska Enskilda Banken AB (publ) Risk-Adjusted Capital Framework Data (cont.) Retail 565, , , Of which mortgage 486,333 86, , Securitization 13,675 4, , Other assets 11,008 8, , Total credit risk 1,894, , , Market risk Equity in the banking book 5,625 5, , Trading book market risk -- 56, , Total market risk -- 62, , Insurance risk Total insurance risk , Operational risk Total operational risk -- 39, , (Mil. SEK) Basel II RWA Standard & Poor's RWA % of Standard & Poor's RWA Diversification adjustments RWA before diversification 918,181 1,188, Total adjustments to RWA -- (84,411) (7) RWA after diversification 918,181 1,103, (Mil. SEK) Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) Capital ratio Capital ratio before adjustments Capital ratio after adjustments 108, , , , *Exposure at default. Securitization exposure includes securitization tranches deducted from capital in the regulatory framework. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. SEK--Sweden krona. Sources: Company data as of Dec. 31, 2013, Standard & Poor's. Risk position: Increasing focus on core markets in the Nordic countries and Germany In our view, SEB's risk position is adequate when compared with that of banks with similar weighted economic risk. We believe that economic imbalances and credit risk in Sweden are likely to remain stable over the next two years, which supports our expectations of relatively low credit losses in SEB's loan book. We expect that SEB's overall asset quality and loss experience will be generally in line with that of its peers. The bank's credit profile has become increasingly focused on its core markets in the Nordic countries, in particular the household and residential real estate sectors, and German corporates. We consider SEB's corporate and retail exposures to be representative of its primary markets, given its high market shares, and we are expecting stability in credit losses in Sweden at very low levels. We project loan loss provisions of about 10 bps in our base-case scenario, a level consistent with SEB's performance in 2012 and In our view, future credit losses will be more balanced between Nordic and AUGUST 29,

8 non-nordic exposures than historically, as asset quality continues to improve in the Baltic countries and Germany. The bank's merchant-banking profile has not led to significant volatility since the onset of market turbulence in On the contrary, its investment banking and market-making businesses have demonstrated stable earnings and credit quality. In addition, the large corporate segment has been very resilient to the various liquidity and capital market shocks of the recent past. Economic trends in the Baltic countries, which represent a shrinking component of the bank's credit portfolio, continue to improve. However, significant growth in lending or profitability is not expected in the near term. We believe the bank's existing provisions for these exposures are generally adequate given the economic transitions we continue to see in these countries. Although shrinking in relative proportions, we expect the bank to remain committed to its Baltic markets. A key part of SEB's de-risking following the global financial crisis has been to reduce the size and risk profile of its fixed-income securities portfolio. Since 2008, SEB has doubled its 'AAA'-rated Nordic and German sovereign and covered bond exposures and reduced its exposures to Europe's most adversely affected countries, corporate and unsecured financial bonds, and structured credits. The existing portfolio and low-risk exposures are a significant part of the bank's liquidity reserves. Chart 2 AUGUST 29,

9 Table 5 Skandinaviska Enskilda Banken AB (publ) Risk Position --Year-ended Dec (%) 2014* Growth in customer loans (10.7) Total diversification adjustment / S&P RWA before diversification N.M. (7.1) (6.8) (8.3) (6.6) Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans (0.1) 0.2 Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets *Data as of June 30. N.M.--Not meaningful. Funding and liquidity: Less wholesale funding and more corporate deposits than peers We consider SEB's funding to be average and its liquidity adequate, given the strong structural support for the high share of wholesale funding in the Swedish banking system. However, we believe that the bank has room to extend the duration of its stable funding sources to better support its illiquid assets. As we expect SEB to further enhance its funding profile, we view funding as neutral for the ratings. SEB's stable funding ratio of 90% at the end of 2013, compared with a three-year average of 92%, demonstrates some weakness in the bank's funding structure, given our expectations that banks should fund their long-term assets with appropriate forms of stable long-term funding. This is especially important considering SEB's large share of corporate deposit funding, accounting for 63% of customer deposits. Despite an observable history of stable relationships and corporate deposits, we see room for further improvement in the bank's use of stable funding sources to support its illiquid assets (according to our definitions) and anticipate medium-term improvements as the bank prepares for eventual compliance with the regulatory net stable funding ratio. In our view, SEB has a somewhat more liquid balance sheet than its domestic peers and has shown improvements in managing short-term and longer term liquidity. By our measures, SEB's one-year liquidity ratio, comparing broad liquid assets with short-term wholesale funding, was 92% at the end of 2013 and below the three-year average of 98%. Despite this decline in our one-year measure, we note that SEB has subtly increased the durations of its largely U.S. dollar/euro short-term wholesale funding positions, improving its ability to manage short-term liquidity below one year. In our view, SEB is exposed to some refinancing risk. However, we consider that the dependence of the bank and its domestic peers on foreign and wholesale funding partly stems from structural factors, including tax incentives and repatriation of capital associated with the large proportion of Swedish investments abroad. Consequently, we believe the Swedish government would be willing and able to provide ongoing liquidity support to banks and support the functioning of the covered bond market if a new funding crisis were to emerge. In our view, such support is unlikely to be withdrawn in full despite restrictions on government support outlined in the European Bank Resolution and Recovery Directive. AUGUST 29,

10 Chart 3 Table 6 Skandinaviska Enskilda Banken AB (publ) Funding And Liquidity --Year-ended Dec (%) 2014* Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits (9.4) (6.4) 3.9 (2.8) (23.9) Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) *Data as of June 30. External support: Two notches of government support The long-term rating on SEB is two notches higher than the bank's stand-alone credit profile. This reflects our assessment under our criteria that SEB has "high" systemic importance in Sweden and that the Swedish government is AUGUST 29,

11 "supportive" of the country's banking sector. Within Europe, we note a move toward avoiding bank bail-outs (government support) by using bail-ins (burden sharing with investors, potentially including senior unsecured obligations). It is our view that there is a chance that we could remove the explicit notches of government support by the end of 2015, a factor that drives our negative outlook. Related ratings: SEB AG We define SEB's German subsidiary SEB AG as highly strategically important given its primary role within the bank's merchant banking division. The rating on SEB AG is 'A/A-1', one notch below that on the parent, in line with our group rating criteria. Additional rating factors: None No additional factors affect this rating. Related Criteria And Research Related criteria Group Rating Methodology, May 7, 2013 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related research Ratings On Sweden-Based Bank SEB Affirmed At 'A+/A-1' Following Government Support Review; Outlook Remains Negative, April 29, 2014 Various Rating Actions Taken On Nine Swedish Banks On Stabilizing Economic Risks And Government Support Review, April 29, 2014 Standard & Poor's Takes Various Rating Actions On European Banks Following Government Support Review, April 29, 2014 Various Rating Actions Taken On Five Swedish Banks After Review Of Funding And Liquidity, And Capital Trends, July 19, 2013 Swedbank Outlook Revised To Stable On Improving Capitalization; 'A+/A-1' Ratings Affirmed, July 19, AUGUST 29,

12 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of August 29, 2014) Skandinaviska Enskilda Banken AB (publ) Counterparty Credit Rating Commercial Paper Foreign Currency A-1 Junior Subordinated Senior Unsecured A+ Short-Term Debt A-1 Subordinated Counterparty Credit Ratings History A+/Negative/A-1 BBB- BBB+ 20-Nov-2012 Foreign Currency A+/Negative/A-1 01-Dec Feb-2010 A+/Stable/A-1 A/Stable/A-1 20-Nov-2012 Local Currency A+/Negative/A-1 01-Dec Feb-2010 Sovereign Rating Sweden (Kingdom of) (Unsolicited Ratings) Related Entities SEB AG Issuer Credit Rating A+/Stable/A-1 A/Stable/A-1 AAA/Stable/A-1+ A/Negative/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Financial Institutions Ratings Europe; [email protected] AUGUST 29,

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