May 26, 2016 / 1:32 PM / a year ago

Fitch Upgrades SEB to 'AA-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has upgraded Skandinaviska Enskilda Banken AB's (SEB) Long-Term Issuer Default Rating (IDR) to 'AA-' from 'A+', Viability Rating (VR) to 'aa-' from 'a+', and Short-Term IDR to 'F1+' from 'F1'. The Outlook on the Long-Term IDR is Stable. Fitch has also upgraded the Long- and Short-Term IDRs of SEB's wholly-owned subsidiary SEB AG to 'AA-' from 'A+' and 'F1+' from 'F1' respectively. A full list of rating actions is available at the end of this rating action commentary. The ratings actions are part of a periodic portfolio review of major Swedish banking groups rated by Fitch. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The upgrade reflects strong execution by SEB of its long-term strategy of de-risking its operations and improving earnings stability and diversification, with reduced reliance on capital markets income. Combined with a strong cost focus, SEB's expanded retail and wider Nordic/German corporate franchises have led to solid financial metrics and we expect the positive trend to be maintained. The high ratings mean further upgrades are now unlikely, which is reflected in the Stable Outlook. Large corporates and financial institutions are SEB's largest profit generator, and the bank is more focused on this segment than its Nordic peers. Profitability in corporate and institutional banking can be more volatile than retail banking and asset quality more sensitive in times of severe stress, in Fitch's view. However, in line with its tightened risk appetite, SEB has moved away from the more volatile capital market-driven businesses, with an increasing proportion of revenues made up of net interest income and recurring fees and commissions, and we believe SEB is managing the risks well. SEB's asset quality is robust and compares well with both domestic and international peers, supported by conservative underwriting focusing on debt servicing capacity and a growing retail book. Corporate lending is of good quality and the book is heavily weighted towards large Nordic and German geographically diversified export-orientated corporations. Loans to small and medium-sized enterprises represent a small part of the portfolio. Non-performing loans are low in numbers, and Fitch expects the bank will be able to withstand deteriorations in both its core Swedish market, as well as its other Nordic and Baltic operations. In addition to earnings, SEB's solid capitalisation provides a buffer against unexpected shocks. SEB's risk-weighted capital ratios compare well with international peers', with a Fitch core capital/risk exposure amount ratio of 21.1% at end-March 2016. Leverage is more in line with peers', with a Basel III leverage ratio of 4.9% at end-2015 (on a fully loaded basis). SEB relies on wholesale funding, although less so than domestic peers, given its stronger focus on corporate banking. Fitch expects SEB to have continued good access to debt capital markets, due to strong liquidity and a domestic captive investor base, particularly for covered bonds. The bank partly funds its corporate lending through corporate deposits, which it closely monitors, and maintaining strong liquidity management is key for the ratings. Corporate deposits have proven to be a reliable source of funding, driven by strong customer relationships, particularly in the Swedish market. SUPPORT RATING AND SUPPORT RATING FLOOR SEB's '2' Support Rating (SR) and 'BBB-' Support Rating Floor (SRF) reflect Fitch's expectation that support from the Swedish authorities remains highly likely in case of need. Sweden has been the leading EU advocate of flexibility, partly due to 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. The banking sector's wholesale funding reliance, with a material interconnectedness between the banks, means faltering investor confidence could spill over to the whole sector. 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 the EU's Bank Recovery and Resolution Directive (BRRD) than Banking Union member countries. While Sweden is likely to retain a high propensity to support its major banks to safeguard financial stability in light of the concentrated structure, Sweden is bound by EU state aid rules, meaning it does not have full control over support decisions. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on the subordinated debt and hybrid securities issued by SEB are notched down from the bank's VR. In accordance with Fitch's criteria, subordinated (lower Tier 2) debt is rated one notch below SEB's VR to reflect the above-average loss severity of this type of debt. Hybrid Tier 1 and additional Tier 1 securities are rated four and five notches, respectively, below SEB's VR to reflect higher loss severity risk of these securities (two notches) as well as high risk of non-performance (an additional two and three notches, respectively). SUBSIDIARY AND AFFILIATED COMPANY SEB's German operation is conducted via SEB AG, its wholly owned subsidiary. Given the close integration, SEB AG's Long- and Short-Term IDRs are aligned with SEB's and Fitch does not assign the subsidiary a VR. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Stable Outlook on SEB's Long-Term IDR reflects Fitch's view that SEB will maintain its strong capital and leverage ratios, sound asset quality and a healthy liquidity profile, offsetting the bank's reliance on its domestic market and its smaller equity base than similarly rated peers. Although not expected by Fitch, pressure on the ratings could come from an adverse change in investor sentiment materially affecting SEB's access to debt capital markets 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, the bank's ratings are 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 larger losses in both SEB's mortgage lending and corporate portfolios. However, this is not Fitch's central scenario. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in Sweden's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. The SR and SRF are also sensitive to the implementation of minimum own funds and eligible liabilities (MREL) in Sweden. In particular, while the Swedish resolution authority appear to promote part of eligible liabilities being debt securities, the status of these securities will be important to the SR. This is particularly the case as 20% of risk-weighted assets (or 8% of liabilities) need to be bailed-in before any public funds can be used, and this is after the point of non-viability is reached. Should these MREL buffers be in the form of senior debt, ie requiring the bail-in of senior unsecured creditors before support can be considered, Fitch is likely to downgrade the SR to '5' and revise the SRF to 'No Floor'. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on the subordinated debt and other hybrid securities issued by SEB are broadly sensitive to the same considerations that affect the bank's VR. Additional Tier 1 securities are also sensitive to Fitch changing its assessment of the probability of their non-performance risk relative to the risk captured in SEB's VR. SUBSIDIARY AND AFFILIATED COMPANIES SEB AG's Long- and Short-Term IDRs are sensitive to a change in SEB's ratings. The rating actions are as follows: Skandinaviska Enskilda Banken AB Long-Term IDR: upgraded to 'AA-' from 'A+'; Outlook Stable Short-Term IDR: upgraded to 'F1+' from 'F1' Viability Rating: upgraded to 'aa-' from 'a+' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt: upgraded to 'AA-/F1+' from 'A+/F1' Certificates of deposit: upgraded to 'F1+' from 'F1' Commercial paper: upgraded to 'F1+' from 'F1' Subordinated debt: upgraded to 'A+' from 'A' Hybrid Tier 1 instruments: upgraded to 'BBB+' from 'BBB' Additional Tier 1 instruments: upgraded to 'BBB' from 'BBB-' SEB AG Long-Term IDR: upgraded to 'AA-' from 'A+'; Outlook Stable Short-Term IDR: upgraded to 'F1+' from 'F1' Support Rating: affirmed at '1' Contact: Primary Analyst Jens Hallen Senior Director +44 20 3530 1326 Fitch Rating Limited 30 North Colonnade London E14 5GN Secondary Analyst Bjorn Norrman Senior Director +44 20 3530 1330 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 299 174 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1005145 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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