CREDIT OPINION Swedish Export Credit Corporation Semiannual Update Update Summary Rating Rationale We assign an baseline credit assessment (BCA) and A long-term issuer and senior unsecured debt ratings to Swedish Export Credit Corporation (SEK). We also assign longand short-term Counterparty Risk Assessment (CR Assessment) of A(cr)/Prime-(cr) to the bank. Swedish Export Credit Corporation Domicile Sweden Long Term Debt A Type Senior Unsecured - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Analyst Contacts Niclas Boheman 44--777-64 AVP-Analyst niclas.boheman@moodys.com Jean-Francois 44--777-565 Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion 44--777-56 MD-Financial Institutions sean.marion@moodys.com SEK s issuer and senior unsecured ratings benefit from a two-notch uplift from the BCA, under our Advanced Loss-given-failure (LGF) Analysis, given the sizeable cushion of bailin eligible liabilities. We also assign one notch uplift to SEK s liabilities to reflect our view of a high probability of government support, even in the absence of a formal public sector guarantee. Exhibit Rating Scorecard - Key Financial Ratios Swedish Export Credit Corporation (BCA: ) Median -rated banks 5% % 9% % 8% 7% 5% 6% 5% % 4% % 5% %.% 9.6% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Financial Metrics.4% Profitability: Net Income/ Tangible Assets 9.5% 9.4% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % % Liquidity Factors (RHS) Liquidity Factors Aleksandar Hristov 44--777-7 Associate Analyst aleksandar.hristov@moodys.com SEK's BCA is supported by agency's mandate to act as Sweden's export credit agency, the lender s strong asset quality and capital position and its stable, albeit moderate, profitability. The BCA is in line with the BCA of other Nordic public sector issuers and takes into account SEK's small proportion of problem loans and for-profit mandate. Solvency Factors RATINGS
Credit Strengths A Government Owned Entity That Supports Swedish Export Industry Good Asset Quality Benefiting from Guarantees and Insurance Adequate Capital and Stronger-Than-Peers Leverage A Diversified Funding Profile and A Large Liquidity Portfolio Supportive Operating Environment As Expressed By the Strong+ Macro Profile Credit Challenges Moderate Profitability High reliance on wholesale funding Rating Outlook The outlook on all long-term ratings is stable. Factors that Could Lead to an Upgrade Increasing support from the Swedish government could prompt upward rating pressure. Factors that Could Lead to a Downgrade Downward pressure on SEK s standalone rating could be triggered by: () a dilution of its policy mandate to act as Sweden's export credit agency, () weaker profitability over an extended period of time, and/or () a weaker standing in debt capital markets. Key Indicators Exhibit Swedish Export Credit Corporation (Consolidated Financials) [] Total Assets (SEK million) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (SEK million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) 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 / Due to Customers (%) -7-6 -5-4 9,8,559,685 7,8,86,94. 9.6.8.7.8.4 8.9 9. 8.4-9,767,45,7 7,,795,894...9.6.. 6.7 9.5 9.4-7,678 9,665,5 6,79,84,99.8.7..6.8.4 5.4 9. 6.5,67. 6,58,4 4,44 5,986,688,4. 8..4.5..4.9 9. 4.5 46,758.7 - CAGR/Avg.4 98,5,689 46,4 4,986,69,.4. 5.8.5.5..7 9.. 4,8.5 -.75 -.5 -.5 4.65.5-5.55.6.97.6.66.77.46 9.6 9.6 6.6,5.56 [] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics 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 www.moodys.com for the most updated credit rating action information and rating history.
Detailed Rating Considerations A Government Entity That Supports Swedish Export Industry SEK is an agency wholly owned by the Swedish government (Aaa stable) with the mission to support the Swedish export industry by providing both Swedish exporters and their foreign customers with corporate and export lending, structured financing, project financing, trade financing, and leasing solutions. SEK does not take deposits and funds these loans by actively borrowing in the global capital markets. In addition to the government ownership, SEK has also further ties with Swedish government: it manages the export credit system on behalf of the government and in line with OECD rules on state support, collaborates extensively with Exportkreditnamnden (EKN), a Swedish-government agency that guaranteed around 6% of SEK's lending at year-end 6. Furthermore, SEK benefits from a SEK5 billion borrowing facility with the Swedish National Debt Office, approved by parliament, to be used to finance the state supported export financing system, the Commercial Interest Rate Reference System (CIRR). All this results in our assessment of a high probability of government support for SEK s senior, and subordinated debt instruments. As an agency established with an explicit public policy mandate, we consider that SEK benefits from an entrenched franchise in a niche market. These conditions provide stability to SEK s asset quality, capital, and profitability, supporting the agency s ongoing operating performances and resulting in a low risk profile. This feature is reflected in a qualitative positive adjustment of one notch in our scorecard for business diversification. Good Asset Quality Benefitting From Guarantees and Insurance Our aa Asset Risk score reflects SEK s low problem loan ratio and its asset guarantees. SEK's problem loan ratio has been consistently low as a reflection of its good asset quality, strong underwriting and asset guarantees. The ratio declined to.% as of March 7, down from.% in 6 as a result of successful restructuring and refinancing of a large problematic exposure during 6. The relatively high levels of problem loans at end-5 was driven by two large exposures almost fully covered by guarantees. At end-6 % of SEK's net credit exposure was outside Sweden, including relatively small exposures in weaker countries such as Portugal, Italy and Spain. At end-6, SEK reported SEK8 billion outstanding loans, of which 45.5% to exporters and 54.5% to end-customers. SEK underwrites loans at prevailing fixed or floating market interest rates (76% of its book at end-6) as well as loans under the State Support System (the S-system, a state-support credit system, including CIRR, which accounts for the remaining 4% of the book), which is administered on behalf of the State in return of a fixed compensation. SEK uses various mechanism to mitigate credit risk under its operations: most important, the agency transfers its private sector borrower credit risk by collaborating with export credit agencies. This results in a high exposure to governments, which consequently represented 5% of SEK's net exposure at end-6 (see Exhibit ). Additionally, SEK uses credit default swaps (CDS) to mitigate credit risk. This effectively transfers credit risk to the CDS counterparty whose creditworthiness potentially could deteriorate. In order to minimise this credit counterparty risk, SEK has signed ISDA agreements and credit support annexes (CSA) with all counterparties with whom it enters into derivatives contracts. In addition, SEK has recently started to work with private insurance companies in order to militate against credit risks.
Exhibit SEK's Net Exposures at end-6 A significant proportion of SEK's net exposures are to regional- and central governments Other % Corporates 9% Central governments 5% Financial institutions % Regional governments 6% Source: Company reports Adequate Capital and Stronger-than-peers Leverage SEK s capital position is adequate and its leverage higher than peers, as reflected in our aa Capital score. SEK is regulated by the Swedish FSA and required to comply with bank capital adequacy rules; at end-march 7 it reported a Common Equity Tier ratio of 9%, adequate relative to its risks. Moody s Tangible Common Equity on risk-weighted assets was 9.7% at the same date. The agency reported a 5.4% leverage ratio at the same date, equating a Moody s Tangible Common Equity on Tangible Assets ratio of 5.7%. This places SEK in a stronger position compared to Nordic public sector peers such as Kommuninvest I Sverige (Sweden), Municipality Finance Plc (Finland) and Kommunalbanken (Norway), who currently report leverage ratios around or below the three percent threshold that might become regulatory requirement in 8. Stable, Albeit Moderate, Profitability Our ba Profitability score captures SEK s stable, albeit moderate, profitability. In the first quarter of 7 SEK reported operating profits of SEK96 million, down from SEK45 million during the same period in 6. The decline was largely driven by decline in net results from financial transactions, while net interest income and operating costs remained unchanged. As a result of the weaker profit, return on equity fell to 4.6% in the first quarter of 7 compared to 5.8% a year earlier. SEK targets a long-term 6% return on equity (ROE) unlike other Nordic government related entities such as Kommuninvest I Sverige AB (Aaa, stable) and Municipality Finance Plc (A, stable), which do not have profitability targets. The above said, SEK is not a very profitable business. Its net interest margin has hovered between 5 and 6 basis points which is comparable with the above mentioned government related issuers that operate under a not-for-profit mandate. More positively, SEK has a track-record of earnings stability which we consider is driven by its mandate and stable business model and that is unlikely to change in the future. Operating expenses are low: the cost-income ratio was 5% in the first quarter of 7 and 7% in 6 (see Exhibit 4), supported by the absence of branch network. 4
Exhibit 4 Cost to Income Ratio SEK's stable income and low cost base supports good efficiency 4% 5% % 5% % 5% % 5% % 4 5 6 Q 7 Source: Moody's Financial Metrics A Diversified Funding Profile and a Large Liquidity Portfolio Our a Combined Liquidity score incorporates SEK s high reliance on wholesale funding, albeit mitigated by its diversification, a consolidated track of market access, largely matched funding, and a large liquidity portfolio. SEK's risk appetite ensures a diversified funding profile to fund all credit commitments through maturity and adequate liquidity investments for new lending even during times of financial stress. At March 7 SEK s outstanding debt (including borrowing from credit institutions, senior unsecured and subordinated debt) was SEK59 billion, or 9% of its balance sheet. This very high reliance on confidence-sensitive funding is mitigated by funding diversification (virtually all long-term funding is issued in foreign currencies, with largest concentration in USD, about 58% as of March 7) and by a strong track-record of market access (SEK s balance sheet grew during the 8/9 period, when many other financial institutions were unable to so because of the lack of access to the debt capital markets). Refinancing risks are very low as assets and liabilities are matched both by maturity and in the terms of currencies, directly or through the use of derivatives. SEK reported liquidity investments for SEK7.8 billion at March 7, a significant increase from SEK59 billion as of end-5, largely driven by investments made prior to the Brexit referendum in the UK. Supportive Operating Environment, as Expressed by a Strong+ Macro Profile We assess SEK's macro profile to reflect the average macro profile of the countries where the institution has its net exposures (after taking guarantees and credit derivatives into consideration). SEK's Strong+ Macro Profile is influenced by Sweden (Very Strong-), where the institution has around two thirds of its net exposures at end-september 6. The remaining exposures - mostly to other European countries for around a quarter of the total book - limit the overall macro profile score to Strong+. Notching Considerations Loss Given Failure We apply our Advance Loss-given-failure Analysis on SEK as the institution is subject to the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. For this analysis we assume that equity and losses stand at % and 8%, respectively, of tangible banking assets in a failure scenario. Under this analysis, SEK's senior unsecured creditors benefit from a two-notch rating uplift from the BCA, because all the agency's liabilities are eligible for bail-in, assuming a currently unlikely stress-scenario. SEK's subordinated and junior subordinated debt are positioned at the BCA level and one notch below the BCA, respectively. 5
Government Support SEK's debt instruments continue to benefit from high government support given its strong linkages with the sovereign. We assign one notch of uplift to its senior unsecured obligations and to its subordinated and junior subordinated liabilities, resulting in A senior unsecured, A subordinated and (P)A junior subordinated ratings. Counterparty Risk Assessment The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, and liquidity facilities. The CR Assessments is distinct from debt and deposit ratings in that they consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default. The CR Assessment is positioned at A(cr), three notches above the BCA, based on the cushion against default provided by senior unsecured and subordinated debt. 6
Rating Methodology and Scorecard Factors Exhibit 5 Swedish Export Credit Corporation Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver # Key driver # Solvency Asset Risk Problem Loans / Gross Loans.% aa aa Quality of assets Capital TCE / RWA 9.6% aa aa Risk-weighted capitalisation Profitability Net Income / Tangible Assets.4% ba ba Return on assets Earnings quality Market funding quality Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 9.5% caa a Term structure Liquid Resources Liquid Banking Assets / Tangible Banking Assets 9.4% a a Stock of liquid assets Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA b Balance Sheet in-scope (SEK million) 6,464 54,74,8 8,755 9,8 Other liabilities Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 7 % a a Aaa aa-a % in-scope 9.% 87.%.8%.% % at-failure (SEK million) 6,464 54,74,8 8,755 9,8 % at-failure 9.% 87.%.8%.% %
Debt class Counterparty Risk Assessment Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt De jure waterfall De facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe jure De facto notching guidance notching Assessment volume + ordination volume + ordination versus Subordination Subordination BCA 9.9% 9.9% 9.9% 9.9% a (cr) 9.9%.8% 9.9%.8% aa.8%.%.8%.% - - - - a.%.%.%.% - - - - - a Instrument class Counterparty Risk Assessment Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Loss Given Failure notching - - Additional Preliminary Rating Notching Assessment - a (cr) aa a a Government Support notching Local Currency Rating A (cr) A --- Foreign Currency Rating -A A A Source: Moody's Financial Metrics Ratings Exhibit 6 Category SWEDISH EXPORT CREDIT CORPORATION Outlook Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured -Fgn Curr Senior Unsecured -Dom Curr Subordinate Jr Subordinate MTN Commercial Paper Other Short Term Moody's Rating Stable A(cr)/P-(cr) A (P)A A A (P)A P- (P)P- Source: Moody's Investors Service 8
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