CREDIT OPINION 2 May 218 SEB Update following upgrade of LT deposit and senior debt ratings, AT1 rating on review for downgrade Update Summary We assign an a baseline credit assessment (BCA) and long-term (LT) senior unsecured debt and deposit ratings to SEB. We also assign a LT and ST Counterparty Risk Assessment (CRA) of (cr)/prime(cr) to the bank. SEB Domicile Sweden Long Term Debt Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Type LT Bank Deposits - 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. Contacts Louise Lundberg +46.8.525.6568 VP-Sr Credit Officer louise.lundberg@moodys.com Niclas Boheman +46.8.525.6561 AVP-Analyst niclas.boheman@moodys.com Jean-Francois +44.2.7772.565 Tremblay Associate Managing Director jean-francois.tremblay@moodys.com The high trigger AT1 rating was placed on review for downgrade as the future CET1 ratio may decline linked to the Swedish Financial Supervisory Authority's (SFSA) proposal to move the risk-weight floor for mortgages to pillar I from pillar II, thereby reducing the distance to the trigger point of 8%. SEB's a BCA reflects the bank's strong credit quality, solid capitalisation and improved recurring earnings, to which the bank's focus on corporate banking could add earnings cyclicality. However, similarly to many Nordic peers, the BCA is constrained by the bank s high reliance on market funding. Exhibit 1 Rating Scorecard - Key Financial Ratios SEB (BCA: a) % 25% 2% 2% 15% 15% 1% 1% 5% 5%.6% 2.8% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets % Sean Marion +44.2.7772.156 MD-Financial Institutions sean.marion@moodys.com CLIENT SERVICES Americas 1-212-5565 Asia Pacific 852-551-77 Japan 81--548-41 EMEA 44-2-7772-5454 Median a-rated banks 25% Solvency Factors (LHS) Source: Moody's Banking Financial Metrics.8% Profitability: Net Income/ Tangible Assets 27.2% 19.2% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % Liquidity Factors (RHS) Liquidity Factors Jakob Oktay +46.8.525.6575 Associate Analyst jakob.oktay@moodys.com On 2 April 218 we upgraded SEB's LT deposit and senior unsecured debt ratings to from Aa, incorporating Moody s expectations of the bank s issuance of additional lossabsorbing debt in response to its MREL (Minimum Requirements for own funds and Eligible Liabilities) requirements. They now include a three-notch uplift in our advanced Loss Given Failure (LGF) analysis, reflecting our view that the bank s junior depositors and senior creditors face an extremely low loss given failure. Our moderate assessment of government support translates into a further notch uplift included in these ratings. Solvency Factors RATINGS
Credit strengths» SEB s credit quality is strong although its focus on large corporate banking implies a degree of concentration risk» Solid capitalisation underpinned by a strong earnings generation capacity» Good profitability, which is nevertheless under negative pressure in the current low interest-rate environment. Focus on corporate banking could add earnings cyclicality Credit challenges» Elevated risks in the residential housing market and household sector in Sweden, although broadly contained by underwriting standards, high wealth levels and a very strong repayment culture» High reliance on confidence-sensitive market funding, which is partly mitigated by proven access to capital markets, a resilient domestic covered bond market and good liquidity Rating outlook The outlook on SEB s ratings is stable, as we expect the bank to continue to offset negative profitability pressures in the current low interest rate environment, over the next 128 months. Factors that could lead to an upgrade» SEB s BCA could be upgraded if the bank significantly (1) improves the profitability of its core activities without increasing its risk profile, (2) reduces its reliance on market funding, and/or () further improves its funding position, for example through lengthening the maturity of its funding profile, increasing the proportion of deposit funding and/or strengthening its liquidity position. A higher BCA would likely lead to a ratings upgrade. Factors that could lead to a downgrade» The ratings could be downgraded if the bank s (1) operating environment deteriorates beyond our current expectations, (2) asset risk increases for example due to higher exposures to cyclical sectors or higher reliance on capital markets activities, () reliance on confidence sensitive market funding increases; and/or (4) profitability reduces sharply or earnings volatility rises.» The high trigger AT1s could be downgraded if the CET1 ratio declines, thereby reducing the margin to the trigger of 8% when the instrument could be fully or partially either written down or converted to equity. 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. 2 2 May 218
Key indicators Exhibit 2 SEB (Consolidated Financials) [1] 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 (%) 1272 1262 1252 1242 2,45,7 249,54 299,64 145,29 14,77 17,75.6 2.8 5.5.8 4..8 47.5 27.2 19.2 149.1 2,4,56 25,659 267,547 15,49 14,14 14,915.5 22.2 5.4.8.7.7 5.6 4. 2.2 151.7 2,279,664 248,92 27,44 11,228 14,29 15,566.6 2. 5.9.8.7.8 49.4 4.4 24.8 154.9 2,64,7 249,69 2,77 12,611 12,7 15,47.8 19.6 8.4.8 2.8.9 49.1 5.2 27.9 145. 122 CAGR/Avg. 2,4,297 264,78 64,852 1,449 11,689 16,17.7 17. 8.6.8..7 5.2 41. 2.4 154.1 1.24.54-4.84 8.84 6.4 2.44.65 21.26 6.85.85.56.85 5.5 4.45 25.55 151.5 [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [] May include rounding differences due to scale of reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile Skandinaviska Enskilda Banken (SEB) is a Sweden-based bank that provides a broad range of products and services, including deposits, loans and other credit, insurance, pensions, asset management, and trading in fixed-income products, foreign exchange and equities. Whereas the bank serves retail and SME clients, it has a focus on large corporates. SEB distributed its products through approximately 11 domestic and 1 international branches or subsidiaries. SEB is operating through subsidiaries in the Baltic states, and through branches in most of the other countries where it is present. SEB was founded in 1856 as Stockholm's first private bank and one of the first commercial banks in Sweden. Its shares are listed on the NASDAQ OMX Stockholm Stock Exchange (Ticker: SEB). As of year-end 217, its largest shareholder was Investor AB, which held 2.8% of the bank s total share capital. Detailed credit considerations SEB's BCA is supported by Sweden's 'strong+' Macro Profile SEB has the majority of its operations in the Nordic countries (around 79% of gross loans at year-end 217) with the vast majority in Sweden. SEB s Macro Profile is 'strong+', in line with that of Sweden. SEB's credit quality is strong, although its focus on large corporate banking implies a degree of concentration risk SEB's credit quality is supported by its strong franchise and good underwriting standards. SEB is the third largest bank in Sweden (Aaa stable), with reported total assets of SEK2.55 trillion (EUR26. billion) at year-end 217. It has strong domestic market positions in retail banking, wealth management and commercial banking. SEB is also one of the largest financial groups in the Nordic region, where it has a leading market position in corporate and, albeit to a lesser extent, in investment banking. Our a1 score for Asset Risk reflects a low and reducing level of non-performing loans (NPLs), as evidenced by the gradual reduction in the problem loan ratio (our definition) to.6% at year-end 217 compared to 1.5% at YE 211 (see Exhibit ). The score incorporates the bank s stronger focus on corporate and investment banking compared to its Swedish peers, as building and maintaining long-term relationships with large corporates is an important foundation for the bank. Although it introduces a degree of concentration risk, SEB's large corporate clients are diversified both across industries and geographies. 2 May 218
Exhibit SEB has reduced its problem loans over the past years Problem loans over gross loans 1,6% 1,4% 1,2% 1,%,8%,6%,4%,2%,% 211 212 21 214 215 216 217 Source: Moody's Financial Metrics and company reports SEB is exposed to the Baltic countries (around 8% of the credit portfolio at year-end 217), which was the main driver of the bank's deterioration in asset quality due to the Baltic financial crisis in 28-29. On 19 January 218, SEB announced that the planned transformation in Germany had taken place as planned at year-end. Moody's considers that the streamlining of SEB's German operations leads to greater integration with its parent, also for SEB AG, and therefore aligned the German subsidiary's ratings with those of its Swedish parent (see Moody's upgrades SEB AG's long-term deposit ratings to Aa from A2; outlook is stable ). SEB's loan book has high borrower and sector concentrations, due to the bank's corporate banking business, which is focussed on large companies. Corporate and property-management exposures accounted for around 48% and 16% of SEB's credit portfolio respectively, at year-end 217. However, a large portion of the bank's property-management exposure relate to housing cooperatives and residential real-estate management (49% at year-end 217), which we view as less risky than commercial property lending. We believe that SEB's high single-borrower concentrations result from the limited number of large domestic enterprises in Sweden, but recognise that these companies are diversified across industries and geographies, and acknowledge the bank's comprehensive risk management framework in this area. Solid capitalisation underpinned by a strong earnings generation capacity We consider SEB's capitalisation to be solid relative to its risk profile, and acknowledge that it is supported by a strong earnings generation capacity. At year-end 217, SEB's Common Equity Tier 1 (CET1) ratio under Basel III/CRD IV was 19.4%. The bank's capital headroom (i.e. excess of CET1 capital above the regulatory requirement) stood at 2.2% at end-december 217, above management's target of around 1.5%. Similarly to the other Nordic peers, we apply a downward adjustment to SEB s Capital score in our BCA scorecard to take into account lower risk-weights compared to the average for similarly rated peers. SEB already meets its increased capital requirement resulting from the conclusion of the bank's annual supervisory and evaluation process (SREP), which includes a Pillar 2 capital surcharge for increased risk weights for corporate exposures and the introduction of a maturity floor for these exposures, based on the Swedish FSA's preliminary calculations. Once validated, the higher risk weights for corporate exposures will be transitioned to the bank's Pillar 1 capital requirement from Pillar 2. We expect SEB to be able to meet future capital requirements mainly through retained profits. 4 2 May 218
Good profitability which is nevertheless under negative pressure in the prolonged low interest-rate environment. Focus on corporate banking may add to earnings cyclicality SEB has improved its profitability in recent years, as evidenced by a net income/tangible assets of.8% at year-end 217 (.72% in 216). Going forward, we expect profitability to remain under pressure due to competition, prolonged low interest rates and challenging market conditions, over the next few quarters. The bank s earnings are well diversified by activity (see Exhibit 4) although a large portion (around 4%) originate from Large Corporates & Financial Institutions (previously Merchant Banking), the performance of which are more dependent on market conditions. For this reason, we consider earnings from these activities as potentially more volatile than more traditional retail and commercial banking, even though SEB has shown a high degree of earnings stability over the recent past. Exhibit 4 SEB: operating income by division and activity in 217 Net interest income Net fee and commission income Net financial income Net other income 2 15 1 5-5 Large Corporates & Financial Institutions Corporate & Private Customers Baltic Life & Investment Management Source: Company reports SEB's cost-to-income ratio has traditionally been higher than its Nordic peers, reflecting its business mix, which is more reliant on Large Corporates & Financial Institutions. These activities are characterised by higher personnel costs that recognises the degree of employee specialisation. While SEB has made significant efforts to improve its cost efficiency in recent years, cost-to-income ratio was 48% in 217, which remains slightly higher than domestic peers albeit lower in comparison to many European peers. High reliance on confidence sensitive market funding, which is mitigated by access to diverse capital markets and strong liquidity Similar to many of its Nordic peers and despite reducing its dependence in recent years (see Exhibit 5), SEB continues to have a relatively high share of wholesale funding, which we consider as a key credit weakness. This is evidenced by a relatively high market funding/tangible banking assets of 27% at year-end 217. 5 2 May 218
Exhibit 5 SEB has reduced its reliance on market funding over the past few years Market funds over tangible banking assets 6.% 5.% 4.%.% 2.% 1.%.% 28 29 21 211 212 21 214 215 216 217 Source: Moody's Financial Metrics In our view, SEB's overall liquidity and funding profiles are adequate. SEB s funding comes from retail and corporate deposits, senior unsecured debt and mortgage covered bonds. SEB is more reliant than its Nordic peers on corporate deposits, which we generally view as more volatile than retail deposits because these tend to be larger and more sensitive to changes in market yields. However, we note that SEB's corporate deposits have been fairly stable in the past, helped by the bank's strong market position in the cash management and custody business, which tend to be less volatile than other corporate deposits. SEB reported a strong Liquidity Coverage Ratio (LCR) in all currencies of 145% at end-december 217). As indicated in our banks methodology, we reflect the greater stability of covered bonds compared to unsecured market funding through a standard adjustment to the Funding Structure ratio. Given the long history of the Swedish and Danish covered bond markets, local currency and deep domestic investor base, we make additional (positive) adjustments for local currency (LC) denominated covered bonds issued in these two markets. SEB s Liquid Banking Assets/Tangible Banking Assets was 19% at year-end 217 (2% at YE 216), which corresponds to a baa1 score for Liquid Resources in our BCA scorecard. In our view, the bank s strong liquidity position largely mitigate refinancing risk from the dependence on wholesale funding. Support and structural considerations Loss Given Failure analysis We apply our advanced Loss Given Failure (LGF) analysis to SEB as the bank is incorporated in Sweden, which we consider to be an Operational Resolution Regime because it is subject to the EU Bank Recovery and Resolution Directive (BRRD). For this analysis we assume residual tangible common equity of % 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 calibrating our LGF analysis, we use the deposit split as provided by SEB in its Q4 217 financials (66% of deposits are junior). Our advanced LGF analysis indicates a very low loss given failure for junior depositors and senior unsecured creditors, resulting in a three notch uplift in the relevant ratings, from the firms a adjusted BCA. The LGF table in this article is based on SEB only, i.e. excluding its both the Baltic and German subsidiaries. However, as of Q1 218 we will incorporate SEB AG, which Moody's - after the streamlining of the German operations - consider as highly integrated with SEB, and will therefore incorporate SEB AG in SEB's LGF analysis. The assigned LGF notchings for long-term deposit and senior unsecured bank debt are positioned one notch higher than the correspondent LGF notching guidance. This reflects our expectation that SEB will issue non-preferred senior debt in order to comply 6 2 May 218
with the Swedish MREL requirements. Moody's expects that SEB will fulfil the requirements, add a buffer, and that the bank will continue to have good access to the capital markets. We have also taken into account the SFSA's proposal from 28 March 218 to move the 25% risk-weight floor for Swedish mortgages from pillar II to pillar I, as our base case scenario is that the proposal will be adopted in its current form. This would lower future MREL recapitalisation requirements as the SNDO currently includes the combined buffer related to the 25% risk-weight floor Swedish mortgages in pillar II, but this will be deducted once the capital held for the risk-weigh floor will be transferred to Pillar I. The lower MREL recapitalisation amounts are expected to come into effect when the SNDO recalculates updated capital requirements, for yearend 219. We attach a high degree of confidence to the likelihood that the bank will fulfil the regulatory MREL requirements, along with a buffer, with the subordination required as of 222, and therefore apply a forward looking time-horizon as per our updated methodology. In particular we expect that depositors and senior unsecured creditors of SEB would benefit from sufficient subordination in the liability structure by year-end 221, which would likely reduce the loss given failure, resulting in a notches uplift. Government support considerations We assess a moderate probability of Government Support for SEB s long-term senior unsecured and junior depositors, resulting in a further one-notch uplift incorporated in the relevant ratings as well as in the Counterparty Risk Assessment. For junior securities, we continue to believe that potential government support is low and these ratings do not include any related uplift. Counterparty Risk Assessment Counterparty Risk Assessments (CRAs) are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CRA 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, guarantees and liquidity facilities. SEB's CRA is positioned at (cr)/prime(cr). The CRA is positioned four notches above the Adjusted BCA of a, based on the substantial cushion against default provided to the senior obligations represented by the CRA by subordinated instruments, along with one notch of government support. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CRA captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. 7 2 May 218
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 methodology and scorecard factors Exhibit 6 SEB Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 Sector concentration Solvency Asset Risk Problem Loans / Gross Loans.6% aa2 a1 Single name concentration Capital TCE / RWA 2.8% aa1 a1 Risk-weighted capitalisation Profitability Net Income / Tangible Assets.8% baa1 Return on assets aa Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 27.2% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 19.2% 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 Balance Sheet Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 8 1% 2 May 218 a2 in-scope (SEK million) 686,12 824,86 28,444 544,92 25,889 18,161 5,659 1,788,647 Market funding quality baa1 Stock of liquid assets Deposit quality a Aaa a2-baa1 a a % in-scope 8.4% 46.1% 15.7%.4% 11.5% 1.%.% 1% at-failure (SEK million) 86,222 674,716 266,422 48,294 25,889 18,161 5,659 1,788,647 % at-failure 46.8% 7.7% 14.9% 22.8% 11.5% 1.%.% 1%
Debt class 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 vs. subordination subordination Adjusted BCA Counterparty Risk Assessment 8.4% 8.4% 8.4% 8.4% aa (cr) Deposits 8.4% 4.% 8.4% 15.5% 2 2 aa Senior unsecured bank debt 8.4% 4.% 15.5% 4.% 2 1 2 aa Dated subordinated bank debt 4.%.% 4.%.% baa1 Junior subordinated bank debt.%.%.%.% Non-cumulative bank preference shares.%.%.%.% -2 baa (hyb) Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Non-cumulative bank preference shares Loss Given Failure notching Additional Preliminary Rating Notching Assessment -2 aa (cr) aa aa baa1 baa (hyb) Government Support notching Local Currency Rating 1 1 1 (cr) (P) ---- Foreign Currency Rating - Baa1 (P)Baa2 Baa(hyb) Possible Downgrade Source: Moody's Financial Metrics Ratings Exhibit 7 Category SEB Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Subordinate Jr Subordinate MTN Pref. Stock Non-cumulative Commercial Paper Moody's Rating Stable /P a a (cr)/p(cr) Baa1 (P)Baa2 Baa (hyb)1 P SEB AG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Stable /P a a (cr)/p(cr) [1] Placed under review for possible downgrade on April 2 218 Source: Moody's Investors Service 9 2 May 218
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CLIENT SERVICES 11 Americas 1-212-5565 Asia Pacific 852-551-77 Japan 81--548-41 EMEA 44-2-7772-5454 2 May 218