Swedish Export Credit Corp.
Primary Credit Analyst:
Sean Cotten, Stockholm (46) 8-440-5928; [email protected]
Secondary Contact:
Alexander Ekbom, Stockholm (46) 8-440-5911; [email protected]
Table Of Contents
Major Rating Factors
Outlook
Rationale
Related Criteria And Research
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Swedish Export Credit Corp.
SACP
a-
Anchor
a-
Business
Position
Capital and
Earnings
Risk Position
Funding
+
+5
GRE Support
+5
+
Additional
Factors
0
Issuer Credit Rating
Moderate
-1
Very Strong
+2
Moderate
-1
Group
Support
0
Sovereign
Support
0
AA+/Stable/A-1+
Average
0
Liquidity
Support
Adequate
Major Rating Factors
Strengths:
Weaknesses:
• Extremely high likelihood of government support.
• Very good loan asset quality.
• Robust capitalization.
• Concentration on large individual exposures.
• Low profitability.
• Total reliance on wholesale funding.
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Swedish Export Credit Corp.
Outlook: Stable
The stable outlook on Swedish Export Credit Corp. (SEK) reflects Standard & Poor's Ratings Services' current view
that ongoing regulatory initiatives (banking resolution and recovery directive) for credit institutions in the EU are
unlikely to significantly hinder the Swedish government from providing timely support to SEK. The outlook also
reflects our expectation that the bank's asset quality will remain strong and its capitalization robust. Moreover, we
believe that there is an "extremely high" likelihood that the Swedish government would provide timely and
sufficient extraordinary support to SEK, if needed. Given this level of extraordinary support and our 'AAA' rating
on Sweden, we could revise our assessment of SEK's stand-alone credit profile (SACP) downward by four notches
without it affecting the rating.
We could consider a negative rating action if we saw that SEK's role for, or link with, the Swedish government
were weakening. This would be the case if, in our view, the final resolution regime presented meaningful
impediments for the government's provision of extraordinary support to the bank.
We consider a positive rating action unlikely at this stage. However, we could raise the ratings if the Swedish
government provided a timely guarantee for SEK's liabilities, in line with our criteria.
We expect that the Swedish krona (SEK)80 billion ($11 billion) funding backup line for the Commercial Interest
Reference Rate (CIRR) portfolio will be renewed as part of the ongoing support we factor into our analysis of SEK's
stand-alone credit profile and more specifically its funding and liquidity profile.
Rationale
The ratings on SEK reflect our opinion that there is an extremely high likelihood of extraordinary support for the
company from Sweden (AAA/Stable/A-1+). Consequently, we factor into the long-term rating five notches of uplift
from SEK's SACP.
We also base the ratings on our view of SEK's business position as moderate, as defined in our criteria, given the
company's somewhat narrow focus on export lending. Its capital and earnings position is "very strong," in our opinion.
We believe it will reach a Standard & Poor's risk-adjusted capital (RAC) ratio of about 16.5% over the next 18-24
months. We assess SEK's risk position as "moderate," reflecting our view of its unsecured concentration risk to some
large Swedish corporates and international financial institutions, as well as the complex nature of its funding structure.
Our views of SEK's funding as "average," and liquidity as "adequate," reflect its link with the Swedish government,
which supports the external wholesale funding profile, and its substantial liquidity portfolio.
Anchor: Blended economic risk owing to net exposure after guarantees
The anchor we assign to SEK is 'a-', reflecting its regulatory headquarters in Sweden and its net credit exposure after
guarantees to different markets worldwide, according to what it disclosed in its Pillar III report as of year-end 2013.
Although our blended economic risk score for SEK is higher than that for banks operating only in Sweden, due to SEK's
external exposures, this does not lower the anchor.
Our bank criteria use our Banking Industry Country Risk Assessment's economic risk and industry risk scores to
determine a bank's anchor, the starting point in assigning a bank a long-term rating. The anchor for a financial
institution operating only in Sweden is 'a-'.
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Swedish Export Credit Corp.
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
Swedish Export Credit Corp. Key Figures
--Year-ended Dec. 31-(Mil. SEK)
2014*
2013
2012
2011
2010
Adjusted assets
315,478.0
306,435.3
313,021.2
319,614.2
339,687.6
Customer loans (gross)
190,807.7
187,280.3
174,088.8
174,818.8
159,468.8
15,156.3
14,643.1
14,185.6
13,012.9
12,183.6
1,097.7
1,958.1
1,372.4
2,391.6
1,830.9
Adjusted common equity
Operating revenues
Noninterest expenses
259.3
511.3
544.5
500.4
464.4
Core earnings
649.2
1,090.1
684.4
1,306.1
1,084.8
*Data as of June 30.
SEK--SEK-Swedish krona. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Business position: Export lender with a generally narrow mandate
In our view, SEK's business position is "moderate," reflecting the company's low-margin operating environment and its
relatively narrow role of supporting Swedish export companies, particularly through loans at the CIRR under the rules
of the Organization for Economic Cooperation and Development (OECD). SEK's business derives from the mandate by
the Swedish government, its 100% owner, to support the country's export sector, which contributes 50% to Sweden's
GDP, with either direct or end-client long-term financing. SEK is an important pillar for the success of Swedish
exporters. It played an especially important role during the difficult market conditions in late 2008 and 2009 (see chart
1 below) when traditional bank financing was scarce. The subsequent recovery and return of bank financing explains
why SEK's loan exposures have grown to a much smaller extent than in 2009. We expect SEK's lending book to grow
by SEK10 billion-SEK15 billion annually should new lending remain at its current level of SEK55 billion-SEK60 billion.
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Swedish Export Credit Corp.
Chart 1
SEK's balance sheet of SEK315 billion as of June 30, 2014, depends on a number of large Swedish exporters for a
significant part of its revenues. SEK's product range, mainly comprising loan syndications in a low-margin
environment, is narrow in our view. We expect the relative concentration risk to gradually reduce over time due to
new business opportunities created by Basel III which makes commercial banks less likely to commit to long-term
export financing syndications and more likely to work together with SEK to create financing solutions for the export
sector.
We see SEK's management and strategy as stable, despite the 2013 change in CEO, and view ownership by the
Swedish state as positive for the rating. In 2011, SEK's strategy was realigned toward a greater focus on the export
business and we believe that management has executed this more defined strategy. In addition, SEK has strengthened
its corporate governance and risk management substantially and is now in a better position to supervise SEK's
complex operations and balance sheet.
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Swedish Export Credit Corp.
Table 2
Swedish Export Credit Corp. Business Position
--Year-ended Dec. 31-(%)
2014*
2013
2012
2011
2010
Total revenues from business line (currency in millions)
1,097.7
1,958.1
1,392.3
2,500.4
4,395.9
65.2
113.3
158.1
94.0
42.9
8.5
7.4
5.0
10.5
22.2
Commercial & retail banking/total revenues from business line
Return on equity
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Capital and earnings: Very strong capital ratios supported by the ample use of guarantees, reducing
balance sheet risk
We consider SEK's capital and earnings to be "very strong" and we estimate its RAC ratio will reach 16.5%-17.0% over
the next 18-24 months from its current level of 16.1%, supported by its high-quality capital base. This high projected
ratio reflects SEK's extensive use of sovereign and bank guarantees that reduce its corporate exposure and risk
weightings. We expect SEK to post healthy annual after-tax earnings in the coming two years, supporting the capital
base. However, as a result of SEK's planned expansion into more residual risk-taking in export syndications, we are
increasing our estimate of risk-weighted assets for the company, which will to some extent counterbalance its growing
capital base.
SEK's regulatory common equity tier 1 ratio was 17.1% in June 2014 and it targets a ratio of 16%. The ratio dropped
from 19.5% at year-end 2013, explained by the introduction of higher risk weights on bank exposures, due to higher
correlation factors, and the increasing direct exposure to corporates. This compares against the newly established
requirement under Basel III of 8.7%.
We believe SEK's earnings composition to be sound and dominated by net interest income. Revenues are almost
exclusively generated through loan syndications and returns on bonds issued by large Swedish exporters that SEK has
invested in and that we consider to be part of lending activity to support the sector. Margins are low in SEK's business,
reflecting the low level of risk and we expect some margin pressure as banks are starting to come back to the market
from a period of deleveraging. In addition, and as a result of the shift in SEK's liquidity portfolio, overall net interest
margin has decreased during recent years and we expect the current level at 60 basis points to remain for the coming
two years.
Given its large liquidity and derivatives portfolio and the use of the option to fair value its own debt, SEK's net financial
gains/losses (unrealized) have been substantial in some years, including 2013 and 2014. However, we believe that
these effects will even out because, in general, SEK's earnings volatility has no economic impact since its portfolio is
largely held to maturity and over time should be earnings neutral. In addition to fair value changes, a settlement
between SEK and Lehman Brothers Finance AG resulted in a positive SEK290 million effect in the second quarter of
2014, following an earlier dispute on the valuation of certain derivatives contracts.
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Swedish Export Credit Corp.
Table 3
Swedish Export Credit Corp. Capital And Earnings
--Year-ended Dec. 31-(%)
2014*
2013
2012
2011
2010
Tier 1 capital ratio
17.1
19.5
23.0
23.3
22.4
S&P RAC ratio before diversification
N.M.
16.1
16.2
16.8
14.6
S&P RAC ratio after diversification
N.M.
16.0
13.5
14.8
12.8
Adjusted common equity/total adjusted capital
100.0
100.0
100.0
100.0
100.0
Net interest income/operating revenues
65.6
79.4
137.0
78.2
103.7
Fee income/operating revenues
(0.4)
(0.3)
0.0
(0.1)
(0.0)
Market-sensitive income/operating revenues
34.8
20.9
(37.0)
21.9
(3.7)
Noninterest expenses/operating revenues
23.6
26.1
39.7
20.9
25.4
Preprovision operating income/average assets
0.5
0.5
0.3
0.6
0.4
Core earnings/average managed assets
0.4
0.4
0.2
0.4
0.3
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Table 4
Swedish Export Credit Corp. Risk-Adjusted Capital Framework Data
Exposure*
Basel II
RWA
Average Basel
II RW (%)
Standard &
Poor's RWA
Average Standard
& Poor's RW (%)
170,912
1,013
1
6,172
4
Institutions
67,352
17,300
26
13,834
21
Corporate
71,855
42,675
59
54,896
76
1
0
0
1
66
0
0
0
0
0
7,804
8,750
112
10,184
130
0
0
0
0
0
317,924
69,738
22
85,086
27
Equity in the banking book†
0
0
0
0
0
Trading book market risk
--
0
--
0
--
--
0
--
0
--
--
--
--
0
--
--
3,400
--
6,004
--
Basel II
RWA
Standard &
Poor's RWA
% of Standard &
Poor's RWA
74,766
91,090
100
--
529
1
(Mil. SEK)
Credit risk
Government and central banks
Retail
Of which mortgage
Securitization§
Other assets
Total credit risk
Market risk
Total market risk
Insurance risk
Total insurance risk
Operational risk
Total operational risk
(Mil. SEK)
Diversification adjustments
RWA before diversification
Total Diversification/Concentration
Adjustments
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Swedish Export Credit Corp.
Table 4
Swedish Export Credit Corp. Risk-Adjusted Capital Framework Data (cont.)
RWA after diversification
(Mil. SEK)
74,766
91,620
101
Tier 1
capital
Tier 1 ratio (%)
Total adjusted
capital
Standard & Poor's
RAC ratio (%)
Capital ratio before adjustments
14,640
19.6
14,643
16.1
Capital ratio after adjustments‡
14,640
19.5
14,643
16.0
Capital ratio
*Exposure at default. §Securitisation exposure includes the securitisation 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: Moderate due to concentration and complexity
We consider SEK's risk position "moderate," on the basis of the company's concentration risk, arising from largely
unguaranteed corporate exposures, bond investments that we consider to constitute lending, and its complex
operational structure, which results from substantial activity in the structured funding market. However, the company's
loss history is exceptional and should continue being strong, in our opinion.
SEK has, in our view, concentrations to unguaranteed corporate exposures to large Swedish export companies in the
form of bond investments. We also believe SEK faces further concentration risk, deriving from financial institutions,
through the guarantees they provide and the counterparty exposures in its derivative transactions, an element of
concentration which is not captured in our RAC framework. However, we note that there is a counterbalancing effect,
which is the double default risk mitigation, requiring both the guarantor and the underlying guaranteed corporate to
default in order for a loss to materialize in a lending transaction and note that the vast majority of losses the bank has
faced have been due to bank failures and investments in collateralized debt obligations in its liquidity portfolio.
SEK has, in our view, a complex operational setup, with a large part of its funding being structured. This requires
extensive use of complex and fairly illiquid derivatives, which in some circumstances can be difficult to value and
renew if necessary. However, the company has strengthened its resources significantly over the past few years and is
well equipped to manage these risks and valuations in our view.
SEK's loss experience has been exceptional. It had almost no losses until 2008, when it wrote down two collateralized
debt obligations and its loss from its exposure to an Icelandic bank (through its liquidity portfolio). SEK has indicated
its intention to increase its participation in syndicated loans, resulting in slightly more residual risk. These transactions
would typically involve large international end-clients of Swedish exporters, which might increase potential risks in the
loan book. However, we believe SEK is likely to manage these new risks conservatively. Losses should continue being
very small, in our opinion, given the guaranteed nature of the business SEK underwrites and its current de-risking of
the liquidity portfolio to comply with the liquidity coverage ratio.
Table 5
Swedish Export Credit Corp. Risk Position
--Year-ended Dec. 31-(%)
Growth in customer loans
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2014*
2013
2012
2011
2010
3.8
7.6
(0.4)
9.6
(3.0)
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Swedish Export Credit Corp.
Table 5
Swedish Export Credit Corp. Risk Position (cont.)
Total diversification adjustment / S&P RWA before diversification
N.M.
N.M.
19.8
13.7
13.6
Total managed assets/adjusted common equity (x)
20.8
20.9
22.1
24.6
27.9
New loan loss provisions/average customer loans
0.0
0.0
0.0
0.1
(0.0)
Net charge-offs/average customer loans
0.0
0.0
0.0
0.1
(0.1)
Gross nonperforming assets/customer loans + other real estate owned
0.0
0.0
0.0
0.0
0.0
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
Funding and liquidity: Supported by SEK's link to the government, mitigating the wholesale profile,
and its substantial liquidity portfolio
We consider SEK's funding "average" on the basis of its link with the Swedish government and the backup facilities at
the company's disposal. We expect the company to remain entirely wholesale funded, to continue to rely on
nondomestic capital markets, and to keep its large exposure to the structured funding market, factors we consider to
be weaknesses. Conversely, we see the link to the government and the diversity of SEK's funding sources as supportive
factors, which have worked effectively in the past when conditions in certain markets became difficult. SEK's stable
funding ratio of 86% as of year-end 2013 is below the Swedish banking system average. This reflects on the one hand
SEK's short-term financing of the CIRR portfolio, roughly constituting SEK40 billion, and our conservative assumptions
regarding rollover of the project-based loan portfolio, which does not capture the company's policy of effectively
matching assets and liability redemptions and, as such, reducing refinancing risk.
In line with the mandate from the state, SEK has funded the loan portfolio related to CIRR loans (with an average
duration of seven years), which it administrates on behalf of the government, with short-term borrowings that have
maximum tenors of one year. While profitable for the government, the structure gives rise to a duration mismatch and
refinancing risk, which is mitigated by the SEK80 billion 10-year credit facility provided by the Swedish National Debt
Office. As contingent financing, the facility is not included in our funding and liquidity ratios. This facility is renewed
on a yearly basis, dependent on a decision in parliament. On the basis of such availability, we consider the funding
profile to be average, despite a ratio that is well below the industry average.
SEK has reported a net stable funding ratio of around 100% since year-end 2013 and we expect the ratio to remain at
that level, considering SEK's financing structure.
We consider SEK's liquidity to be "adequate" despite its low liquidity ratio of 75% at year-end 2013 (broad liquid assets
to short-term wholesale funding). As for the funding assessment, this ratio ignores the backup facility provided by the
government. As such, we believe the short-term financing of CIRR loans is not the result of an opportunistic strategy
jeopardizing SEK's liquidity situation. Excluding the part dedicated to the CIRR loans, the liquidity ratio would go
above 90%. In our opinion, SEK could cover additional liquidity requirements, if needed, particularly in view of its
close ties with the Swedish government.
SEK's regulatory liquidity coverage ratio, which is a binding requirement in Sweden since Jan, 1 2013, amounted
overall to 621% on June 30, 2014, with levels in euros at 3,456% and 317% in U.S. dollars. This measure is, in our
view, very volatile and influenced by the timing of the company raising funding in the capital markets.
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Swedish Export Credit Corp.
Table 5
Swedish Export Credit Corp. Funding And Liquidity
--Year-ended Dec. 31-(%)
2014*
2013
2012
2011
2010
0.0
0.0
0.0
0.0
0.0
Core deposits/funding base
Customer loans (net)/customer deposits
311,927.5
314,520.4
304,688.9
294,657.5
823,356.0
Long term funding ratio
66.8
66.8
62.7
59.2
59.0
Stable funding ratio
89.6
86.1
82.9
77.9
87.7
Short-term wholesale funding/funding base
35.0
35.0
39.2
42.9
42.7
0.8
0.8
0.6
0.6
0.7
Broad liquid assets/short-term wholesale funding (x)
Net broad liquid assets/short-term customer deposits
Short-term wholesale funding/total wholesale funding
(36,817.5) (39,387.3) (68,063.0) (83,849.5) (196,939.9)
35.0
35.0
39.2
42.9
42.7
2.8
2.6
1.2
1.3
1.6
Narrow liquid assets/3-month wholesale funding (x)
*Data as of June 30.
N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.
External support: Five notches of uplift, owing to SEK's government-related entity status
We qualify SEK as a government-related entity (GRE) under our criteria. According to our methodology for rating
GREs, we consider that SEK:
• Plays a "very important" role for the Swedish government in providing financing to the export sector (which
generates about 50% of Sweden's GDP), especially in times of scarce credit availability.
• Has an "integral" link with the Swedish government, reflecting its 100% ownership of SEK and its supportive stance
toward the company, as well as its mandate to act as the country's sole provider of CIRR export loans to the
Swedish exporters and effectively function as an arm of the government in supporting the sector.
This results in our view that the likelihood that the Swedish government would provide timely and sufficient support, if
needed, to SEK is "extremely high." Our long-term rating on SEK consequently incorporates five notches of uplift
above the SACP.
Additional rating factors: None
No additional factors affect this rating.
Related Criteria And Research
•
•
•
•
•
Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Sept. 18, 2014
Banks: Rating Methodology And Assumptions, Nov. 9, 2011
Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
Bank Capital Methodology And Assumptions, Dec. 6, 2010
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
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Swedish Export Credit Corp.
Anchor Matrix
Economic Risk
Industry
Risk
1
1
2
2
3
4
5
6
7
8
9
10
a
a
a-
bbb+
bbb+
a
a-
a-
bbb+
bbb
bbb
-
-
-
-
bbb
bbb-
-
-
-
3
a-
a-
bbb+
bbb+
bbb
bbb-
bbb-
bb+
-
-
4
bbb+
bbb+
bbb+
5
bbb
bbb
bbb-
bb+
bb
bb
-
bbb+
bbb
6
bbb
bbb
bbb-
bbb-
bb+
bb
bb-
b+
bbb
7
-
bbb
bbb-
bbb-
bbb-
bb+
bb
bb
bb-
b+
bbb-
bbb-
bb+
bb+
bb
bb
bb-
b+
b+
8
-
-
bb+
bb
bb
bb
bb-
bb-
b+
b
9
10
-
-
-
bb
bb-
bb-
b+
b+
b+
b
-
-
-
-
b+
b+
b+
b
b
b-
Ratings Detail (As Of October 2, 2014)
Swedish Export Credit Corp.
Counterparty Credit Rating
AA+/Stable/A-1+
Commercial Paper
Foreign Currency
A-1+
Senior Unsecured
Greater China Regional Scale
cnAAA
Senior Unsecured
A-1+
Senior Unsecured
AA+
Senior Unsecured
AA+/A-1+
Short-Term Debt
A-1+
Subordinated
BBB
Counterparty Credit Ratings History
04-Sep-2009
Foreign Currency
AA+/Stable/A-1+
06-Jul-2009
AA+/Watch Neg/A-1+
06-Jun-2003
AA+/Stable/A-1+
04-Sep-2009
Local Currency
AA+/Stable/A-1+
06-Jul-2009
AA+/Watch Neg/A-1+
06-Jun-2003
AA+/Stable/A-1+
Sovereign Rating
Sweden (Kingdom of) (Unsolicited Ratings)
AAA/Stable/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]
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