Maintaining control over credit risk, the single largest risk in a bank, is fundamental. Long-term relations and a deep knowledge about the customers is at the core of SEB’s risk philosophy and the foundation for a stable and well balanced credit portfolio.
Every credit decision is based on an analysis of the customer’s ability to repay. For smaller household loans this is done through a standardised process, while large loans to corporate and institutional customers require an individual analysis. The quality of SEB’s credit portfolio is high. The bank’s corporate portfolio is dominated by financially strong Nordic and German large corporations. The household lending consists mainly of household mortgages in Sweden, which historically have had a very low risk. The average credit loss level in Sweden during the last ten years (including the financial crisis) mounts to 0.19 per cent of total lending.
Asset quality for the aggregate credit portfolio remained high and the credit loss level continued to be low at 7 basis points.
Banks must ensure that funds are available on demand. Since depositors in a bank may want to withdraw savings at any time, regardless of when the bank receives loan payments, liquidity risks arise. This means that access to liquidity and funding is vital.
The Swedish FSA’s Liquidity Coverage Ratio (LCR) measures to what extent SEB’s liquid assets are sufficient to cover short-term cash outflows in a stressed scenario. The ratio amounted to 168 per cent in aggregate, and 305 and 272 for US dollars and euros, respectively. This is in compliance with the Swedish FSA’s minimum requirement of 100 per cent.
One of the bank’s important roles is to help customers buy and sell various types of securities. In order for this to work, the bank must have a trading portfolio of instruments, including equities, currencies and fixed-income instruments. SEB also maintains liquidity reserves invested in bonds with low risk. Market risk arises in the trading portfolio and the liquidity reserve since their value may decrease.
SEB’s market risk level was relatively low throughout the year, despite high customer activity and volatility in the financial markets.
SEB handles a large number of customer transactions every day. This requires the bank to have reliable systems, wellfunctioning processes and that the employees avoid mistakes. Operational risk involves all types of situations where the bank makes mistakes which can lead to additional costs. This risk also includes fraud or external events.
SEB:s operational losses continued to be low. Benchmarking against members of the Operational Risk Data eXchange Association (ORX) shows that SEB’s operational losses are below peer average.
SEB offers two forms of pension insurance:
- unit-linked insurance, where the customer decides the risk profile, how the savings are to be invested in various funds and where the risk is borne by the customer, and
- traditional life insurance, where SEB assumes responsibility for management of assets and risk, and guarantees a minimum return.
Banks’ risk in life insurance is that the premiums, which are based on assumptions about life expectancy and future claims, are inadequate. There is also a risk that the return on assets will be insufficient to meet the guaranteed minimum return over time. Since most of SEB’s life insurance business consists of unit-linked insurance without any guaranteed return this risk is limited in SEB.
The buffers against insurance risk increased during the year as a result of the favourable development in the market value of the bank’s traditional life portfolios.
In the traditional life insurance portfolios, buffers consisting of assets less guaranteed benefits serve as protection against insurance risk for SEB. The buffers, which are calculated for each investment portfolio, remained at satisfactory levels throughout the year.