M&A announcement

Dec 14, 2017

Summary

SEB agreed to sell its Danish life and pension business for DKK 6.5bn, with closing expected in summer 2018 subject to regulatory approval. The sale supports investment in SEB’s core segments and is expected to lift its pro forma CET1 ratio by ~60 bps.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's SEB call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. At that time, the conference is being recorded today. Jonas Videric, please go ahead. Thank you very much. Good morning to all of you. Thanks for listening in to this call regarding the divestment of SEB Pension in Denmark. Just to make sure that you have the slides, you can find them under our home page, sebgroup.com, under the investor relations and at the bottom left of the page where it is called latest presentations, and the presentation is labeled Divestment Pension Denmark Analyst Call. I will now, as always, Johan and Jan-Erik will go through the presentation, and then we will open up for the Q&A at the end. I am happy to hand it over to you, Johan, to kick it off. Thank you, Jonas, and good morning to you all, and welcome to this analyst call regarding the transaction that we announced this morning. We are very pleased, together with Danica, to announce that we have concluded a mutually beneficial transaction. This deal has clear strategic and long-term financial benefits to SEB and is consistent with our strategy, and therefore will allow us to continue to grow in our core customer segment and accelerate the transformation of the bank. SEB Pension serves a portfolio of life and pension contracts, and they enjoy one of the highest client satisfaction rankings and has a very strong track record in Denmark. It is a very well-run business. We have spent significant time and effort developing this business since it was acquired about 12 years ago. However, to remain competitive and to further develop this business and the customer base, we would have to invest, maybe even invest significantly in local distribution capabilities to be on par with the best. We are therefore convinced that Danske Bank, as one of the largest banks in Denmark, and with a broad local distribution network and an existing life insurance operation, will be the best possible home for this business and its clients. SEB remains very committed to its bancassurance case, and that will continue as is in Sweden and in the Baltic countries. As many of you know, we have a fairly ambitious growth and transformation agenda. In that, Denmark is included and remains one of our most important markets. Our business in Denmark going forward with large corporate and financial institution clients, as well as our asset management business, has grown considerably since we focused our strategy in 2010 on this segment. We will now continue to hone in on these segments, creating further customer value, as well as being committed to profitable growth in Denmark. That was my short introduction remark. I will come back with some concluding comments. Now I will ask Jan-Erik Back to go through the transaction and the financial effects. Jan-Erik. Yeah, thank you, Johan. We are turning to page 2 in the presentation, and just a few words on what we are actually divesting here. We are divesting 100% of the shares in SEB Pension. In fact, two companies, SEB Administration A/S and SEB Pensionsforsikring A/S. Companies that we acquired in 2005 for DKK 2.7 billion. As Johan mentioned earlier, we have developed this business in a good way. We are now handing over a very strong and well-respected business consisting of both traditional and unit-linked life insurance business. About 275 employees and the portfolio of life and pension contracts are included in the transaction. If we then turn to page 3, we will go through some of the financial highlights of the transaction. Here on page 3, you can see that the transaction value amounts to DKK 6.5 billion, with the cash consideration is DKK 5 billion, and the pre-closing dividend is DKK 1.5 billion. That is on top of the dividend we have taken earlier this year of DKK 1.1 billion. We will also upon closing prepay DKK 0.9 billion of debt. The multiples are well in line with the market, and we have, for example, reached a price to book of 2.3 times and a P/E multiple of 12. The transaction is expected to close in the summer of next year and include normal reps and warranties for a transaction of this nature. Johan went through the strategic rationale earlier, but I will just point out that to develop this business, as Johan said, would require considerable further investment. A franchise like this is also exposed to both market and regulatory risk. If we then move on to page 4, we look at the pro forma financial effects. What we have done here is we have tried to keep it simple and transparent. We have decided to show you a pro forma as if the transaction would have closed on 30th September 2017. We do not have to make any further assumptions. SEB Pension contributed with DKK 880 million to the operating income and DKK 292 million of operating expense. That is DKK 588 million to the operating profit line. Credit losses would not have been impacted. The CET1 ratio would increase since the surplus equity would be upstream to the parent company and increase our equity position. Furthermore, we have funded this business with subordinated debt, so the total capital ratio would also increase with an additional part. The total effect positively on CET1 is around 60 basis points pro forma at end of September. Total assets under management in SEB Pension amounted to 129 billion SEK as per the end of September. With that brief overview of the numbers impact, I will hand it back to you, Johan. Thank you. Then I will ask you to switch to the last page 5, what will happen now? Just remind everyone that this transaction is subject to regulatory approvals. Until then, our business plan remains unchanged for 2018, including our cost cap of 22 billion. Of course, everyone is aware that questions are now being raised about the next steps, i.e., is there room for capital repatriation? Where are you going to reinvest for potential M&A activities, et cetera? If this transaction is approved by the authorities, it will of course provide us with a meaningful enhanced flexibility to accelerate and reinforce our growth and transformation plan. That is really aiming at coming into the business plan period of 2019 to 2021 with some increased strategic flexibility. It is definitely not a problem. We have a wide variety of value-creating initiatives that can be contemplated in also the context of this transaction that we then can reinforce. It is our responsibility as management of SEB to always ensure that we create customer value, but also shareholder value in a long-term perspective. That is, of course, the basis for us, that this is going to be better for SEB in the medium to long run. As you might know, we will also present our annual accounts on January 31st. With that, I would actually like to conclude and say happy holidays to everyone on the call. Now we are going to open up for questions. Thank you. As a reminder, if you would like to ask a question, please press star and 1 on your telephone keypad now. That is star and 1 should you wish to ask a question. We have had one question come through from the line of Kim Bergoe. Please ask your question. The line is now open. Hi, this is Kim Bergoe from Deutsche Bank. Just one question from me in terms of you're splitting out the income and cost effect of this. In Denmark, obviously you're staying with banking and I guess particular corporate banking. Are there any sort of cross sales or any other things, or was this very much a standalone unit? That would be my first question. Secondly, in terms of your sort of cost guidance and targets, going further out, is this going to change anything in terms of how you're going to guide and how you think about the cost in the group? Thanks. Hi, Kim. Jan Erik here. No, I think on your first question there in terms of standalone business, I think that the answer to that is broadly, yes. The very successful large corporate financial institutions business that we've been running here for a long time really has no big overlap to this business. That, as Johan said, is also one of the rationales behind the whole thing. To build this business going forward, we would have had, we think, to invest into distribution capacity and create traditional bancassurance, and we don't have that here. So that's exactly the background. Okay. Just to confirm, so when you are talking to corporate clients, have you been selling the pension products with that as well and been offering that product? Are there any of your larger corporate clients that are also clients in the pension business? There is a very limited overlap like that. So not a big effect. Okay, thanks. Then in terms of your second question on cost guidance, Johan again touched on this. We will keep our powder dry here now until we have closing, and that may be hopefully summer next year. We will have to revert to that question, but I think we should proceed to closing first before we can answer that question. Makes sense. Thanks. Thank you. The question comes from the line of Magnus Andersson, KFC question. The line is now open. Yes. Hi. I was just wondering, you are now selling an asset with a very high return. It should be north of 20%, just from your implied price to book multiple and the earnings so far in nine months in this business. You say you want to invest in other areas. Do you really think you can find something with a similar return to invest in? That is number one. Number two, you are saying on the rationale that to continue with this business, it would require significant investments in local distribution capacity, et cetera. Could you say something about what kind of magnitude we are talking about here and whether something has changed here? Has some distribution agreement expired or has something changed, or is there any other issues like capital or something else? Just trying to get my head around the rationale here for selling this highly profitable business. Hi, Magnus Andersson. Erik, Jan-Erik Back again. You are right. This is certainly a healthy business as we stand today. I think the view that we have taken here is that this is the right time for us to sell to a willing buyer, and we are doing that at a good price, and we are avoiding a lot of investments that we would have had to take otherwise. Of course, our intention is to redeploy the funds into something that is also high yielding. Again, I think we should just wait the transactions actually close before we actually move into what those areas are. As you and Jonas Odberg said earlier, the building of the updated business plan is something that we are working on now. So we will come back to you and talk about that. Just on the distribution, what kind of investments, what is it that you would have had to do to stay with this business? It must be really significant. I think I would like to answer that question about what is required. I cannot give you a number, but think about the way we talk about our bancassurance model in Sweden and in the Baltics. If you want to conduct a business like this and give your employees and your clients the best possible platform to win in a very competitive market, where margin mixes are working against you, and you need to compensate for tough margins, tough competitive environment through volume growth. You need a very well-established physical network because you get some income from there in terms of meeting clients face to face. You need a well-established online platform, both mobile and on the internet for the mass market, for people in the country, but also for the mass market corporate, SMEs, and mid corp. As you know, SEB doesn't really have an ambition to grow or even be conducting business in the mass market of Denmark. This is not a change in our view. This asset was bought 12 years ago, and this is really a time in this cycle of owning this asset, where we find a very good buyer. They don't come around that often, good price, and that we can reinvest in the core segments of ours, which is not mass market Denmark. The strategic rationale, if I put the text out, is really that it's going to be very expensive. That's my view. Very expensive to get every distribution channel up in the level where I would call it state of art to give this business the best platform for the coming 5 to 10 years. We would rather invest in other things. In other words, you think you're selling this at peak profitability now? Yes, for us. In our business plan, if we were to do the forward looking assessment, this would be a drag for us in a very competitive market without super distribution. Of course, this is a perfect situation where you have a new buyer who can have synergies and put it into the remaining platform. Danske Bank rationale for this is identical to ours, but we have the universal banking effort. Okay. Finally, will there be any transaction costs related to this when the deal closes? I wish I could say no, but I will ask Jonas Odberg to answer the question. There will be transaction costs involved, but we have not gone into normal for a deal like this. We have not gone into the details of that until we will distribute that on the closing. Okay. Just one more thing. Your target of operating profitability for 2018, will it now be DKK 23 billion instead of DKK 24 billion. That is it. We are still aiming high, Magnus Andersson. As we are always. Okay. Thanks very much. As a reminder, it's star and one on your telephone keypad should you wish to ask a question. No further questions at this time. Please continue. Okay. If there are no further questions, we read that it was a transparent disclosure regarding this. Thank you very much for the interest in today's call, and please feel free to reach out to any of us in IR during the rest of the day. Thanks a lot, and enjoy the rest of the day. That does conclude our conference call today. Thank you for participating. You may now disconnect.