Earnings Call: Q4 2019

Jan 29, 2020

Ladies and gentlemen, thank you for standing by and welcome to the SCB's Q4 2019 Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to speaker today, C. J. St. Thank you. Please go ahead. Thank you, Andrea, and good morning, everyone. This is Madsje and sitting with me here today is Christophe Geiger, Head of IR. I'll do a very brief intro to this call and then we'll open up for Q and A. And in the intro, I trust you've seen the numbers. I won't repeat them that much. I'm just going to repeat some of the guidance we gave in the report as well as during the press conference this morning. So firstly, starting with net interest income, we have two changes impacting 2020. The first one is the repo rate hike that we saw in December 2019. We said this morning that we expect the gross impact of that rate hike to be about SEK 1,000,000,000 in 2020. That impact includes what happens to the liability side of the bank's balance sheet that includes both the deposits as well as the equity base and also the reference rate floors on the lending side. In terms of lending margins, we don't have a guidance. We don't know how they will develop during 2020, but just including the liability side and the reference rate floors, we expect a positive impact of SEK 1,000,000,000 Also in 2020, the resolution fund fee will be reduced from 9 to 5 basis points. We expect a positive impact from that of about SEK 600,000,000 Now that's sort of the fee you pay is risk adjusted every year. It's the Swedish debt office that makes that risk adjustment depending on how a few key ratio changes versus other banks. And we don't know what that how that's going to end up. So we say SEK 600,000,000 plusminus SEK 100,000,000 and we typically find this out by end of April, early May. On capital, we ended the year on a strong note with a quarterly improvement of 120 basis points, ending the year at 250 basis points with a dividend proposal from the board. There is nothing extraordinary in those numbers, I would say. So it's more sort of recovering from a lot headwinds on FX and interest rates prior to Q4 in 2019. So that number is, in our view, very much normalized, but then a lot of things could happen with FX and interest rates in 2020. So it's difficult to sort of predict how this will end up. But we feel that, that kind of a buffer, given the regulatory uncertainty and the certainties, one certainty is the commercial and residential risk weight floors that will be introduced in Q3 2020. We estimate an increase of our capital comments because of that of 60 basis points. So pro form a, the 250 basis points will be 190 basis points. So given that and then future regulatory uncertainty on EBA guidelines and TRIM exercises Basel IV, we think that the level of capital we have now is sort of prudent and sufficient given the fact that we want to have some dry powder would the corporate sector especially see more demand for lending? Maybe if that's conjunction with sort of capital markets freezing a bit compared to the various sort of active levels we've seen in 2019 and early 2020. That's pretty much it. And I'll open up for Q and A. So back to you, operator. Thank you. And first question comes from the line of Johan Igloo. Thank you. Your line is now open. Thank you very much. Just a couple of questions. If we can start on the risk weighted asset development and outlook. Just looking through the fact book, it looks like the risk weighted assets related to FX risk have disappeared. I'm just trying to understand what has changed there. And then maybe if you can elaborate a bit on the market risk. So I guess you said on the press conference that Q4 is seasonally a bit lower. But I guess even in historical context, it's pretty low now. How should we think about your appetite for taking on market risk, in particular if we see some higher volatility? And then on a forward looking basis, I mean, you flagged some of the potential headwinds in terms of RWAs and capital requirements. Apart from the CRE add on, is there anything else you expect to be finalized in 2020? Or are they kind of beyond this period? And then I guess related to that, you've seen a big growth in your real estate management portfolio in the last year of about 10%. Are you pricing new loans today on the basis of the capital add on? And then I guess final question, just a clarification. On the deposit guarantee fee, which was very low in Q4, what's your expected run rate for next year? Okay. Thank you very much, Johan. I'll try to remember all of your questions. On Ria, you're right, the FX risk has disappeared. That's due to a model approval from the Swedish FSA. So typically, you don't have to hold capital against structural FX positions in the bank. We have some structural FX positions. And during Q4, we applied to get the CapEx for those structural positions removed and the FSA approved that application from us. On market risk, I think some of the reduction, as I said earlier this morning, is due to the fact that in Q4, it is typically lower. But I also think that some of it is structural. A large part of the market risk exposure amount is due to stressed VAR. So you applied a very stressed situation on your sort of real value at risk. That stress situation is based on a Lehman scenario. And it's difficult to fully understand when you take on positions in the bank exactly how the stress bar will end up based on those positions. But I think the business, mainly during this year, but obviously continuously, but mainly during the latter part of this year, start to get a much better understanding of that. So they've been much better at managing the positions they take on. I think it has had no impact on the actual revenue generation on and sort of the potential for future revenue generation. It's just managing risks better, understanding what risks that drive capital requirements. Forward looking on capital, I mentioned the CRE risk rate floor. Anything else in 2020? I can't really say anything happening. There are a couple of very, very small countercyclical buffers changing in 2020 in some jurisdictions where we operate, but I expect the impact of that to be less than 10 basis points. I hope and think that maybe at some point during 2020, the Swedish FSA will come out and say something about the future capital requirements of the Swedish banks, given the bank package that will be introduced because some of the pillar 2 comments we have, you're not really allowed to have in banks given the bank package and then whether the EBA guidelines are expected to have any sort of impact on us. And so I hope that at some point, they'll just come out with some kind of directional view on where the capital promise of Swedish banks will move given the new regimes that will be introduced with the bank package, and I hope that will happen in 2020. On Real Estate Management, yes, we have taken into account the increased capital requirements from the Swedish FTSE. So we will now, in 2020, allocate capital to the divisions based on the higher risk weights. It means that if they don't reprice, the divisional return on business equity will decline. So we'll see how that ends up. I think that there is a lot of pressure, obviously, because it's a very strong increase in risk weights for these kind of exposures. So unless we reprice the return on equity will come down quite significantly. So I hope and believe that to some extent, you're going to see some margin improvements in these sectors. It's likely to be less for large commercial real estate as they have an alternative funding source in the capital markets. When it comes to the residential part, especially the smaller corporate clients we have, it should be slightly easier to reprice. But exactly what the magnitude will be and how long it takes, it's too early to say. And then finally, deposit guarantee. Again, there's a risk adjustment there, too, and we had a negative risk adjustment in 2019. I don't I can't I don't dare to predict how that's going to look in 2020. But generally, as risk as deposits, guaranteed deposits increase year over year and if you assume an unchanged risk adjustments, then this fee should year over year go up. It's not very many million in nominal terms, but it should sort of continuously go up as guaranteed deposits increase. But if we look at the full year number then rather than the Q4 as a base, that should give us a good starting point? Yes. Thank you. Thank you. Next question comes from the line of Riccardo Rovere. Thank you. Your line is now open. Good morning to everybody. Three questions, if I may. The first one is just trying to get a feeling. You had very, very strong trading gains this quarter. You had stronger or let's say, maybe abnormal seasonality in cost and provision. I was wondering whether besides the opportunity of such a strong trading gains to book in advance some cost and maybe some provisions to start 2020, let's say, in a cleaner way. Is that would you agree a little bit with that? This is my first question. The second question I have is, you mentioned this morning during the press conference that part of of the improvement in the capital ratio was due to the pension side of your assets and liabilities with better with higher rates. Now rates are going down again. I don't know how they will end up at the end of the quarter. But if you had to throw a ballpark with the current level of rates, did you be able and would you be in the position to give us an idea where would what would be the impact on capital from the current level of rights? And the third question I have is from a business activity perspective, do you see anything that is absolutely extraordinary that we have seen in 2019, some levels that cannot be, cannot go on like that for a long time? Okay. Thank you, Ricardo. On the first question, which was clearly put, did we do any kitchen sinking in Q4? No, we didn't do that. I think the cost level and the sort of provisional level is accurate in terms of how it looked in Q4. And now costs are seasonally higher and the provision level is elevated. We do say that. We don't believe that the 18 basis points of Q4 is something you should extrapolate, but it has nothing to do with how the income side of the bank developed during the quarter. On the capital ratio, it's yes, you're right. Long term rates have started to come down a bit early this year. I can't say at this point how much that will impact the discount rate for pension liabilities and how that will impact the capital position because you have to look at the asset side, too. And if you look at the asset side, equity markets on average are slightly up so far this year. Whether that's enough to compensate for a potential decline of discount rates, I can't really say. I have to look into an Excel sheet to say that, but I mean, it's just 1 month into a quarter. So I can't really predict anything there. Business activity, if there's anything extraordinary, again, very difficult to say. We had very many years with, to some extent, low activity in some areas in the bank, corporate finance to some degree, ECM to some degree, even though maybe DCM has structurally sort of increased year over year. But then we have been surprised for a couple of years when we had strong GDP growth and didn't really see corporate activity pick up. Now maybe to some extent, we've been surprised that corporate activity has continued to be elevated for maybe a longer period than what macro indicators would suggest. So it's difficult to say. But I don't think I mean, the business plan, the what we plan for the future is to increase revenues also in the large corporate and financial institution sector, also in the areas where the numbers in 2019 look strong. So the plan is for the advisory business, the capital light business in the bank to be enhanced and improved year over year. Thanks, Matthew. Very, very clear. Thank you. Next question comes from the line of Sophie Peterson. Thank you. Your line is now open. Yes. Hi. Yuri Sophie from JPMorgan. So just a quick or a question on the details that you provided in the Q4 on your Estonian flows. So you gave the number of €85,000,000,000 of flows that you have seen from the nonresident clients out of which you deem €25,000,000,000 being low high risk. Could you just give a little bit more details on how you define kind of low risk customer or a low risk nonresident customer in which country or what's the residency of the customers that are you consider low risk? Are they from Russia or are they Nordic people? Or really what are the kind of criteria that you use to deem that these €60,000,000,000 or so are low risk flows? And then I also wanted to ask, you earlier suggested that other expenses in the bank will fall to meet kind of your guidance on more investments in AML and also strategic investments. Could you just give a little bit more details on where these cost savings are going to come from? So that would be my questions. Thank you. Okay. Thank you, Sophie. On the Estonia flows, in the press release, we had there's an Excel sheet as well there where you can see the criteria for putting something on low transparency. We call it low transparency, not high risk, and we call it sort of elevated risk. It's difficult to say whether it's high risk or not. We can just say that what we knew about the clients back 10, 15 years ago would not be sufficient based on the requirements we have today on know your customer, and that's why we put them in that. But I think you had 17 criteria. You can look through those. I don't remember them by heart right now. When it comes to the Yes. On the 17 criteria, you actually don't disclose them as far as I know because I tried to ask for those, but they were not disclosed. So if you can share those with us now, that would be great. I'll look into that. It's a very sort of in-depth bottom up analysis of this. It has to do with, generally speaking, do we understand whether the flows that we see through the bank can be coupled and correlated with the sort of general business activities they have described that they have? Can we prove the transaction flows with different invoices we've seen? Do we have copies of the invoices? Do we have photos of the plans that they say that they have given the transaction flows? So a lot of different criteria. It has to do with do we understand the business and what kind of evidence do we have of understanding the business. So that's just a general description. We'll see whether we sort of sometime in the future come out with some kind of disclosure on the exact criteria that we have used. On the non residents, excluding the low transparency, we haven't disclosed what that is exactly, but we've said in the past that the non residents this bank has, has to do with the customers we have in our home markets. So typically, if you look at Estonia, the nonresidents would be corporates from Latvia, Lithuania, Sweden, Norway, Finland, Germany. Those kind of countries is the absolute lion's share of the non residents in Estonia. Sorry, can I just ask a question on that? So what you basically are saying is that you basically have a Swedish corporate who will open a bank account with SEB in Estonia, not be a registered company in Estonia, but just have a bank account with in SEB Estonia. Why would they do that? What's the rationale typically for a Swedish corporate to open a bank account with SEB in Estonia if you're not a registered company in Estonia? So can you just maybe explain a little bit how the rationale works? Well, when you say registered, I'm not sure if that's sort of in line with our definition. What we have as our definition of nonresidents, if it's a company with a residency outside of the country where they have the relationship with us. So a Swedish company in Well, I'm just looking at the Estonian Daxon Customers Board and how they kind of define nonresident clients. And they say nonresident clients are all corporates that are not registered in Estonia. So I'm just curious to understand how it would in practice work if you're a Swedish corporate and you have a bank account with a CV in Estonia, but you are not a registered company in Estonia, like why would you do that? Why wouldn't you just if you buy something from Estonia, why wouldn't you just buy it straight from your Swedish bank account? So if you can just explain that concept, that would be great. Well, what I'm trying to answer is that what are the nonresidents that we have in Estonia? And I mean, I gave you my answer and you can sort of decide whether you want to trust that or not, but the non residents, a big lion's share of the non residents we have in Estonia are corporates from the other home countries that we have. Okay. And what about on the cost side? Yes. On the cost side, Yes. So we have given that we plan to invest in these strategic initiatives and given that we are slightly above the plan, mainly due to investments in our AML capabilities. And since we reiterate our cost target, the other expenses, so everything excluding initiatives and AML will have to be reduced. There are a few drivers of how we'll intend to achieve this. One is actually within an initiative, but the cost benefit comes outside initiatives. So that's in the critical enablers. If you look at the presentation, we have something called end to end automation. This has to do with automating different back office processes and operations processes in the bank. So for example, you have a lot of payments in a bank. Some of the payments are dealt with manually and a lot of them are dealt with automatically. But you can sort of continuously make these processes more efficient, which will over time reduce the number of FTEs you need to do these processes. You can use robotics, for example. And this is something we've been working with for 10 years. We accelerated this in 2019 and invested some money into this. And the benefit comes in terms of FTE reductions, both in Business Support as well as in the divisions. That's part of the automation initiative. Another part is to move FTEs from Sweden to the Baltic countries. Currently, we actually have 5,000 out of the 15,000 employed in the bank in the Baltic countries. Not all of them work in the Baltic division. Some of them a large part of them actually work in the what we call the global service centers, helping out the divisions in operations, for example. So it's a general sort of efficiency effort we do that will sort of reduce the general cost base of the bank. It's something we've done for 10 years, but it will have accelerated it a bit in 2019 by investing more in this automation process. That's one part. But then generally also, we work continuously in the divisions by taking out low performers and then adding people that we think will do better and then a lot of efficiencies done there as well. So it's yes, continuous sort of modeling on and trying to reduce costs in the operations that we have. Okay. Thank you very much. Thank you. Thank you. No further questions at this time. Please continue. Okay. That was it. Thank you very much for joining this morning. We're going on the road now to London and New York. So hope to maybe see some of you there. Thank you. Have a good day. Thank you. And that does conclude our conference for today. Thank you for participating.