Earnings Call: Q3 2019

Oct 23, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the SEB's Q3 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 I would now like to hand the conference over to the first speaker today, Mr. Masi Yazi. Thank you. Please go ahead. Thank you very much. This is Masi Yazi, Finance Director, and I have together here with me Christophe De Geyer, Head of IR. I'll just do a short introduction, and then I'll open up for Q and A. So I'll just go through the numbers quickly so that you have all the information we also gave this morning at the press conference. If I start with net interest income, as you've seen, it's up 5% quarter on quarter. That's mainly driven by the lending growth we've had, but also partly driven by the lower funding costs. In addition to that, as you probably used to since the past, is that we sometimes have some volatility in our net interest income coming from our markets business. We note this quarter that NII from our markets business is about SEK 100,000,000 higher than the average over the last 8 quarters. And we expect this to come down over time. Exactly when that happens, it's difficult to say. It could be right away in Q4. It could be later on. But over time, it's about SEK 100,000,000 elevated, I would say. This is sort of money that is creating a traffic between net interest income and NFI, net financial income. Of the If I move to commission income, which is up 4% compared to the same quarter last year, that is very much driven by lending fees, payment fees and card fees as well as advisory fees that are about double the level compared to the same quarter last year. Nothing strange in those numbers, I would say. So this line is clean. And F5, as you're used to, we typically guide for that number to be between SEK 1,200,000,000 and SEK 1,400,000,000 excluding XVA and excluding treasury. This quarter will land at SEK 1,200,000,000. So just to comment on that. So I mentioned SEK 100,000,000 that is sort of going from NFI to NII this quarter. In addition to that, we have negative XVA effects of SEK 160,000,000 this quarter, and then we have approximately SEK 100,000,000 negative effect due to the sharp decline in interest rates that happened mainly in August, which has an impact on valuations on bonds in treasury, but also negative impact in our life business. So if you adjust for that, the level, I would say, in this quarter is pretty much in line with previous quarters, and we have no reason to, at this point, change the guidance we've given on that line. Moving to costs. They are up 3% year on year so far this year. If you adjust for FX, that level will be 2% up. And that 2% is very much in line with the cost target we set in our business plan in December last year. So costs are developing according to the plan that we've set within the bank. Credit losses, 9 basis points this quarter. It's up slightly from the previous quarter. A large amount of that increase is due to the changed assumptions on the macroeconomical outlook that our Chief Economist and his team did earlier in Q3. They increased the likelihood of a negative scenario when it comes to global GDP and Swedish GDP, which leads to higher reserves for expected credit losses. If you adjust for that, the nominal credit loss level would be approximately same level as we had the previous quarter. And then finally, on capital, you can see that our buffer declined by 20 basis points in the quarter. That is very much due to FX headwinds, continue to have that as the Swedish kroner has continued to depreciate as well as the falling interest rates leading to a lower discount rate for our pension liabilities. The requirement this quarter is flat for us. So even though we had an increased countercyclical buffer that increased requirement by about 30 basis points, that has been offset by lower Pillar 2 requirements for pension risk as well as interest rate risk in the banking books. So the requirement is unchanged at 14.7 with a ratio of 16.4, the buffer stands at 170 above the around 150 basis points management target that we have set. With that, I'll open up for Q and A. So back to the operator. Thank you. Your first question comes from the line of Nicolas Magdyss. So first, a question on the dividend and the growth. I mean, you've been approaching your management buffer target here over the next few quarters. And if you could elaborate a bit how you think about the balance and priority between continuing to grow in your loan book and increasing ordinary dividend in line with your dividend ambition? Okay. Yes, I mean, we started the year with a buffer of 2 70 basis points, and it's been almost a perfect storm ever since with the krona coming down quite significantly and with interest rates falling. And in addition to that, we've had very strong credit growth. So we're very happy that we started the year with the buffer that we had, and we've been able to consume that buffer in a good way, I think, generally, as the business we have had this year has had a good ROE on it. Now obviously, at this point in time, we have a smaller buffer than we started the year. Saying that, I think it's also very unlikely that credit growth continues to be at a very high level. It has been the last couple of years, given the macro outlook, it should come down. But in the end, obviously, there could at some point be a conflict between raising the dividend and continue to grow at this rate. And I think in the end, it's going to be up to the board to exactly decide on what dividend they want to propose for next year over this year in early next year. So we'll see what that how that discussion goes. But typically, if you look at the business we're doing right now, return on equity is around 13%, which is obviously above cost of equity. So from that standpoint, it creates more value in our view, both for the customers as well as for the shareholders to continue to grow if we have that opportunity. Okay. And then if you could just summarize or spell out what is the expected changes to your capital position and capital requirements that you foresee over the next few quarters? Yes. So if I take Q4, what's happened so far this quarter is that FX is pretty much unchanged so far. We have interest rates coming up by 20, 25, 30 basis points. And so if that sort of stays at the current level, that will be positive for our discount rate for pension liabilities. We know in December that we will have a couple of hikes in a couple of jurisdictions on the Candacellica buffer. It's not a massive impact, but that's going to come up by a few basis points when it comes to requirements. And then obviously, we're going to hopefully generate some profits. So that's sort of the Q4 development. I think we have a good chance of showing a buffer in line with this quarter or maybe above this level, assuming that the board does what it usually does, which is increase the EPS by 0.25. Then past that, so next year, we know that there will be some kind of proposition from the Swedish FSA on the commercial real estate. We have no idea at this point exactly what that will be, what the scope for that will be and how much they want to raise the risk rates. So we'll have to see how that comes into force, but I think that will be in the autumn of 2020. In addition to that, looking beyond that, we have the bank package that will be introduced in 2021. And then obviously, beyond that, we have Basel IV. And when it comes to both of those introductions, it's very difficult at this point to say exactly how they will look and to what extent the Swedish FSA will offset any negative effects from the bank package and Basel IV. So we'll just have to wait and see for that. Okay. That's clear. And then second question, a bit more long term. If you have attempted any assessment or quantifications of lending potential into sustainable finance like renewable energy and energy efficiency, if and if that's something you could share? Yes, we have. We set up a new energy team, a global one in the sense that we have people in our all our home markets working in a virtual energy team now. And that's part of our advisory initiative that we presented with the business plan, and it has a very sort of sustainable tilt to it. We've done some work on how we think that renewable energy will grow in the next 10 years, And we see an expanding profit pool, and we think that we as a bank could be a very good adviser to our customers. Both the customers that we have today that will be in a transitional process moving from fossil fuels to more renewable energy in the coming 10 years, but also to potentially new customers that are already sort of in renewable energy to who we can advise a different kind of energy solutions. So we've set up a team. I think there are more than 10 people now, and it's part of our adviser initiative. So obviously, we view that as a very good potential for us going forward. Okay. Thank you. Thank you. Your next question comes from the line of Adrian Cighi. Please ask your question. Hi there. Thank you very much for taking my question. Just one follow-up on capital, please. We're still expecting, as you noted, some measures from the Swedish FSAs on commercial real estate potentially in December. Do we have any more insight as to what footprint this will cover? Is this all commercial real estate or just sort of the residential? And just to clarify on your buffer, does the 150 basis points buffer cater to headwinds from the regulator? Would you be comfortable lowering that buffer once we know the impact? Or will you offset the potential higher capital with other measures like a lower dividend or sort of potentially other measures? Thank you. Okay. Thank you, Adrian. On the commercial real estate, no. What we know so far is that it will only cover Swedish exposures and nothing outside of Sweden. Whether it's going to be both commercial or residential property as well, we don't know at this point. It could be both. It could be just one of them. So we'll just have to wait and see. I think the FSA has said that they will publish something in November, so not too many weeks off. That's all we know. When it comes to the buffer, the buffer is set at around SEK 150,000,000 to cater for FX headwinds, I. E, the krona weakening and also to cater for the discount rate for pension liabilities coming down. The buffer is not there to offset any regulatory changes. Obviously, would there be some kind of regulatory change now? It wouldn't be the first time. We've had many of those in the last few years. I think just to have as a background, we generate about 2 50 basis points of capital per year pre dividend. And I think as long as you do that as a bank, you really don't have any capital concerns because you're generating enough capital to offset different types of uncertainties. Obviously, you might have to, at some points, adjust the dividend if something happens that are that's extraordinary. But in the last 10 years, we haven't had to do that even though we've had several regulatory surprises. That's very fair. Thank you very much. Thank you. Your next question comes from the line of Sophie Bathersens. Please ask your question. Yes. Hi. Here is Sophie from JPMorgan. So I was looking at the corporate and private customer net interest income. It's down 2% quarter on quarter, but your volumes were up 2% quarter yes, 2% up quarter on quarter, and you had also positive decon effect. Could you just elaborate a little bit on why the NII in the Swedish retail business was so weak? Yes. Hi, Sophie. We can do that. There are 2 main reasons for that. The first one is the adjustment on the deposit guarantee scheme that we had this quarter. That's a SEK 68,000,000 negative, and I think all of that hit the CMPC division. In addition to that, there is an add on change, I. E, internal funds transfer pricing change for Swedish deposits. So the most sticky deposits that we have, which meant that Treasury paid less for those deposits to CMPC, which had a negative effect of, I think, around SEK 35,000,000 this quarter. So if you include both those, it's a negative impact of SEK 100,000,000 on CMPC Q on Q. So I think if you adjust for those 2, you will see that CMPC's NII grew Q on Q. Okay. That's clear. And then I was wondering on asset quality, you mentioned that you took a little bit higher provisions this quarter. Do you the curve NPLs going forward? If I look back, NPLs are up 37% year on year, and we have seen NPLs rising every quarter this year. Is that all due to macro adjustments? Or is there something else in the NPL number? No, I don't think that's driven by macro adjustments. That's I mean, first of all, you have to have in mind or look at how much our balance sheet has grown. So you have to compare the development of NPLs with the balance sheet in general. So first of all, I would do that adjustment. No, I mean, there's been an increase in loan losses or expected loan losses. You can see that in the numbers from very low levels starting 2018, and then that has creeped up to a more sort of normal but still low level of 8, 9 basis points, and we saw an uptick this quarter as well. It's driven by a handful credits here and there. It's mainly within LC and FI, and it's different sectors. We can't really see a linkage to a general macro development and the expected loan losses that we've had. And we've dug pretty deeply into this. And everyone all the sort of people in credits we have, they're very experienced. They say that there is no correlation between the expected loan losses that we've had right now and the deteriorating macro. So we don't see that correlation at all at this point. Okay. And my last question would be one of your peers was announcing that they are closing down some of the international operations because in the current environment, it's just less profitable to operate in noncore markets. Are you considering anything similar, especially considering that you have still operations in countries like Ukraine? No, we're not. The way we look at it is that the offering we have to our customers, I mean, we have very international customers. We help them across the globe. And it's been very good for us to be able to help them in other jurisdictions than only the Nordic countries. So the branches we have, the rep offices that we have across the globe, we think, has been very beneficial for us to serve our customers. So that's how we look at it. Okay, great. Thank you. Thank you. Your next question comes from the line of Riccardo Lobir. Please ask your question. Yes. Good afternoon to everybody and thanks for taking my question. Couple, if I may. The first one is again on, let's say, the dilemma between growth and dividends. It was very clear, your comment right at the beginning. But I was wondering whether at the current stage, you see less growth opportunities than, let's say, 12 months ago or 6 months ago because of the deteriorating macro outlook? Or do you think you can and the growth opportunities you see are exactly the same? This is my first question. Second question I have is on the cost of medium to long term funding. When it comes to, let's say, replace the maturing covered bonds, the maturing senior unsecured or when it comes to issue senior nonpreferred, what is would you be able to quantify a little bit the lower coupons that you are paying today in respect of what comes to expiry? Yes. Thank you, Ricardo, for those two questions. When it comes to growth opportunities, I mean, I think I have 2 answers to that question. The first answer is no, we don't see a difference because the business, when we talk to them, they say that the pipeline looks healthy. It continues to look good. So from that perspective, no, there's not a difference. But then the sort of the second answer will be, yes, there is a difference because if you look at what's happened in the last 6 months, you can see that growth outlook has deteriorated. Every economist out there and also the fixed income market is telling us that macro is slowing down. So I mean, we obviously look at cycle. And it's likely the end of this cycle. And it's likely that when that happens, you will see less growth. That's how it usually is. That's how it's supposed to be. So just from our perspective bottom up, no change. Top down, yes, there is a change. On the funding side, I think generally, when it comes to the normal types of funding, so cover bonds, senior, senior bonds and also senior nonpreferred, all of those are passed on. The funding cost for those are passed on to the customers. So if the funding cost goes down, it doesn't really matter. It's going to be passed on to customers. And if it goes up, it doesn't really matter. The only time it matters if we if our funding costs differ compared to our peers, and I can't really see that, that has happened to any large scale. The only part of the sort of liability side of the balance sheet I would look more closely at is sort of the hybrid capital instruments that we have to issue, so the Tier 2s and the additional Tier 1 instruments, those costs are usually not passed on to the customer to the same degree. So if the funding costs for those go up or down, we will replace that prior to that. So when we issue that, if that is issued at a price lower than the last one and if the volume is different to the last one, that could have a positive or negative effect on NII. So when I analyze that, I will more look into sort of the hybrid capital instruments rather than the sort of normal funding operations as those costs are instruments rather than the sort of normal funding operations as those costs are typically passed on. Okay, okay. Very clear. Thanks. Thank you. Your next question comes from the line of Richard Smith. Please ask your question. Yes. Hi, there. Thanks for taking my question. 2 for me, please. I guess the first, I was just looking at the lending growth that you saw in the quarter on Page 34 of the report. And it looks like a chunk of that growth has come through from the finance and insurance segment. I just wanted to check if that was something that we were expecting to persist or if that was sort of more short dated lending that may be rolling off. And if it is going to roll off, what the impact of that might be in terms of NII, I. E, is it sort of higher or lower margin? And then second one was just on the update on sort of FSA investigation and things like that. I mean, I took the comments that you made in terms of the press conference this morning that it's difficult to split out the exact amount that you're investing in AML and things like that. But I just wondered if there were any additional programs that you launched since sort of conducting your own response to the FSA that you could call out in terms of kind of number of initiatives in the wash or anything like that? Thanks very much. Okay. Thank you for that, Richard. Lending growth, when it comes to I mean, I think I can answer that generally. The lending growth we've had in the last 12 months is extremely broad based. So we looked at the 40 largest customers we have in the bank, and we can see that 30 of those 40 have increased lending in the last 12 months. And also, we mentioned a number of SEK 100,000,000,000 in corporate lending growth FX adjusted in last 12 months. Those SEK 100,000,000,000, EUR 80,000,000 of those EUR 100,000,000 comes from 30 single customers. So it and those 30 customers, we know very, very well, and we've been doing business with them for a long time. Finance and insurance, exactly. I mean, maybe. I mean, you've probably heard of a deal we did during Q3, EQT, could be linked to that if it's increasing something due to that, if there's any funding or bridge loan. But these type of loans, they go up and down. And sometimes, we have bridge loans that are 3 to 6 months, and then they go down again and then issue a new one. So I think, generally, activity has been high. And we've had short term loans earlier quarters that have been replaced with new short term loans coming next few quarters. I would more generally look at the activity level. FSA investigation, no, we haven't done any sort of additional programs. I think maybe to some degree, the whole focus on AML has sort of accelerated existing programs. I think that's really what has happened. So nothing that's been additional. And if you look at our cost levels so far this year, it's very much in line with the business plan that we set in December. So there's nothing that's really happened that is leading to a cost inflation through a new program. So maybe to some degree, it's been accelerated and maybe some people in the bank have been working more on AML rather than other things, but no sort of large amounts of additional costs at this point. Okay, that's great. Thanks. Okay, thank you. Your next question comes from the line of Jacob Kruse. Please ask your question. Hi. Thank you. Could I just ask a couple of questions? Firstly, the dividend. I was just wondering if you could just talk me through the accrual of your dividend in the how much you've taken against equity and what kind of payout ratio that's based on? And my other question was on lending growth. Could you just talk a bit about and I guess this comes back to this pipeline. If you look at the growth that you saw during this quarter, is there a difference between the start of the quarter and the end of the quarter? And could you also say something around what has been happening to the margins on the lending in the quarter? And then my last question was just there was a comment around your investigations in Latvia when it comes to money laundering. Could you expand a little bit on that? When you say there's a risk or criticism or sanctions? What kind of what is the scope there? What are we actually talking about? Thank you. Okay. Hi, Jacob. Thanks for those questions. When it comes to the dividend, we accrue for 70% the 70% payout ratio adjusted for the IAC. So the items affecting comparability that we had last year, which was SEB Pension and the sale of UC, so 70% of the underlying profits. Lending growth, no, I don't think there's a big difference between the start and the end of the quarter. When it comes to margins, they are pretty much stable. I think there is some margin pressure or the main margin pressure in the corporate sector is in Denmark. That was the case in Q2, and that continues to be the case. There's also some margin pressure in Finland, but much less than Denmark. And then in Sweden and Norway, margins are pretty much stable. When it comes to the investigation in Latvia, so this was an investigation that was started in 2017. It's a regular sort of investigation that they did, which has to do with how the bank has introduced AML 4 or compliance with AML 4. Since it's been a lot of focus on AML in general and since everyone out there already knows that there is a Swedish investigation going on that will be concluded soon. We felt that because of transparency, we have also this investigation that will be concluded soon, And we think it will be concluded during Q4. And we just wanted to put it out there that there is something that could come out and it could lead to criticism or sanction. And we have no way of assessing the risk of that at this point. We just know as we have an investigation, that's always a possible outcome of any investigation. So for full disclosure, we wanted to put it out there so that everyone knows. Okay. And just on the AML, not here in Latvia, but when it comes to the Swedish investigations, do you get any sense that they may look at implementing Pillar 2 buffers for Swedish banks like we've seen in Nordea or we've seen in the Alske Bank? No. No. Okay. Thank you. All right. Thank you. Your next question comes from the line of Ricardo Rovere again. Please ask your question. Yes, thanks for taking. Just a quick very quick follow-up. With regard to the EUR 100,000,000 traveling, I just wanted to be 100% sure that you stated there was EUR 100,000,000 more that in NII that should or could have been accounted in trading revenues. Did I get it right? That's absolutely correct. Okay, okay. Your next question comes from the line of Jacob Kruse again. Thank you. Please go ahead. Hi, thank you. Just a follow-up on the dividend accrual. I guess what confuses me is, if I look at the statement of the change of equity, the dividend to shareholder up to September is SEK14.1 billion versus income of SEK14.3 billion. So is there another adjustment somewhere? Or have you already accrued for what looks like 70% of full year? I have to look at that, to be honest. It should include something else. So we haven't assumed that dividend will be SEK 14,100,000,000 for the 1st 3 quarters. That would be a very high level. So there has to be something else included. So I'll ask IR to come back to you after the call. Okay. Thank you very much. Thank you. Thank you. And your next question comes from the line of Johan Ekblom. Please ask your question. Thank you. Just a quick follow-up on the capital and buffer discussion. If I look at your fact book, it looks like over since the beginning of 2018, you've had some €120,000,000,000 increase in RWA related to FX. And admittedly, there are positive P and L effects of that, too. But if you just adjust for that FX, it's kind of a 300 basis point capital headwind over a little shy of 2 years. When you set your buffer, do you think about 150 percent agnostic of where the absolute valuation of the 3 dish krona is or agnostic as to the absolute level of long term rates? Or wouldn't this be the time when you'd expect the buffer to be used? Yes. Johan, if I start with the first one, I think you might be reading that table incorrectly. So what that table shows you is the FX effect every quarter, and it's cumulative for the full year. And then when you go into the next year, it's reset. So you can't add the previous year to the next year. So actually, when I read that table earlier this week, I did the same mistake. But then I understood that, no, the effect cannot be that darn big. Yes. So it's not that large. But obviously, we've had very negative FX effects for several years now. And if you add back all the years, it will be quite a couple of 100 of basis points. So that is correct. But then just when it comes to FX, we have a return on equity of about 13%. So basically, obviously, you have a negative impact on capital right away. But then through your P and L, it takes about 7 years before you get it back. So it's just a lag effect. But obviously, in the sort of in the short term, it's annoying, and it could impact your capitalization quite a bit. Yes, we do set the buffer sort of agnostic to the current level of the Swedish krona. I mean, it's very difficult for us to have an assessment of whether the Swedish krona will weaken or strengthen from here even though people think it's very weak. So we believe that we should have this buffer irrespective of how weak it is. But then obviously, you have a buffer for you to be able to consume it at some point in time if you have very negative developments. So if we tap into the buffer and go down to 120 or 110 and it's due to FX or it's due to the discount rate coming down, then we have used the buffer in the way it was intended to be used. So I think it's very important to actually view buffers as something that are usable. If you see them as a minimum requirement, then they have no use. And then you can start discussing having a buffer on top of the buffer because the buffer cannot be used. So I think it's important from an external point of view, but also internally to be accepting when it comes to using buffers. And I guess the flip side of that is if the Swedish krona were to enter a phase of long term strengthening or, God forbid, long term interest rates would once start to rise, we should expect you to either distribute that capital or use it to accelerate growth? Yes. I think that's just speculation. We'll have to see exactly what that would lead to at that point in time. Fair enough. It might not happen tomorrow. It might not, no. Thank you. Thanks. Okay. Thank you. There are no questions at this time. Thank you. There are no further questions at this time, sir. Please continue. Okay. Thank you very much for very good questions. We're coming to London this evening, and hopefully, we'll see some of you tomorrow. We'll bring our Head of Digital Customer Experience and Communication. I think that will be very exciting for you. So please attend tomorrow's afternoon Swedish vidcast if you can. Thank you very much and good night. Thank you. Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.