Earnings Call: Q2 2019

Jul 12, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the SEB Q2 2019 Results Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. And I would now like to hand the conference over to your speaker today, Johan Torgebi. Thank you. Please go ahead, sir. Thank you, and welcome, everyone, to today's phone conference. So So I'll just start with a quick summary of this quarter, and then we'll open up for Q and A. So we characterize this quarter as driven strongly by high client activity, and we saw it being a broad based activity lift. Particularly, we saw higher demand for borrowings and higher demand for capital markets financing. On the mortgage side, not to be mixed up with the general market, which has come down in growth rates over the last 6 months, we have performed a little bit better in the last 5 months and are now back on track where new sales are in line with our natural market share. We definitely got helped this quarter by strong equity markets and all the AUM related business areas benefited from that and continued high fee and commission generation coming from high activity within payments and credit card activity. The weaker area during this quarter was particularly the business area fixed income, which meant that the markets activity contributed a bit less to this quarter's result than Q1. That was predominantly driven by the flattening of the yield curve and some of the stressed bar kicking up also the capital consumption for that business area. So all in all, a solid quarter. And I think I'll stop there and just open up for questions, please. And we have a couple of questions that came through. We will now take our first question and this comes from the line of Sophie Peterson. Your line is now open. Please go ahead and ask your question. Yes, hi. Here is Sophie from JPMorgan. Thanks very much for taking my questions. So my first question would be on a divisional level. How should we view net interest income in the Large Corporate division as well as in the Retail division going forward, given that you mentioned on the press conference that sorry, that you mentioned on the press conference that most of the funding was just due to internal transfers and accounting. So I was just wondering, is the second quarter now the right run rate the different divisions to think about going forward? Or should we assume that there will be kind of another correction in the Q3 and net interest income in these divisions will be higher? Or how should we think about net interest income going forward? And my second question would be on AML. The FSA is going to publish a report in November. What do you expect from this report? And how concerned are you about this report? Okay. If I start with the NII and I'll ask Masi to fill in and then I'll take the AML. I mean we don't really give any forward guidance on NII, but I think that the current market dynamics when it comes to margins and volumes, we have no strong change in our opinion for the short term future. So I'll give through some of those dynamics. The margins in all material aspects in the NII for LC and FI is flat. There's not a meaningful direction of margins. If anything, there might be slight margin pressure in 1 or 2 small areas, but we can't even get them to matter on the whole. So we have a very good volume momentum at stable margins, and the pipeline looks unchanged and strong going forward. On retail, there is 2. 1st, the overall market growth is has come down. So we've probably gone from 8%, 9% of annual growth in household mortgages down to something around 5%. And that is, of course, in our opinion, a level that probably going to be stabilizing here or maybe a little bit lower given that we have a flat house price projection for the short term. But there has been margin pressure both coming from competition, but also from the hike that we saw from the Central Bank in December. So it's as good of a guess as anyone's what you think about rates, but it's definitely the last hike here really changed the price and equilibrium for mortgages and deposits. So very positive for deposits, where margins more or less equaled the rate hike. So cautiously optimistic on volumes. Margins look flat right here and now, but there will be many changes potentially coming given the rate outlook. Matti? Yes. Hi, Sophie. It's Matti here. Just adding on NII. Obviously, there is some sort of money going back and forth between treasury and the divisions. And the main sort of volatility there is how much treasury compensates divisions for deposits. And the way that works is that we compensate the divisions based on the value of those deposits, and we use our senior unsecured funding price to do that. So when the marginal cost of senior secured funding goes up and down, the compensation for deposits goes up and down as well. And it's very difficult to know how that's going to develop going forward. It just depends on the spread development in the market. Going into Q1, spreads went up and therefore the divisions got more pace for the deposits. In Q2, they went back down again. So they were compensated less and we'll just have to wait and see what happens in Q3 and Q4. But I think if you want to sort of have a make a good assessment of the total NII development of the bank, just look at the overall picture adding treasury to the divisions, I think that gives you a good guidance of how the bank is performing. On FSA, we have the same expectation as you outlined that we will get something from them this fall in a statement or a summary of their view of the state of affairs when it comes to SEB's history in the Baltic. We don't now speculate in what that will be. So we are just like we always are, openly and transparently working with them in this situation. The practice is very common here. That is the first thing we get is probably well, we get something of a preliminary sounding of what the findings are, then we complement and give more information or clarify any questions they might have, and then they give the final recommendation or status report. That will come this fall. So right now, I would just be we have in Sweden, I would say, 20 to 30 of these open and ongoing any point at any point in time always. So this is the way we work with our financial regulators. So we get many of these all the time every week. And there's no change. And of course, you regard every such report as super important and what the findings are. Sometimes you agree, sometimes you disagree, but regardless, you need to conduct yourself in a manner in line with whatever comes out. What is unusual is that this one, one of these that are so commonly done in a bank, was published by the central by the finance FSA. So they went out saying they conducted and gave a timeline. So we will just wait to comment and speculate until we don't need to speculate and can comment on what the facts are. And most likely, we assume that to be made public in this instance. Okay. Thank you very much. Thank you. And we'll now take our next question. And this comes from the line of Adrian Cighi. Your line is now open. Please go ahead and ask your question. Hi, there. This is Adrian Chigi from RBC. Two questions from my side, please, on capital. So the big move quarter on quarter is in large part driven by the increase in the market risk weighted assets. How much of this is reflecting a potentially higher risk you're taking in your markets operations? And should this lead to a higher trading run rate? And the second question still on capital is the proposed regulation from the Swedish FSA on commercial real estate exposures. Do you have any estimates on SEB or even a range? Hi, Adrian, it's Matt here. So starting with the first questions on market risk weighted assets. It was a spike this quarter, which was mainly due to the fact that parts of markets within the bank were expecting yield curves to steepen when they actually flattened. What happened there is that VAR goes up and what we do internally is that we apply a very stressed scenario on the increased VAR, which led to stress VAR going up and CapEx for market risk going up. That is based on the positioning you have at that point in time. Then positioning in markets can change depending on their outlook. And what I said in the press conference this morning is that our expectation is that the elevated level you saw in Q2 will come down again to a more normalized level. So if you follow the risk weighted assets or market risk over last few quarters and look at the normalized level there, we do expect that capital consumption to go back to that level. So I wouldn't say that there is anything structurally within the bank or in the market that has happened that should lead to that level being higher than it's been historically. On the CRE, no, unfortunately, we don't know what the scope of that really is. And I don't think the FSA has decided either, to be honest. I think they will start their analysis now. And then by the autumn, they will come out with the scope and also the changes they plan to do. And our expectation is that by probably mid next year, this will be implemented. So it's not going to apply on us until mid next year. So unfortunately, it's just impossible at this point in time to give any estimates on the impact. Perfect. Thank you very much. Thank you. And we will now take our next question. And this comes from the line of Geoff Doss. Your line is now open. Please go ahead and ask your question. Yes. Hi, good afternoon, everyone. It's Jeff Doose here from SocGen. A couple of questions for myself. First of all, on capital distributions. Obviously, when you come back to us after the summer for Q3 results, I think we'll all be thinking quite heavily about distribution policy and everything else. With that in mind, your 150 basis points buffer that you run, you're obviously ahead of that. How do you think about that going forward? I mean, if you paid out to the 150, would you be happy going below that if FX moves, if pension accounting changes and so on? Or do you want to maintain a buffer to the buffer as it were? Second question is on the large corporate division. It's nice to have the detail on new clients coming in and kind of what their contribution to the group. I think that's very helpful. Can you give us an idea though of the other side of the equation? So have you been actively exiting any customer relationships where it hasn't been profitable? And kind of has that had any impact on the return on equity as well? Obviously, bringing that a little bit higher, but what would the revenue contribution of those clients be? That would be very helpful. Thank you for that. On capital distribution, it almost feels awkward as we are about to take summer holiday to go through it, but I'll still repeat where we stand. So we have we've run the bank with a bit more buffer than the indicated €150,000,000 We described it quite at length in conjunction with this year's proposed and executed dividend. And that was really the best thing we can do with this capital is to try to deploy it at 15% return on equity or more. How we assess that ability is pretty much the most important question in management eyes. We still just do recommendations. It's the board that in the end decides these things. And I would say these 6 months, even though we also we talked about planning for a bad market, this has been a pretty good market. But still, we've been able to deploy it just like we said we wanted to. You can see that in the market shares. And of course, the capital consumption goes up, particularly immediately when you put these trades on. And then it takes a full year before the NII comes through the books and gives you even more return on equity through that channel. If you look at the what we call red zone, how we exited clients that have not been working, we always have an ongoing red zone strategy, and that is big, big brush, 3 years into a new relationship or 3, 4, 5 years with a relationship that doesn't work. We have to go and motivate why we should put capital to work if it's not mutually beneficial to us and the client. We haven't done anything specific there. So that's the ongoing, except for one which has had an effect, and that is Germany. So the restructuring in Germany was, of course, before the restructuring, a drag of X on return on equity. In that process downsizing it by 75%, creating a branch, and that has, of course, helped the group ROE of having a much better or I should say, less drag from our German business. And those are client exits. You. And we will now take our next question and this comes from the line of Riccardo Rovere. Your line is now open. Please go ahead. Good afternoon to everybody. Just one question from my side. I noticed that the amount of securities on the liability side has gone up substantially in the semester, EUR 100 and EUR 40,000,000,000 or something like that. I was wondering whether you have taken the opportunity to prefund in the semester, exploiting maybe the current favorable rate conditions or maybe just the commercial papers with very short term duration and might eventually revert in the coming quarters? Yes. Hi, Ricardo, it's Matt here. Yes, that's probably correct. And it's mainly commercial paper. It has to do with a lot of different things. If we have more activity in markets, we have to fund ourselves more on the short term end. Also what's happened recently is that the Swedish FSA has introduced a plan to introduce a 75% LCR in Swedish kronor and other significant currencies. On the margin, this leads to that we will have to have a bigger balance sheet because we have to issue more short term paper and we have to invest that in liquid assets that are eligible to comply with LCR requirements. So generally, this is what happens. We now in Sweden have a total LCR requirement of $100,000,000 We have it separately also for dollars and euros at 100%, and now we also have it for other significant currencies at €75,000,000 This just basically means that the aggregate LCR level will be higher than 100%. We're at SEK 149 this quarter. So this is mainly what happens. And then there is sort of opportunities within treasuries where they can find ways of funding the bank very cheaply and placing that in a liquidity portfolio and sometimes actually make money on that. So there are different drivers for why the balance sheet or maybe that line grows or comes down. But this quarter, I think it's very much linked to LCR. Okay. So what I understand is there has not been any particular prefunding on the medium to long term side. I mean, that's a fair assessment. On the long term side, you can see in the report how much we've done in the quarter. You can see that we've done quite a bit of a covered bonds, and we've done couple of senior unsecured as well. So you can see that separately in the report. All right. Thanks. Thanks a lot. Okay. Thank you. And we will now take our next question. This comes from the line of Marco Di Matteo. Your line is now open. Please go ahead. Good afternoon and thanks for taking my questions. So I just wanted to ask about the Baltic business. So I think you highlight some improved lending margins. So could you elaborate what drove that? And can you remind us of what the sensitivity or the impact would be on the business if your rates were to decrease? And then secondly, on the FX impact on capital, would you consider hedging some of this FX exposure in OREA? Or do you see it as preferable to accept some volatility because of the costs? Thank you. Thank you. If I start, we can fill in if required. So in the Baltics, you probably need to just step back one first step and see that there's been an exit of financial institutions and banks for a long time since the financial crisis. For the minority of banks that has decided to still be committed to that part of the world, including us, That has, of course, been a very good business environment. As many exits, these new these clients need to find new homes. So it's actually been a luxury problem for the ones who have been established in order to get the right clients in because it's been quite high demand to join one of the committed institutions in the country. That has been coupled with improving volumes and margins. That has been the result. But we are actually a little bit cautious. We don't want to grow too much. We want to have the right clients and do the right business. And this doesn't lead to this opportunity to turn all cylinders and go and grab it. It actually leads to a little bit of conservatism and cautiousness. So we do the right thing when the market accepts it. Right now, I find it to be very stable. It will not continue to improve to the same rate we've seen in the past because it's just there is a limit. And that's what I think about the Baltics. On FX capital hedging, no, we typically do not hedge. It's mostly a philosophy to rather have a cushion baked in so you can stomach any FX effects. They are not important in the long run, and we think that hedging is associated with the cost. So it's been better to have a stable balance sheet that can absorb those short- and medium term market movements. And then finally on rate sensitivity, I mean, we basically have the same sensitivity going up as rates going down. So the rate increase we saw in Sweden, we said that that's almost SEK 1,000,000,000 in terms of higher NII if you exclude whatever happens to lending margins, so only including the liability side and the reference rate floors we have on the asset side. So if rates would be cut back again by 25 basis points, you would see as much of an effect going the other way. Now when rates were increased, we didn't see we see a pretty large decline of mortgage margins. Maybe if rates go down, you see that's going the other way. So it's very difficult to say what the aggregate impact is going to be, but only including liabilities, it will be the same sort of range as when rates went up. Sorry, I was referring actually to the impact from rates going down for the Baltics business. Okay. So ECB cuts rates? Yes. I don't have that number, but it should be quite limited on a group level. Okay. Thank you very much. Okay. Thank you. We'll take a follow-up question from Riccardo Rovere. Your line is now open. Please go ahead. Thanks for taking my follow-up question. As a general terms, do you see anything in these numbers that you consider as clearly one off or by nature or by or just by maybe by magnitude? And if I may, I also something related to my previous question, I also see that the stock of bonds on the asset side has gone up quite substantially. I would imagine it should be more or less for the same reason. So commercial papers are short dated bond, but just to be 100% sure I get it correctly. Okay. Hey, Ricardo, if I start with on the business side, there is there's nothing exceptional one off about this quarter, which is different from other quarters. There are always some market movements, of course, and the strong equity markets have helped all the strategic holdings one had on the balance sheet. Of course, the lowering of interest rates also helped market valuations on inventory on those type of assets. So those are kind of in the normal course of business. So otherwise, it was it's a very broad based fair representation from how our business has performed in this quarter. Yes. On a very sort of detailed level, obviously, we reserved too little for the resolution fund fee in Q1, and we had to adjust for that in Q2. So we took about SEK30 1,000,000 extra compared to what we otherwise would have done. So you can basically say that NII in Q1 was a bit too high and NII in Q2 is slightly too low if you adjust for that resolution front fees. So there's going to be a small tailwind on that in Q3. On the bonds, if you look at also cash at central banks, you can see that that has come down. So for our liquidity management, we can basically hold very highly liquid assets and cash at central banks or AAA rated bonds have the same quality in that assessment. So I think what's happened in this quarter is that we have less cash at central government bonds. And I just want to say one more thing. If you in the first question, trying to assess what's the underlying kind of sustainable performance in this quarter going forward. I also like to just highlight that the year on year numbers historically has been affected that we had SEB Pension in Denmark in the first half of twenty eighteen. So that is not a like for like when you do the comparison. Yes, yes, very helpful. And if I may, just a quick very quick follow-up on the Masi answer. Should I assume that the level of cash, let's say, the switch between cash and short dated bonds on the asset side is something that your liquidity management department is going to go on like that for the foreseeable future? Yes. I mean, they always change how we should allocate our liquidity portfolio based on what makes sense from risk management, but also P and L wise. So in this quarter, cash at Central Bank is down. We're holding more bonds and we have bought more reverse repos. That's the shift you see this quarter. It could go back to what you saw in Q1 next quarter. It's difficult to say. It just depends on how spreads move and what's most profitable for the bank to hold in combination with complying with the liquidity requirements and having a good risk management. Thanks. Thanks a lot. Thank you. We will now take our next question and this comes from the line of Robin Rain. Your line is now open. Please go ahead. Hi, Robin Rain, Kepler Cheuvreux. Just a clarification question. I think this morning you said that some of the net inflows to assets under management were reclassification. So this part of the net inflows doesn't affect the Casa de mutual funds fees? Or am I have I understood that correctly? Yes. I mean, if you would just assume that it is all new asset under management, then it would look like we have severe margin pressure in asset management. But the SEK 60,000,000,000 extra that has been reclassified comes from it used to be asset on the custody, now it's asset on the management and the fee level for that SEK 60,000,000,000 is very, very low. So we wanted just to point that out you don't think that we have very severe margin pressure within asset management. So it's just a reclassification from custody to asset management. All right. Thanks, Sven. So the margins going forward, everything else equal, is going to be a tad lower? Yes. If you do sort of fee coming from asset management divided by AUM, it's going to be lower. Yes, all right. Thank you. Thank you. And your next question comes from the line of Jacob Kruse. Your line is now open. Please go ahead and ask your question. Hi, thank you. I just wanted to double check on the NII first. The movement in the corporate sector, you say that's just internal pricing that affects that relative to the division? And then could I just also ask on the cost line? How comfortable are you that you will continue to deliver in line with your target level? Do you see any are you seeing projects that are popping up for new issues found that you may need to address? And I guess follow some of your peers in terms of pushing up the cost guidance? Thank you. Yes. It was difficult to hear you on the NII questions. We'll take that later. But on the cost line, I mean, we always have parts of the bank that have higher cost inflation than expected, and then we have other parts that have lower cost inflation than expected. We are pretty used to that. We've had big projects previously in the bank. If you look at 2016, 2017, when MiFID II was introduced, that was a massive project and it costed more than we expected. It didn't lead to us not reaching our cost target at that point in time. And there's really nothing happening at this point in time that has the magnitude that could should lead to us not being able to reach our cost target. So at this point in time, no, there's no change. We are comfortable. I'm not sure if that's the right word, but we still stand to the cost targets that we have by 2021. It's never comfortable. You'd always have to work with it on a daily basis to make sure that you take out the efficiencies that you need. But we're definitely sticking to that target. And if you can repeat the NII question, please. Yes. I just wanted to confirm that the strength in the center NII or your group functions NII and the relative weakness on some of the divisions, that that's just the internal pricing model and that there are no other issues that affect that? Yes. It's internal pricing to a very large degree. Some of the weakness in the divisions is the fact that we had reserved too little for the resolution fund fee in Q1. So the delta Q on Q looks lower than what the underlying business has generated. So but it's mainly activity. Okay, fantastic. Thank you very much. Thank you. And we will now take our next question, and this comes from the line of Richard Smith. Your line is now open. Please go ahead. Yes. Hi, guys. Thanks very much for taking the question. Just 2 for me, just circling back on NII. The first was, I think in previous quarters, you called out any sort of unusual deviations that you've seen in terms of market net interest income. I just wanted to check that there wasn't anything surprising or different there this quarter. And then the second one, I think if we look at some of the sector stats data, it looks like some of the growth might have gone on in sort of the later month in the quarter that we have today. And I think as I understood your press conference comments, there was nothing particularly in terms of bridging finance and shorter dated lending, but just wanted to check if there was any kind of effect in terms of timing where we should be seeing a stronger pickup going into the Q3 given some of the lending that's gone on in the back end of this quarter, if that makes sense? Yes. Thanks. On the NII, there's nothing unusual that we want to highlight or point out. So that's nothing specific. Yes, you understood the press conference comment correctly. Just to elaborate a bit, when you have such high a bridge type of engagement put on. Which has bridge type of engagement put on. Those bridges are sometimes being inverted into equity, if it's an equity underwrite or an equity facility, sometimes into bonds, but most often they are actually converted into long term loans. So you might have a bridge financing where the vast majority of that bridge in an M and A situation needs to then be converted. So sometimes, one, it's easy to go wrong and say the bridge are temporary because there will not be anything after, but they are actually also a leading indicator for putting on more financing permanently in the capital structure later. I would also point out that there's nothing different. That's what we wanted to say in the kind of mix is broad based and the proportions are right. So as I said also before, if we sometimes we have a quarter where you put some 2 or 3 or a few super large deals on, and that's really what's happening. And that we will also in the future point to that if that's the case. Okay. Understood. Thanks. Thank you. And we have no further questions over the phone line, sir. Please continue. Then I will thank you all for your attention and wish you all a good summer, and maybe some of us will meet shortly. Otherwise, have a great summer. Thank you. Thank you. And that concludes our conference for today. Thank you all for participating. You may now disconnect.