Thank you. I would like to welcome you all to this call, SEB's Q3 financial report. I thought we would do this today, that I will give a 3, 4-minute summary of the key messages from the report, then we will open up for Q&A, not flick through the presentation, which I assume you all have in front of you. To start with, to characterize the quarter, we have seen that we have a solid result despite the seasonal weakness one would expect during the third quarter. It was primarily driven by higher corporate activity coming from 4 different areas. We saw it in M&A or investment banking. We saw lending fees and lending NII developing quite strongly. Healthy growth in the payment and cards areas amongst the corporates.
The relative weakness came from the markets area, which seemed to have struggled a bit, mortgages, household lending was growing, but at a very modest pace in the third quarter, around 2%. We also say the margins have been fairly stable across the board during the quarter. Some of the financial metrics. If we isolate the third quarter, income came up at 3%, profit before items affecting comparability was at 4%, with strong cost control in line with last year and in line with our communicated cost cap target of SEK 22 billion. I will also say that NII was particularly strong from LC & FI, so the wholesale division contributed in a good way.
We also talk about the net fees and commission when you look at advisory and secondary markets, to my initial point, we saw a quite large discrepancy with nice growth from the fee-generating parts of the wholesale banking up 22%. However, it is a very small number, markets contribution through secondary trading was down 9%. We got a bit of help from strong equity markets in the third quarter a modest inflow of new assets under management, resulting in a year to date, we have gotten SEK 47 billion in AUM, but it helped the results from custody and mutual funds on fee and commission payments, cards, lending, et cetera, did also perform well. We actually do not have any positive contribution to speak of from the deposit taking, which is up SEK 200 billion from the end of the year.
However, in the results today, there has been a roughly SEK 200 million change between funding and other and the deposit income because of a change in our internal transfer pricing model. On NFI, we are down 13% year-to-date compared to last year. That is predominantly explained by a very strong first quarter 2017 that we did not replicate in the first quarter of 2018, we were helped approximately SEK 150 million from valuations of our inventory, the XVAs, as we call them. I think I will just stop there and see if Maciej would like to add anything before we open up for Q&A.
No. Let's go to Q&A.
Operator, we're ready for Q&A, please.
Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments, and if you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. Our first question comes from the line of Matti Ahokas. Please flash your question.
Yes. Good afternoon, Matti Ahokas here from Danske Bank. Looking at the large corporate financial institutions business your wording is quite positive altogether and then again, the Q3 figures lending was down a bit and also it seems like the margins were down a bit. Was there something specific in that the lending book decreased in the third quarter in the LC&FI and were the margins actually stable? That's my first question.
Yeah, I would characterize the margins as actually stable, when I say that, I mean I look at the average price one would extract from shipping, real estate, corporate lending, LBOs, et cetera. However, the mix might change when you look at it from a financial result and do the kind of averages. I think we mentioned in the second quarter, we had a little bit of an extraordinary, call it event-related bridge financing that sometimes are higher than the average, they of course, fall off quite recently. The underlying trend on what we actually price our balance sheet in wholesale, there is no meaningful change.
If we look at the kind of 7% year-on-year growth rate in LC&FI, in your opinion, is that a sustainable run rate for the foreseeable future?
I don't make any predictions, I would note it's a relatively high one. If you think about where we bank our big clients, we have close to 100% penetration. We're all over the Nordic large caps. Nominal GDP should be, in my book, the baseline for where this should go. I would also point out my previous comments up until three quarters ago, where we were very surprised for a long time this did not grow despite nominal GDP growing healthy. There's of course, always the question if this is a bit of a catch-up effect or if it's a real investment cycle very late that is actually kicking off. I'll make no predictions on that.
Thanks. The second question is regarding the cost outlook for 2019 and 2020. How should we look at that?
You should just look at the 22 for 18 and then listen to our updated call later this year or beginning of next year.
Very good.
Thank you. Our next question comes from the line of Adrian Tcheukui. Please flash your question.
Hi there. This is Adrian Tcheukui from RBC. I have a few follow-up questions, please, on fee income. A very good quarter, again, following a very strong Q2. I'm just trying to understand the sustainability of this going forward, as have previous questions, but is there any lagging booking for deals that have happened in Q2, or do you see this sort of an underlying base going forward? Then on capital, earlier today, you mentioned that the 310 basis points buffer you have does still not contain any excess capital, but you'll update us as of Q4 as to where you stand. Do you expect any regulatory updates between now and Q4? Is there part of a broader rethink of the business model and plan? Thank you.
Thank you. I'll start with the fees and hand over capital and regulatory updates to Matti. We are not saying anything about the fee generation in this quarter being of temporary nature. Implicitly, there's nothing that stands out on the positive. I wouldn't say even that the lag effect that you typically have is different from what it normally is. The summer is a very slow period, and of course, in the beginning of the summer, you actually book some of the stuff you did in the latter half of Q2. However, I would say that there are some fees coming through in the payments and card area, which is more a recurring type of business. They should not be mixed up the pattern for M&A, ECM, and investment banking, which is a more lumpy type of profile.
There, at least there is some support unless you think the economy will come to a halt. That is a little bit sticky.
Super.
Okay. On capital, obviously being at 310 basis points, we do have excess capital relative to the long-term target of a buffer of around 150 basis points. Now, this year, that buffer has been built through different things. SEB Pension, the sale of that is one of those things. Going to Q4, you asked about regulatory changes. You're going to have one change, which is the mortgage risk weight floor move from Pillar 2 to Pillar 1. That has a negative impact of about 50 basis points or slightly below that. That's our regulatory update. Otherwise, we don't adjust our capital base throughout the year. By the end of the year, the board's going to make their decision on the dividend.
Obviously, they're going to look at our capital position, and they're going to look at whatever future outlook you have on regulation as well as the new business plan that's going to be presented. You're going to just have to wait for Q4 and hear the response on that from the board.
Thank you very much.
Thank you. Your next question comes from the line of Paulina Sokolova. Please flash your question.
Hi. I have two follow-up questions. One is just coming back to the large corporate demand this year. Could you please maybe give your opinion on what you see as the most important drivers of this demand? If possible, could you give us an outlook into 2019 on whether these drivers are going to continue? Another follow-up on the capital position. As you just mentioned, at 310 basis points above the minimum, you do have excess capital. I was just wondering if you're open to the possibility of share buybacks as a way to calibrate your capital level back to your target. Thank you.
Thank you, Paulina. I'll start with LC&FI. If you divide LC&FI up into the balance sheet deployed to corporates and the payments that corporates do through our cash management. That's really where the demand for our services has been the strongest, coupled with parts of the investment bank. We did have a very slow start on fees and commission in investment banking during Q1, it came back in Q2 and Q3 a bit. We are saying the activity level to be judged from the pipeline we see is constant. We're not guiding up or we're guiding down. There has been a clear shift in the composition of the advisory services that we perform away from IPOs into M&A. Of course, we are relatively strong in both and hope to capture if this continues, the opportunity that arises from that.
Otherwise, it's really the markets side, which is struggling. We would love to see the return on equity come up also for having less of a drag from our markets. It's not the client facilitation or the client-driven flows. It's the inventory, the market making, and the risk side, which has been quite tough for us to get up to an adequate profitability. I also would add that volumes do differ. The margins on investment-grade lending are very low. We're not saying they're changing, but they are very low. As you know, that's a low return on equity business. We really don't see that we are right now firing on all cylinders. We would love to see the markets area, equities, fixed income, commodities, and derivatives, all of them just to pick up a bit.
Okay. Going back to capital. The general response is this, that we would like to deploy the capital we generate into businesses that return higher than the cost of equity. That's our basic principle. We're going to present a new business plan, and we're going to have to look at how that looks like. If we see very strong growth potential out there, obviously with a high return, it's better to deploy it there. If that's not the case, then we'll have to come back to how we then distribute the excess capital we have to shareholders. Again, it's a board decision, and it's going to come in Q4. We do like the fact that we have more capital at this point than our financial targets. It's a good point in the cycle to have that. In that sense, it's a position of strength for us.
Again, back in Q4 on this.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Riccardo Rovere. Please flash your question.
Good day. Good afternoon to everybody. A couple of questions, if I may. The first one is a general one. In general, do you see, especially in revenues, anything that you could classify as non-recurrent, maybe by nature or by the magnitude in this quarter? The second question I have is on credit losses. We have seen a pickup in large corporate. Is it due to maybe single names, or do you see anything that is changing the asset quality? Some first signals of deterioration, maybe. Very last question, if I may. Risk-weighted assets have gone down this quarter. Is it fair to assume that going forward, we should not see major improvement in RWA due to migration and so on? Because I struggle to understand why credit loss is going up and RWA going down.
Okay. On your first question on non-recurring revenues, we always have non-recurring revenues. You always have the small sales or divestments of somehow you have valuation effects. I would say it like this, we don't have more non-recurring revenues this quarter than a normal quarter. You don't really have to adjust for anything, I would say. On asset quality, you see an uptick from very low levels to a more normal level, I would say. It's driven by very isolated events two or three different events. They are not cyclically driven, I would say. There's nothing with the current economic environment that has driven those events. They're isolated by nature. Then connected to your last questions on RWAs. RWAs are down this quarter, mainly driven by FX. FX, the Swedish krona was stronger by end of Q3 than it was by the end of Q2.
You also see a positive impact from asset quality improvements. Risk-adjusted went down SEK six billion due to asset quality improvements. You can have both. You can have higher losses from very low levels to more normal levels, and at the same time see a general improvement of asset quality, and that is what we saw this quarter, and we've seen that throughout the year. We've seen a reduction of risk-weighted assets of SEK 16 billion so far this year because of improving asset quality. Yes, both things happen at the same time.
Thanks.
Thank you. Our next question comes from the line of Sophie Peterzens. Please flash your question.
Yeah. Hi. Here is Sophie from JP Morgan. I wanted to ask about your new business plan. Will you have a separate day when you give details on what you plan to do, or will you just announce it with your fourth quarter results? If you could just comment on the money laundering cases that people are talking about in the Baltics and also the Cum-Ex issue, what your take on these two topics are. Thank you.
Okay. On the business plan, we have been working throughout the year, I would say, to try to understand what we think is going to happen with this market going forward. We have had a Vision 2025, and we've done what we call a refresh of that vision. What do we have to adjust based on what's happened in the last three years when it comes to our outlook of how the banking environment is going to look like by 2025? Based on that basic view, we decide as a bank what we want to target, where we think we can grow, where we think we can make a difference, and where we think there's going to be some profitability for us to gain from. That work is ongoing.
We've done that work for quite some time, but it's ongoing, and by Q4 at the latest, with the results of Q4, we're going to present the conclusions from that work, and you're going to have a plan of how we target a growth and profitability going forward, what kind of business lines, in what way, what geographies and all that. That's basically it. It's been extensive work, and I'm sure you're waiting for it, and so are we to present it to you.
Just quickly on that, in general, what's your view of the market over the next seven years then? Do you think we will have a downturn in the next seven years, or do you think that the bull market will continue?
Well, when looking at the market, it's not just a discussion of the cyclical changes of the market. It's more about structurally what's going to happen with the banking sector, and especially where do we think as a bank we can make a difference. It's not about trying to predict the next recession. It's about trying to understand the long-term development of banking. That's what we're thinking about. We're not doing this for the next year or so, more about the long term.
Okay. I think I could just address the Estonian money laundering and the Cum-Ex. I think I'll do a fairly short version of what we did this morning, and then you can just ask follow-up questions. The short story on AML and money laundering in Estonia is really driven about the general interest for parallels being searched for subject to the Danske Bank situation. I think most banks, including ourselves and the two other in this part of the world who are active, has gone out with similar data to say it's really not for us to be worried about. We feel very comfortable that what we've done from 2008 up until today doesn't have any real red flags we need to worry about in the comparison.
Secondly, there has been, since Wednesday last week, quite a lot of media in Sweden where SEB has been mentioned as a bank partaking in the very aggressive dividend transactions around securities finance in Germany in the past, so-called Cum-Ex. Today we've just clarified that SEB has not been participating in Cum-Ex. It's not been an offer that we give to our financial institutions clients, and to the best of our knowledge, we've never done any of this in the light of what media has reported. However, there is an individual in SEB who we learned in July 2018, a former employee, who is part of an investigation conducted by the prosecutor's office in Köln, in Germany. That's all we know.
media has made a very large reporting cycle around this in Sweden and pointed to SEB being one of the many banks mentioned in these reports who systemically and systematically used this dividend treatment in conjunction with it. That is not the case.
All right. Thank you.
Thank you. Our next question comes from the line of David Bengtsson. Please ask your question.
Hi. Thanks for taking my questions. I have one to start with. You're growing a bit slower in Sweden in the mortgage space than the market. Could you maybe share some extra color on that, the dynamics you're seeing, and maybe also on margins in that space, please?
Okay. I'll first do just a recap. Up until a couple of quarters ago, we had 8%, 9% mortgage growth in the market, we've been around the 4%, 4.5% mark. We've talked about a year and a half or so that that's not satisfying, but it's not a catastrophe. We are slightly different. Lately, since the house prices stopped increasing in August, September last year, we've seen that the growth numbers for mortgages as a whole has come down and is probably approaching the 6 level. We come out now, I guess, around two. Two, three potential explanations. One is that we are, relatively speaking, very exposed to Stockholm. We are the largest mortgage provider amongst the large banks. In Stockholm, you have a slightly different characteristic than you have for the average of the country.
That is that the house price fall has been somewhat more accentuated in Stockholm. When prices fall 10 or a bit more than 10%, so does the demand for mortgages. It's almost a one-to-one relationship in the short run. As we are more exposed to that type of market, growth therefore will be more shown in our financial results. The other potential explanation, I say potential because it's hard to validate these things, is that we do have a relatively tight underwriting standard. We are having 7% interest rates in our mortgage calculation to accept the mortgage. We also have the housing co-op financial metrics included. We do rate sensitivities based on both your personal disposable income ability to service the debt, but also include a monthly fee increase in your housing co-op as rates go up.
I think we are one or, if not the only, pretty much the only one do that. We know these are two reasons why we have lost out from the market on average. We're not happy with this. This is not where we want to be. Right now we can see the price is not the issue. Margins are stable in this quarter. We did lower the price and the margins a bit last quarter. Right now we're just working organically and operationally to make sure that our service offer is tip-top.
All right. Thanks.
Thank you. Your next question comes from the line of Jacob Kruse. Please ask your question.
Hi. Thank you. Just a couple of questions. Firstly, just on the NII, your average volumes in customer lending, sorry, your end point volumes in customer lending were down in Q2. How should we think about growth of volumes into Q4? Because I guess with that slowdown, your average volumes will by nature be down all else equaling Q4, and I guess your NII would be pushed down on that. Secondly on NII, could I just ask about your front and back book mortgage margins? Then I just wanted to ask, with respect to the strategic plan, a lot of the other banks in Sweden have invested quite heavily in IT and compliance while you have been able to keep your cost target flat. How married should we consider you to be to this fairly long-running SEK 22 billion cost target?
Do you think it's a place where you might look at cost income or something like that as an alternative metric? Then if I may just lastly, the commission expenses were quite low in the quarter relative to income. I just wanted to see if there was anything specific happening there. Thank you.
Okay. Four questions then. On NII, the reason you have a lower lending by the end of Q3 versus Q2 is mainly the bridge loans that we mentioned that we had in Q2. Elevated levels of bridge loans that come off the books in Q3. Obviously, we don't know exactly what's going to happen in Q4. Whether you're going to have new bridge loans or other type of lending that's going to increase, it's very difficult to predict how you should think about that. Obviously the negative impact from the bridge loans running off, you have now seen in Q3. On the mortgage margins, we said in conjunction with Q2 that front book margins are about 10 basis points below back book margins.
Moving forward one quarter, nothing has happened to the front book margins, and the back book margins have now come down by one basis point, driven by that change or difference we had in Q2. You now basically have approximately nine basis points difference between the front and back book margins. On the commission expenses, generally, if you look at it on an annual basis, commission expenses are a static percentage of commission income. Between the quarters, you're going to have some volatility. If you look at it, I think in Q1, for example, you had higher commission expenses relative to commission income than the average level throughout the full year. Because some of the commission expenses are fixed expenses, you pay them once a year. You might pay some more in the beginning of the year, and you pay less of that later in the year.
Most of the expenses are variable expenses. I would say if you look at it through the whole year, you're going to see that expenses versus the income is pretty much unchanged versus previous years, but they are lower now in Q3. I would still view the net commission line as the best estimate of how the bank was doing on that line this quarter. On the cost level, what we try to say with our cost cap is that you should not forget where we came from. We started about 10 years ago with a cost-income ratio of 65%, and most of our peers were way below that level. We weren't as cost-efficient as our peers back then.
We have had this cost cap, and we've come down to 48%, I think it is right now, which is more in line with our peers. At the same time, a couple of our peers actually moved down from those levels that they were at 10 years ago to lower levels today. It's definitely possible to become more cost-efficient. We believe that we have done the IT and compliance investments in the last 10 years that we should have done. We're doing about SEK 2 billion worth of IT development investments every year as we speak. That number has gone up in the last 10 years, I would say. It's possible it's going to continue to go up in the future. If that's the case, you might have to become more efficient elsewhere.
When it comes to compliance, I think our compliance function is at least twice the size it was 10 years ago, we're definitely investing in that area as well. We don't feel we're underinvested. We feel that we came from a different position than other banks, and now we've managed to come as closer to where other banks are in terms of efficiency for the last 10 years.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Riccardo Rovere. Please ask your question.
Thanks again for taking my follow-up question. On customer funding, very recently, given trade tensions, Brexit, budget law in Italy, and all these political uncertainties, are you seeing an increase in your potential cost of funding recently?
Well, yeah. If you look at the spreads on the secondary market, you can see that spreads have gone up. The market value of our senior bonds have come down. Spreads are going up by 10, 15 basis points on our senior lending, more for some banks and less for other banks. That's something that is happening in the market. For us, we have about SEK 90 billion of different bonds maturing this year. We've done SEK 83 billion of issuance this year. We have had larger deposit inflows that we planned for this year. We have very little funding to do for the next six to nine months. We don't have to do anything really if we don't want to. In that sense, we're in a good position. Yes, spreads have gone up.
Normally, that if you have to do funding with the higher spreads, you pass that on to your end customers. In that sense, it's not an issue. Yeah, there's been a change. We've had a very long period of spreads coming down, and you've seen a change for the last three or four weeks, maybe to a more healthy level. I don't know. Yeah, we've seen that, but it doesn't really impact our funding cost for now.
All right. Thanks.
Thank you. As a reminder, if you wish to ask a question, please press star and one. Your next question comes from the line of Bruce Hamilton. Please ask your question
Hi, good afternoon, guys. Thanks for taking my question. I just wanted to ask or remind myself on rate sensitivity and how you're thinking about that as we move towards Riksbank hikes. Which parts of the asset side of the loan book do you think can be repriced quickly, and how are you thinking about the stickiness on deposits or whether you'll need to pass through any of that on deposits? Obviously, one of your peers is talking reasonably optimistically about scope to get some benefits, be interested to hear your views.
We updated our rate sensitivity to SEK in Q2. We said it is about SEK 3 billion if rates go up by 100 basis points. Just to be clear what that SEK 3 billion is based on. It is based on the fact that we have about SEK 140 billion worth of equity that we do not pay any interest on. You have a one-to-one linear exposure there. If rates go up by 100 basis points, you make SEK 1.4 billion more on that equity, basically. You have sensitivity on deposits. Some of the deposits you pay interest rates on when rates go up, others you do not. We have included all of that in the SEK 3 billion guidance. We also included the LIBOR and STIBOR floors you have on the lending side. That deposit equity is all included in the SEK 3 billion.
What is not included is any implication higher rates could have on any type of lending. It could be corporate lending, it could be mortgage lending. We have basically said that you have to make your own assessment of what you think will happen with lending rates and lending margins when rates go up. That is basically our guidance. We guide for the things that we can measure and calculate, you have to make your own assessment for everything else.
Okay. Thank you.
Thank you. Our next question comes from the line of Adrian Tcheukui. Please ask your question.
Hi there. Thank you very much. Just one follow-up question on net interest income. Your non-customer-driven NII declined quite meaningfully quarter-on-quarter, and you assigned that performance to markets NII and the change in the FTP. Is this in part driven by developments in the U.S. money market funds, and do you assume this to be a fair run rate going forward? Thank you.
Yeah. No, it is not driven by the U.S. market. It is driven by the FTP changes. It is driven by the short-term NII, strong elevated NII we had in markets in Q2.
Thank you. Should we assume this going forward?
I would say this, that we had an elevated level in Q2. The level is now normalized in Q3.
Perfect. Thank you very much.
Thank you very much. There are no further questions at this time. Johan, I pass the call back to you for closing.
Okay, I'll thank everyone for dialing in, and wish you all a very nice afternoon. See you soon. Bye-bye.