Earnings Call: Q2 2017

Jul 14, 2017

Okay. Good afternoon, everyone, and welcome to the teleconference for the Q2 results. I will now hand over the call to Johan, who will make a short introduction before we open up for the Q and A. So Johan, please go. Hi, everyone. Good to have you on. We'll start with Page 2, and we note that we had a solid financial performance the first half of the year, where operating profit grew 18% year on year, driven by 8% higher income and 1% higher costs, in line with our cost cap of SEK 22,000,000,000 You can just note that we had continued exceptionally low credit loss levels, marginally improved cost income ratio, more or less similar core equity Tier 1, but somewhat improved return on equity from the 12.2% in the 1st quarter till 12.6% in the 2nd quarter. Flipping to Page 3, we have isolated the 2nd quarter. We characterized it as similar to marginally better than the Q1, which must be viewed as a fairly strong Q2, with income up 2%, operating profit up by 3%. The key ratios are very similar to the previous slide, except for the return on equity that on the quarter isolated increased to 13.2%. This was really a quarter it felt like we grew our business together with our clients. Flipping to the net interest income, which increased 4% year on year. This was driven by somewhat of volume expansion on the loan book, predominantly associated with mortgages and house building construction. Margins were stable during the quarter. The negative effect of negative interest rates can be seen here on the deposit line, and we've also increased the resolution fee. We had 4.5 basis points last year. This year, it was doubled to 9 basis points, which affects NII negatively. But we did have a small positive adjustment, and that was that the risk factor was lowered, and we saved about $100,000,000 compared to previous estimates. Go flipping on to net fees and commission. We had a very strong quarter, noting 12% up year on year. This was driven by particularly 2 areas, predominantly 2 areas. 1 was the investment banking activities, DCM, ECM and M and A. The other was that we had strong equity markets, helping asset under custody and asset under management to increase, coupled with an uptick in net inflows, which we noted now at SEK 41,000,000,000 for the 1st 6 months. And as you may remember, that number we pointed out in the Q1 to be a bit disappointing when we had SEK 6,000,000,000. So we've had a little bit of an uptick on net inflows. Going on to net financial income, the difficult line to estimate. We see a drop from SEK 2,100,000,000 in the first quarter to SEK 1,500,000,000 in the second quarter. The exceptionally low volatility that we saw in the markets had 2 consequences. 1 was that the activity level in our markets area, trading, fixed income, commodities and currencies, was quite muted. And also, the activities in our own treasury operation was clearly lower than previous. Another headwind for NFI was the CBA, which had a negative effect on the quarter. All this said, we've kind of come to something close to an average over the last 8 months 8 quarters and year on year still shows a strong number of plus 14%. Our favorite slide, the next one, operating leverage, we now say is back on track. As we put the plan together late 2015, 2016 was somewhat of a disappointment. It now feels like the first half this year have the desired momentum and the pace of positive change that we initially thought we would have over the next 3 year period at the time of this plan. We're now halfway through, and it's quite encouraging to see that we are now pacing where we want to be pacing. Could be good to highlight that 2 assumptions in our business plan have not materialized as we thought. The first one is this performance is really despite having any meaningful increase in the lending book. We continue to see low demand for corporate lending. That's away from the real estate related areas. Secondly, we were in 2015 expecting a slightly steeper and faster interest rate curve that would help the P and L at least reduce the drag meaningfully that we now see on the deposit line, and that has not happened. So those 2 are really important cylinders to us going forward, although there is not expected to be a change in the near term. Flicking through the different customer segments, large corporate and financial institutions recorded a similar operating profit in the first half of this year as last year. Under that headline, there's been 2 strong trends. 1 is a very much stronger investment banking activity, but also the muted markets area. There's also been 3, call it, technical headwinds. One is, of course, that the CVA charges has mostly been taken in this client segment. The increase in the resolution fee and also the implementation of changed risk weights for sovereigns. Looking at corporate and private customers, we increased the operating profit by 600 percent from last year. Return on equity came in at 15.1%, and this was driven by primarily driven by 2 areas. We continue to have some growth in our mortgage book and lending in relation to residential construction, stable margins, but still some growth, and the growth was a slight uptick from what we recorded in the Q1. Secondly, we continue to attract more clients in the SME and Midcorp segments, and we can now say that during the 1st 6 months this year, we've added 7,600 new corporate customers. Next page, we look at our Baltic operations and similar to the last few quarters, it's doing very well. All three countries are performing better. And here, we do see some loan growth materializing. 2nd quarter this year, we have an annual pace of loan increasing by 7% year on year and return on equity has increased to 23.2%. In our Life and Investment Management division, we got help from the new net inflow of SEK 41,000,000,000 coupled with SEK 40,000,000,000 in addition to that increase, thanks to stronger equity markets. We also saw a very high continued demand for sustainable savings products in all shapes and forms, and return on equity came in at 26.1%. One area we thought we'd just highlight, you might know that we are one of the market leaders in green bonds. We take an active role in the companies that we can influence to work for a more diverse board composition. We just launched our 6th microfinance fund, and we're now reaching about 18,000,000 entrepreneurs in predominantly emerging markets. It's SEK 5,500,000,000 under management. We are the only Nordic bank included in the Dow Jones Sustainability Index. This is an index where we are 1 out of 250 companies in the world. We aim to be at the forefront in sustainability. And here, we've just showed today 2 prototypes not yet in production, but something we're working on which we find exciting for the future. 1 is called My Footprint, which will be an integrated capability in the app where you can visualize your own carbon footprint. We here will use data that we have about our clients. We will start with private, but it could potentially also be used for wholesale clients and to give back a very simple picture of your own carbon footprint. The other one is really a customized investment advisory tool. We call it the sustainometer. And this is where any individual or institution can put in very simply your own preferences between, call it, 1 to 10 when it comes to coal, CO2, defense industry, etcetera, whatever is important to you. And we will then do a customized recommendation of financial assets that we think is appropriate for that profile. As I said, both of these are pilots. We are trying my footprint right now on some people in the bank. The sustainability, we've just done the prototype, but we really hope that we can do some real improvements like these in a good pace going forward. And by the way, both of them came from our own innovation lab efforts. So these are the products of young people burning with desire to continue this journey. Next slide, just to conclude, very strong capital position, very good liquidity position, and I will just keep it at that. You have the numbers on this page, if you would like to. And there, I'll just end saying that we had a solid second quarter in 2017, clearly helped by having a diversified business mix, so we could capture the opportunities that we spoke about previously. Somewhat improved market sentiment despite the low volatility, which led to lower hedging and markets activity, and we'll continue now to really accelerate our transformation journey, both to enhance customer experiences, but also to get increased operational efficiency in the bank. Thank you. Okay. Thank you, Johan. We will now open up the Q and A session, and we would just like to inform you that Johan will stay on until 2 CET, that means for another 16 15 minutes roughly. And then Jan Erik and I will stay if we are continuing to have questions on that one. So please feel free to post your questions. Thank you. And the first question comes from the line of Andreas Hakansson. Thank I have two questions. The first one is starting with the customer driven net interest income margin and more specifically on the lending side. You said this morning that there was no margin pressure in mortgages and still room for repricing. And on that point, should we expect a similar magnitude than what happened in 1st H, so 4, 5 bps of repricing? And then the second question or the second part of the question is on the corporate side, you seemed a bit more bearish on the margin development there. If we assume that everything remained the same and no rate move also, how do you foresee the second half in term of asset pricing for corporate? Okay. Thank you. If I start commenting on the margins relating to mortgages, I think it's important for us to stress the headline word, and that is stable. There are, under that stable, some continued future attempts to continue what we did see in the first half. But it's not large numbers. We've also seen, contrary to that, that the new business that has been written in the quarter is a basis point or a couple below previously. So all in all, it's kind of a sideline movement with where we've decided we've guided 4, 5 to 10 basis points higher for the full year of 2017, and we still stick to that. And I think we probably 4, 5 through already now at half time. On margins for corporate, it's almost the same story. There is no real indications of increased margins for corporate lending or reduced. It's kind of stable at a fairly low level. Credit spreads, as you know, have come down, but so has the funding cost for the bank. So it's important to keep those 2 in mind when you look at the net profit that we generate from lending. And on the other hand, we are having a fairly significant deposit base in Sweden at 0 with a minus 0.5%, which is, of course, where we are leaking a little bit or a little bit more than a little bit of money. Okay. Thank you very much. And the second one is moving to fees and commission, which were very strong and especially coming from the asset management business. So the equity market was strong, but also when we look at the flows there continue to improve and they're also much higher than the market flow. So are you from who are you gaining market share and what is the split between institutional and retail investors? Is there a change in mix? Or is it remaining broadly the same? I can start and I'll ask my colleagues to fill in the details. We don't see a real trend in anything but all of the different segments. As you know, we have institutional sales, we have our retail network and our lights division, all generating asset under management, and it's a broad based effort. We call it the initiative around savings. The one we pointed out during the Q1, we were not satisfied with. So it's good to see that we've got some momentum. Visa Commission from this side came in. There was a little bit of questions this morning about the margin. And I would say there's no, to me, signs that we have a margin increase even though some of the data might suggest. So it's rather the mix that has then been a bit favorable in that aspect. So that's unchanged. Okay. That's very clear. Thank you very much. Thank you. And the next question comes from the line of Andreas Hakansson. Thank you. Your line is open. Yes, good afternoon. I hope it works this time. Just wanted to come back to the PBT guidance for 2018. You said that you're now back on track to deliver on it. And then you said that you didn't get a rate increase, of course, that we see and that corporate lending hasn't picked up yet. If I look into next year, rates, we don't have a view I mean, we could all have a view on. But do you think you can reach the $24,000,000,000 target without corporate lending recovering in 2018? Thanks. Andreas, I think it's the tricky question when you want to look out in the future. If we were to reach the 24, we almost you can look at what performed very well this time. You have to repeat it one more time if you want exactly the same picture. And that is, of course, some challenge to it. The stock market has performed in 6 months pretty much what standard assessments are for a full year, and we did have an exceptional quarter on the investment bank. So I think more of it that we are currently on track. We can definitely say that we have 2 cylinders on this engine that can help us reach it. We just need the corporate lending side to expand or interest rates to come up. And kind of just feeling a little bit that we are about what we were supposed to be, not exactly like we said in 2015, but we're still around that mark here and now. Okay. Thank you. Thank you. And the next question comes from the line of Yefei Tian. Your line I have a follow-up question on the margin side here on the mortgage margin. And I have a few other questions. So first of all, on margin, over this quarter and almost past 2 quarters, you started to see cyber moving up on average by 3 to 4 bps per quarter. And the mortgage margin has been able to be stable for yourself because you some back book pricing and the back book pricing gap. But if we will look into longer term, hypothetically, if the rates were to go up by 1 percentage higher, how would you expect the margin to develop on the mortgage side from a longer term perspective? And then the second question is on the IT and Fintech investments that you have been doing as a firm. I think that is incredible from the context of European banks. Where should we expect to see that translate into either top line growth or cost reduction? Thank you. And, Ed, would you want to do the margins? Yes, sure. Well, I think the question is what's going to happen to the mortgage margins long term. I think the that the concentration in this market is fairly large. And I think all the larger retail banks, we're not one of them, but there are 2 large retail banks, which together hold about 50% of the market. And then if you add another 2, we're up to about 80% of the market. And I think we're all going to want to try to hold on to the mortgage margins. But I agree with you that they will be under a bit of pressure if interest rates move up. But for us, we changed the pricing model last year, and we have a bit to catch up still. So I think in our case, I think we can continue to move up in a positive sort of relative game to others. So yes, we'll have to keep our eyes on it and defend it. But I think we'll try to hold on to it as best we can. Okay. And on the IT investments, it is a very difficult question to answer. So I'll just relate to the plan that we have, where we've indicated the SEK 24 billion of 2018 at a flat cost. Operational efficiency coming from IT Investment is part of that plan. Otherwise, it's very difficult to be forward leaning and spending as much as we do on further IT investment without doing operational efficiencies. So it's in there. Although some of the IT developments you do don't necessarily equate to return on investment. It's a client enhancing result that is very hard to quantify what it means. But in the end, it should mean that we gain clients more than the rest if we're relatively successful doing this or and or that we also can conduct our business at a percentage point cheaper than the one who didn't succeed in this. And that's percentage point year in and year out is a little bit what guides us always trying to be a little bit more cost efficient than the rest. Thank you. Thank you. And the next question comes from the line of Mehdi Ahokas. Thank you. Please go ahead. Hi, yes. Good afternoon. Matti Ahokas from Danske Bank here. Two questions, please. Firstly, I note that you haven't included a slide on the business plan on the 2018 business plan. And the only thing also in the report you mentioned about is that you're halfway into the business plan. Should we take this as any kind of indication that you're less committed at least on the €24,000,000,000 pretax profit target? Or is this pure coincidence? Assuming you Assuming you would reach a €24,000,000,000 pretax profit target, where would that figure stand in 2018? Thanks. On the first question, I would say that's a coincidence. There was no thought behind not including the business plan for 2018. I'll just remind, when we talk about the commitment to the 24, it is in the spirit of us being as transparent as we can with our best guess if things work according to plan with a wide variety of assumptions. I mean, it's modeling the whole bank in order for that. And that is, of course, very dependent on whatever the financial markets do, interest rates, FX, etcetera, but at least something to point towards. On LC and FI, we don't really communicate the return on equity, but I can say it's going to increase. Fair enough. Thanks. Thank you. And the next question This is Adrian Chigi from RBC. 1 follow-up question on NII and one on capital. On NII, the quarter has benefited from a €100,000,000 reduction in the resolution fund fee. My understanding was that resolution fee was calculated as a 9 basis points on an adjusted balance for 2016. Can you give us more color as to what this adjustment relates to? And if this is a one off in Q2 or is it repeating in coming quarters? And then on capital, you remain at 190 basis points buffer above your 150 basis points target for the management buffer. I know it's only Q2, but how does management think about excess capital above and beyond the management buffer? Would you consider distributing it as a special dividend or a share buyback at the end of the year? Thank you. Okay. Thanks, Jan Erik here. I think on this resolution fund fee, let's try to sort this one out, once in a while. I think we had a little bit of confusion around this one this morning. But if you just take note of looking at after the fall on Page 4 in the interim report under the heading operating income in the left hand column, we discussed the NII and we say that the total regulatory fees, including resolution fund and deposit guarantee fees amounted to SEK 9 55,000,000. And that number has then been adjusted with the SEK 100,000,000 that you just mentioned. So the best sort of outlook for what that number is going to be in the second half of the year, I think, is just to use that same number again. So it's minus 55 times 2 for the full year. And what this is, is the National Debt Office is sort of finalizing their charge to the individual banks in Q2, whereas in Q1, they gave us a preliminary number. And this is a zero sum game between the banks. So if we do a little bit better in this final adjustment, it means someone else is doing a little bit worse. So but exactly how they do this in minute detail, we don't know. We have some transparency on it, but not full transparency. So that's that one. Then perhaps on the if I continue on the capital level, the 190 basis points, it's obviously something that we're absolutely comfortable with. It's fine. It means that we can continue to aim for and deliver the progressive dividend stream that we've always aimed for. And I think it's just too early to start to discuss capital repatriation. But if and when we get to that point, it's more likely to happen in the form of a buyback or a redemption or something rather than an an extraordinary dividend. We don't believe in mixing ordinary and extraordinary dividend streams with the same payout. Perfect. Thank you very much. That's for a later discussion. Thank you. Thank you. And the next question comes from the line of Amal Shah. Thank you. Please go ahead. Hi, good afternoon. This is Amal Shah from Redburn. You've spoken for a number of quarters now about the disappointing corporate activity. So I was just wondering if you could give us a sense of how much gearing there is to your business if corporate activity does pick up. If you could just give some numbers around that, that would be helpful. I'll just say the headline without giving numbers because I can't do them this fast. But it has been disappointing. We're speculating in why. It's kind of if you're a macro economist, you would actually find it a little bit of a conundrum with the GDP growth and the strong corporate client performance that we've seen in our client base that it has really led to no more leverage. Capital positions of our clients are very strong, liquidity positions are very strong and leverage is low. And this is outside housing related areas and acquisition finance because there we've actually had some high activity. I'll think the team here can or want to give some numbers, but I can say it's meaningful. It's if you were to do the income that we generate on the corporate balance sheet, which is the largest part of the balance sheet in the bank, and you can just mechanically increase with current margin the volume with 10%, which could have been a year where we would have stopped saying that it's disappointing. That could come from organic growth coupled with M and A debt financed M and A transactions. And without the margin change, it would just be 10% higher. I would stay with what you just said, Johan, but maybe just add, look at the evidence of Q2. I mean, the small uptick in activity level that we've seen, we get immediate traction. And I think it's just a testament of what you answered. Okay. Sorry, guys, I need to run. I just had one concluding remark, so I'm not unclear. And that was when we talked about the plan for 2018. We remain 100% committed to our business plan, and that involves having a flat cost target for the full year 2018 and aiming for the 24,000,000, which, of course, is subject to market changes. So full commitment behind it. Okay. Thank you, Johan. And now we will continue with the Q and A session. Thank you. And the next question comes from the line of Jens Hallen. Thank you. Please go ahead. Good afternoon. It's Jens Salenia from Carnegie. Two questions from my side. It's on the, I guess, the line of thought of weak credit demand. You mentioned this morning that under the ELSE, large corporate financial institutions, Denmark represented an opportunity for you. Could you maybe elaborate a little bit on that, what that could what you can do, what it can lead to, etcetera? 2nd question is on risk weight floors on the Basel IV. We don't have a final clarity, but it looks like we're looking at something between 70% 75% floor. You done the calculations? And what kind of impact that would have on SEB? Okay. Jens, we'll try to do try to sort out the legal dimension then on the what the question this morning in the room was actually about how much potential and the kind of the market position that we're having in respective markets. And I think where we have are the least penetrated both in terms of market share and in terms of share of wallet, that's in the Danish market. So I think looking at the position that we have in Finland and Sweden, that's kind of a go to number. We haven't really put down that in numbers. But I think coming back to the earlier question regarding the potential and the leverage that we have on our model, I think you have to kind of try to merge those 2 into 1. So I think we have I think it's important to mention that we have we see that we have potential in increasing the share of wallet in all our markets where we are participating. But when it comes to this market share for new clients, there we see the best the biggest potential in the Danish market. So I think that's important to mention. So our strategy builds on increasing share of wallet in all the Nordic markets and in Germany. And that should be done by increasing the deepness in the relationship and adding more services together with the customers. And then Jan Erik will take the other one. Okay. Yes. So on the risk weight source, I think the whole Basel IV discussion is anything but clear. It's just as unclear as it's ever been. I think the whether we're going to have output source of the levels that you spoke about or perhaps indeed have them at all is still unclear. So I think we've certainly run numbers in the bank of all sorts of outcomes, output flows of 75%, which has been sort of the highest number I've heard. And then you can we can run them on 70% or 65% or any other number that we may want to pick. And I think the way to think about this, I think, in where we are is to start where we are now and say that we are comfortable with our capital position. And very important plea, that goes for our regulator as well. We've specifically spoken to them on a few occasions, and they are happy with the capitalization level in the Swedish banks. And that means whether you get a Basel IV or remain with the system we've got today or any hybrid in between, they're just different yardsticks. And that in combination with a long implementation period means that we're talking about before you get to the end number, whatever that is, we're talking 10 years out from now. So I think this whole thing is much less of a concern than it once was. So I think we've got all the time we need to adjust or adapt to what comes down. Okay. Maybe as a quick follow-up. So if I'm hearing you right, this is not influencing your views on management buffers in terms of your capitalization or sort of short term dividend policy, etcetera? No, not at all at this point. I think we don't have a go to number yet. So it's I don't think anything has happened yet. And I think we can just rest assured that we are well capitalized at this point and we are continually committed to our progressive dividend stream. Okay. Thank you. Thank you. And the next question comes from the line of I just had, I guess, one question. On the net interest income bridge or breakdown in the fact book, you have a big increase in derivatives related net income versus Q1. It's all about SEK 260,000,000. Is that does that capture things like the deposit in title pricing and the Resolution Fund C moves? Or is that a separate item? And also just could you just explain a little bit how that number fluctuates and why it fluctuates? Thank you. Okay, Jacob. Regarding that, the derivatives, I think it is capturing the internal funds transfer pricing is, of course, eating in. If you change that model, it will be changed at overnight when you do that on the whole deposit book. So that includes of course, there can be a margin difference on that one, but it's just an internal transfer between the business division. And in this case, it's between the treasury and the LC and FY part that is the main the 2 main points of being affected for this change. Then when it comes to the resolution fund fee, it is also the business divisions, I. E, the Baltic franchise, the corporate and private customer franchise and the large corporate and financial institutions franchise, that's the divisions where we are then charging for the resolution funding because they are the ones that is then making up for the kind of the number that you are having to pay for to the National Debt Office. And if they are doing changes in the way that they are risk adjusting our balances with them, including derivatives, then that would also be seen in the NII table, of course, because we are out of the we're running with the strategy that we should allocate costs and capital to point of sale. And that's kind of our methodology. Okay. So the big derivatives gain then in the quarter, is that just funding related? Or is that trading related? Or how does it how do we get those big that big benefit? Or it can be that those the treatment of those certain assets can be changed from a resolution authority base. That can be another way of thinking at it. Okay. I guess my question kind of boils down to if that derivatives number normalizes towards CRO where I think it normally sits, would you more or less automatically get that back in the other lines? Or are you actually having an unusually strong hedge income this quarter when it comes to NII? I think I would we would not exemplify this quarter as a very strong hedging quarter. Okay. Okay. Thank you. Thank you. And your next question comes from the line of Riccardo Rovere. Thank Just one question from my side. We're seeing some kind of deceleration in real estate prices in Sweden, at least in some type of real estate in some areas of the country. Could you be able to explain how real estate prices are captured into your internal models and how this could eventually drive provisions? Hi, Ricardo. Well, we capture it in many different ways and we're feed it into many different models and pricing mechanisms and sort of stress test models in the bank. So we use that sort of data extensively. And just as you say, we have seen a cooling off in some of the larger cities. That's certainly true for Stockholm since sometime back. But we do capture it into stress testing. We feed it into loan to value models. We feed it into pricing models. So it's part of everyday life to keep track of that. And as you know, Swedish society is very transparent on that sort of thing. So we've got good data to work on that. All right. And would you be able to give us an idea what kind of correction should we see before something is captured in your provisions line? Well, given many times before, and apologies if it's a little bit of a broad brush where I repeat myself. But I don't think that we see a very large price correction in front of us in the first place. And even if we do see something a little bit larger, we don't think it's going to feed into the credit loss line on retail mortgages because the it won't happen like that because the transparency and the willingness to service your debts on mortgages is huge. And you rescore everyone and it's available in databases for all the banks all the time. So if you start to default on paying your mortgage debt or if you get sort of blips in that system, then you're locked out from credits in any shape or form in society. So the sort of willingness to service debt is therefore very large. So what will happen instead, we believe, is that people will continue to pay their debt, but will cut down on other types of spending like restaurants and travel and other things that people award themselves in this environment. And if you take the commercial real estate recorder as an example, what will happen there, then you can say that the Swedish FSA's model suggestions or requirements on us from starting from last year is then introducing that every 5th year should be a downturn scenario. So you could say that we are already modeling that 1 year of downturn every 5th year. So that's kind of so that's why it's already in there in the current model. So it will take some time before it hits also in you need a more prolonged period of time of pricing correction before that eats into that. Okay. Crystal clear. Thanks. Thank you. We don't have any further questions at this time. Okay. It doesn't seem to be any more questions this Friday afternoon. And outside the windows here in Stockholm, the celebration for the Crown Princess 40th birthday has just started. So with all we would also then on SAB's behalf, we'd like to end this call by congratulating her then on that big day. And to all the rest of you, we wish you a nice weekend, and thanks a lot for your interest. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you.