Good afternoon, everyone. Welcome to the teleconference for the second quarter result. I will now hand over the call to Johan, who will make a short introduction before we open up for the Q&A. Johan, please go.
Hi, everyone. Good to have you on. We'll start with page two. 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 billion. Can just note that we had continued exceptionally low credit loss levels, marginally improved cost income ratio, more or less similar Core Equity Tier one, but somewhat improved return on equity from the 12.2 in the first quarter till 12.6 in the second quarter. Flipping to page three, we have isolated the second quarter. We characterize it as similar to marginally better than the first quarter, 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. We've also increased the resolution fee. We had 4.5 basis points last year. This year it was doubled to nine basis points, which affects NII negatively. We did have a small positive adjustment, and that was that the risk factor was lowered and we saved about SEK 100 million compared to previous estimates.
Flipping on to net fees and commission. We had a very strong quarter, noting 12% up year-on-year. This was driven by particularly two areas, predominantly two areas. One was the investment banking activities, DCM, ECM, and M&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 billion for the first six months. As you may remember, that number we pointed out in the Q1 to be a bit disappointing when we had six. 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 2.1 billion in the first quarter to SEK 1.5 billion the second quarter.
The exceptionally low volatility that we saw in the markets had two consequences. One was that the activity level in our markets area, trading, fixed income, commodities, and currencies, was quite muted. Also the activities in our whole treasury operation was clearly lower than previous. Another headwind for NFI was the CVA, which had a negative effect on the quarter. All this said, we've come to something close to an average over the last eight months, eight quarters, and year-on-year still shows a strong number of +14%. Our favorite slide, the next one, operating leverage, we now say it's 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 two 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&L at least reduce the drag meaningfully that we now see on the deposit line, and that has not happened. Those two 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 the first half of this year as last year. Under that headline, there's been two strong trends. One is a very much stronger investment banking activity, but also the muted markets area. There's also been three, 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 SEK 600 from last year. Return on equity came in at 15.1%, and this was primarily driven by two areas. We continue to have some growth in our mortgage books 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 first quarter. Secondly, we continue to attract more clients in the SME and mid-corp segment, and we can now say that during the first 6 months this year, we've added 7,600 new corporate customers. Next page. Excuse me. We look at our Baltic operations, and similar to the last few quarters, it's doing very well. All three countries are performing better. Here we do see some loan growth materializing.
Second quarter this year, we have an annual pace of loans increasing by 7% year-over-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 billion, coupled with SEK 40 billion 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. 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 sixth microfinance fund, and we are now reaching about 18 million entrepreneurs in predominantly emerging markets. It's SEK 5.5 billion under management.
We are the only Nordic bank included in the Dow Jones Sustainability Index. This is an index where we are one out of 250 companies in the world. We aim to be at the forefront in sustainability, and here we've just showed today two prototypes, not yet in production, but something we're working on which we find exciting for the future. One 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 one to 10 when it comes to coal, CO2, defense industry, et cetera, whatever is important to you. 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 the My Footprint right now on some people in the bank. The Sustainometer, 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. By the way, both of them came from our own innovation lab efforts. 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. 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. 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&A session. We would just like to inform you that Johan will stay on until 2:00 P.M. CT. That means for another 15 minutes, roughly. Then Jan Erik and I will stay if we continue to have questions on that one. Please feel free to pose your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, you may press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you may press the hash key. The first question comes from the line of Andreas Håkansson. Thank you. Your line is open. It seems like we've lost the line of Andreas. Next question comes from the line of Willis Palermo. Thank you. Please go ahead.
Hi, thanks for the presentation. I have two question. 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. On that point, should we expect a similar magnitude than what happened in first half, so four or five basis points of repricing? 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 remain 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. That is stable. There are under that stable some continued future attempts to continue what we did see in the first half. It's not large numbers. We've also seen contrary to that the new business that has been written in the quarter is a basis point or a couple below previously. All in all, it's a sideline movement where we've guided for five to 10 basis points higher for the full year of 2017. We still stick to that. I think we probably four or five through already now at halftime. 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 stable at a fairly low level.
Credit spreads have come down. So has the funding cost for the bank. It's important to keep those two in mind when you look at the net profit that we generate from lending. On the other hand, we are having a fairly significant deposit base in Sweden at zero with a -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. The second one is moving to fees and commission, which were very strong, especially coming from the asset management business. The equity market was strong, also when we look at the flows there continue to improve, and they are also much higher than the market flow. 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 probably the same?
I can start. 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 life 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. It's good to see that we got some momentum. In addition to that, I think stock markets were up 8%. That also is a meaningful explanation why fees and commission from this side came in. There was a little bit of questions this morning about the margin. 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. That's unchanged.
Okay. That's very clear. Thank you very much.
Thank you. The next question comes from the line of Andreas Håkansson. Thank you. Your line is open.
Yes, good afternoon. I hope it works this time. I just wanted to come back to the PBT guidance for 2018. You said that you're now back on track to deliver on it. You said that you didn't get a rate increase, of course, that we've seen. Corporate lending hasn't picked up yet. If I look into next year, rates we don't have a view on. I mean, we could all have a view on, do you think you can reach the SEK 24 billion target without corporate lending recovering in 2018? Thanks.
Hey, Andreas. I think it's the tricky question when you want to look out in the future. If we were to reach the SEK 24 billion, 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. That is, of course, some challenge to it. The stock market has performed in six months, pretty much what standard assessments are for a full year. We did have an exceptional quarter on the investment bank. I think more of it that we are currently on track. We can definitely say that we have two 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.
just feeling a little bit that we are about where we were supposed to be, not exactly like we said in 2015, but we are still around that mark here now.
Okay. Thank you.
Thank you. The next question comes from the line of Riccardo Rovere. Sir, your line is open.
Hey, thank you for taking the question. I have a follow-up question on the margin side up here on the mortgage margin, and I have a few other questions. First of all, on margin. Over this quarter and almost past two quarters, you started to see STIBOR moving up on average by three to four basis points per quarter. The mortgage margin has been able to be stable for yourself because you have some back book pricing and the back book pricing gap. But if we look into longer term, hypothetically, if the rates were to go up by one percentage higher, how would you expect the margin to develop on the mortgage side from a longer-term perspective? 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.
When should we expect to see that translate into either top-line growth or cost reduction? Thank you.
René, would you want to do the margins?
Yeah, sure. Well, I think the question is what's going to happen to the mortgage margins long term. I think the fact that the concentration in this market is fairly large, I think all the larger retail banks, we're not one of them, but there are two large retail banks which together hold about 50% of the market. Then if you add another two, we're up to about 80% of the market. I think we're all going to want to try to hold on to the mortgage margins. I agree with you that they will be under a bit of pressure if interest rates move up. For us, we changed the pricing model last year, and we have a bit to catch up still. I think in our case, I think we can continue to move up in a positive relative game to others.
Yeah, we'll have to keep our eyes on it and defend it. I think we'll try to hold on to it as best we can.
Okay. On the IT investments, it is a very difficult question to answer. 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. 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. In the end, it should mean that we gain clients more than the rest if we're relatively successful doing this, and/or that we also can conduct our business at a percentage point cheaper than the one who didn't succeed in this.
That percentage point year in, 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. The next question comes from the line of Matti Hokkanen. Thank you. Please go ahead.
Hi. Yes, good afternoon. Matti Hokkanen 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. 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 SEK 24 billion pretax profit target, or is this pure coincidence? The second question is regarding the LC&FI return on equity. It's roughly 10% now. Assuming you would reach a SEK 24 billion 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. It's modeling the whole bank in order for that. That is, of course, very dependent on whatever the financial markets do, interest rates, effects, et cetera. It leaves something to point towards.
On LC&FI, we don't really communicate the return on equity. I can say it's going to increase.
Fair enough. Thanks.
Thank you. The next question comes from the line of Adrian Cighi. Thank you. Your line is open.
Hi there. This is Adrian Cighi from RBC. Thank you for taking my questions. One follow-up question, then one on capital. On NII, the quarter has benefited from a SEK 100 million reduction in the resolution fund fee. My understanding was that the resolution fee was calculated as a nine 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? 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. Johan here. I think on this resolution fund fee, let's try to sort this one out once and for all. I think we had a little bit of confusion around this one this morning. Perhaps if you just take note of looking at after the call on page four 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 955 million. That number has then been adjusted with the SEK 100 million krona that you just mentioned. The best 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.
Okay.
SEK 955 times two for the full year. What this is the National Debt Office is finalizing their charge to the individual banks in Q2, whereas in Q1 they gave us a preliminary number. This is a zero-sum game between the banks. If we do a little bit better in this final adjustment, it means someone else is doing a little bit worse. Exactly how they do this in minute detail, we don't know. We have some transparency on it, but not full transparency. That's that one. Perhaps 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. I think it's just too early to start to discuss capital repatriation.
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 extraordinary dividend. We don't believe in mixing ordinary and extraordinary dividend streams in the same payout.
Perfect. Thank you very much.
That's for a later discussion.
Thank you.
Thank you. The next question comes from the line of Namit Shah. Thank you. Please go ahead.
Hi. Good afternoon. This is Namit Shah from Redburn. You've spoken for a number of quarters now about the disappointing corporate activity. 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 would be helpful.
I'll just say the headline without giving numbers because I can't do them this fast. It has been disappointing. We're speculating in why. If you're a macroeconomist, 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. This is outside housing-related areas and acquisition finance, because there we've actually had some high activity. I'll see if the team here can or want to give some numbers, but like I say, it's meaningful.
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, 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&A, debt-financed M&A transactions. Without a margin change, it would just be 10% higher.
Yeah. I would stay with what you just said, Johan, but maybe just add, look at the evidence of Q2. The small uptick in activity level that we're seeing, we get immediate traction. I think it's just testament of what Johan just said. 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. That involves having a flat cost target for the full year 2018 and aiming for the 24, which of course is subject to market changes. Full commitment behind it.
Okay, thank you, Johan. Now we will continue with the Q&A session.
Thank you. The next question comes from the line of Jens Hallén. Thank you. Please go ahead.
Good afternoon, Jens Hallén 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 LC&FI large corporate financial institutions, Denmark represented an opportunity for you. Could you maybe elaborate a little bit on that, what you can do, what it can lead to, et cetera? Second question is on risk weight floors under Basel IV. We don't have final clarity, but it looks like we're looking at something between 70 and 75% floor. Have you done the calculations on what kind of impact that would have on SEB?
Okay. Hey, Jens. We will try to sort out the legal dimension on 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 the respective market. I think where we are the least penetrated, both in terms of market share and in terms of share wallet, that's in the Danish market. 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. 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 try to merge those two into one.
I think it's important to mention that we see that we have potential in increasing the share wallet in all our markets where we are participating. When it comes to the market share for new clients, there we see the biggest potential in the Danish market. I think that's important to mention. Our strategy builds on increasing share wallet in all the Nordic markets and in Germany, that should be done by increasing the deepness in the relationship and adding more services together with the customers. Jan Erik will take the other one.
Okay. Yeah. On the risk weight floors, I think the whole Basel IV discussion is anything but clear. It's just as unclear as it's ever been. I think whether we're going to have output floors of the levels that you spoke about or perhaps indeed have them at all is still unclear. I think we've certainly run numbers in the bank of all sorts of outcomes. Output floors of 75%, which has been sort of the highest number I've heard. We can run them on 70 or 65 or any other number that we may want to pick. I think the way to think about this, I think where we are is to start where we are now and say that we are comfortable with our capital position, and very importantly, 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. 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. 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. I think this whole thing is much less of a concern than it once was. I think we've got all the time we need to adjust or adapt to what comes down.
Okay, thank you. Yes, maybe as a quick follow-up. If I'm hearing you right, this is not influencing your views on management buffers in terms of your capitalization or short-term dividend policy, et cetera?
No, not at all at this point. I think we don't have a go-to number yet. I don't think anything has happened yet. I think we can just rest assured that we are well-capitalized at this point and we are continually committed to our progressive business stream.
Okay, thank you.
Thank you. The next question comes from the line of Jacob Kruse. Thank you. Your line is open.
Thank you. I just had one question. On the net interest income bridge or breakdown in the fact book, you have a big increase in derivatives related net interest income versus Q1. It is over SEK 260 million. Does that capture things like the deposit internal pricing and the resolution fund fee moves, or is that a separate item? Could you 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 overnight when you do that on the whole deposit book. That includes, of course, it 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&FI part. That is the two main points of being affected for this change. 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 Corporates & Financial Institutions franchise. That's the divisions where we are charging for the resolution funding because they are the ones that are making up for the number that you are having to pay for to the Swedish National Debt Office. If they are doing changes in the way that they are risk-adjusting our balances with them, including derivatives, that will also be seen in the NII table, of course. We're running with the strategy that we should allocate costs and capital to point of sale, and that's our methodology.
Okay. The big derivatives gain in the quarter, is that just funding related or is that trading related? How do we get that big benefit?
It can be that 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 boils down to if that derivatives number normalizes towards zero, where I think it normally sits, would you more or less automatically get that back in the other lines? Are you actually having an unusually strong hedge income this quarter when it comes to NII?
I think we would not exemplify this quarter as a very strong hedging quarter.
Okay. Thank you.
Thank you. Your next question comes from the line of Riccardo Rovere. Thank you. Your line is open.
Good afternoon to everybody. 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, Riccardo. We capture it in many different ways and/or feed it into many different models and pricing mechanisms and sort of stress test models in the bank. 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 some time back. We do capture it into stress testing. We feed it into loans value models. We feed it into pricing models. It's part of everyday life to keep track of that. As you know, Swedish society is very transparent on that sort of thing. We've got good data to work on that.
All right, thanks. Would you be able to give us an idea what kind of correction should we see before something is captured in your provisions line?
I think this is the same answer as we've given many times before. Apologies if it's a little bit of a broad brush or if I repeat myself. I don't think that we see a very large price correction in front of us in the first place. 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. It won't happen like that because the transparency and the willingness to service your debts on mortgages is huge. We score everyone, and it's available in databases for all the banks all the time. 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.
The sort of willingness to service debt is therefore very large. 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.
If you take the commercial real estate record 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 fifth year should be a downturn scenario. You could say that we are already modeling that one year of downturn every fifth year. That's why it's already in there in the current model. 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. Once again, ladies and gentlemen, if you wish to ask a question, you may press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you may press the hash key.
Okay. It doesn't seem to be any more questions this Friday afternoon. Outside the windows here in Stockholm, the celebration for the Crown Princess' 40th birthday has just started. We would also then, on SEB's behalf, would like to end this call by congratulating her then on that big day. 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 all.