Earnings Call: Q3 2016

Oct 20, 2016

Okay. Welcome to the teleconference for the Q3 results. We would like to keep this conference at 45 minutes due to other arrangements throughout the day. So I will hand over immediately to Annika for introduction. Okay. Welcome to the presentation of the Q3 of 2016. Operating profit SEK 5,200,000,000. Slide 2. Even though market conditions continue to be challenging both for our customers as well as for ourselves, we saw a small increase in activity at the end of the quarter. Market uncertainty after Brexit vote continued into the Q3 and Swedish short term interest rates fell further. Activity increased towards the end of the quarter when we saw stronger demand for loans and also better stock market climate. And we continue to have a strong balance sheet as the quality even this quarter is very good. On Slide 3, you can see that this quarter we had no one off items. And to make it easier to follow our underlying results, I'll just briefly address the non recurring items that we've had in the recent quarter. Just remember that in the quarter of this year, we realized the Baltic part of Visa, SEK 520,000,000 came in under other income. In the Q1 of this year, we have a breakdown of the goodwill after our reorganization. We are now organized organized on the basis of customer segments. We had restructuring effects due to that totaling of SEK 5.9 1,000,000,000. During the Q2 2015, growth had a negative effect from being denied the right to deduct a good a good holding tax of SEK 900,000,000 in Switzerland. So for simplicity, I will now continue presenting the In a challenging business environment, income declined by 5% compared to the 1st 9 months last year. Operating expenses dropped 1%, and operating profit fell 9% compared to last year to SEK 14,700,000,000. Return on equity came to 11.2%, and our Return on equity came to 11.2 percent, and our common equity Tier 1 capital ratio was EUR 18.6 percent. It was 17.8 percent a year ago. On Page 4, if we take a look at the 3rd quarter's stand alone, revenues increased by 2% versus the Q2 of this year, which is quite unusual. Costs were unchanged and the operating profit increased by 4 percent. Return on equity was 12.3% for the quarter alone. In other words, a pretty good Q3 for SEB. I will now just comment on the different line items. On Page 5, you see NII decreased 3% compared with the 1st 9 months of last year, but was unchanged from the Q2 this year. Also customer driven NII was unchanged from the previous quarter. Currency adjusted lending volumes increased in all customer segments by totaling of SEK 28,000,000,000 in the 3rd quarter, even though large corporate investment driven loan demand remains low. In addition, we have support from slightly better lending margins. The positive effects within lending were offset by the negative repo rate and also that fiber dropped further in the quarter, but down 8 basis points points in Q3, which puts pressure on deposit margins and markets and treasuries NII. Non customer driven NII weakened slightly further quarter on quarter. On Page 6, you see NFI NFI commission. Net fee income income fell by 14% for the 1st 9 months and 1% against the previous quarter. The reason is from so called stock lending operations has declined as we have adapted to the new liquidity and capital regulation. The positive stock market climate in the 3rd quarter increased managed asset volumes in the quarter. Commissions from payments and cards also increased compared to the 2nd quarter. And the Q2. And the underlying net result of financial transactions increased by 7% compared with the 1st 9 months of last year. The increase would have been greater if adjusted for market valuations that we had working against us this year. In the 1st 9 months, the difference is just over EUR 900,000,000. Compared with the previous quarter, the effects were more than EUR 100,000,000 better, even though they remained negative in the quarter, and that is on Page 7. The results rose 11% against the Q2 2016, and the quarter was characterized by higher activity in the aftermath of Brexit, which meant that customers were active on the fixed income and foreign exchange side. As we said in the last two quarters, our strong NFI income is true that our customer driven business model shows good results in shaky markets, even while those shaky markets often lead to lower corporate activity, which affects commissions negatively. This is another example of importance of our well diversified business mix. You need to look at all three lines. On Slide 8, you see the first 9 months of the new 3 year plan has been very challenging as market conditions have changed. We're closely monitoring international development and how our customers are reacting. We have for many years now worked to reduce underlying expenses, and we do this while at the same time investing around SEK 2,000,000,000 per year in pure IT development. And as I said earlier, this has been held under our cost ceiling. I will show some examples of this later on. On Page 9, with the large corporate and financial institutions. The result is down by 18%, excluding one off effects compared with the 1st 9 months of last year. Major reason for this is the negative market valuation I mentioned earlier. Customer demand for risk management services has been strong in all asset classes. The number of business transactions were few and credit demand has been held back by uncertainty. However, we now see an increase in lending demand in the 3rd quarter, driven by a number of major transactions. Currency adjusted lending increased SEK 19,000,000,000 in the quarter. Apart from the higher activity after Brexit, activities within financial institutions have been rather low. The results for the 3rd quarter amounted to SEK 2.1 billion, of which was 9% lower than the Q2 of this year. Asset quality remains very good. The division and private customers in Sweden adversely affected by the negative interest rate as well as the new regulation on interchange fees on the credit card side. Operating profit dropped 2% versus the 1st 9 months of last year, but were up 1% from the previous quarter. Even here, credit quality is good. On the corporate side, we continue to see that both the number of customers loan volumes increase. I will come back to that. And since last summer, we have grown more slowly in mortgages. Currently, we're growing by a bit more than 2% annually versus 8% for the market as a whole. Looking at the savings area, we see that customers selected more strategy and equity funds again. In Private Banking, we continue to attract new net infill for Catheter, MXN 25,000,000,000 this year. On Page 10, the ball stick show a better result versus last year, increasing by 5%, and we are seeing continued increase in customer activity and loan demand in all countries and for both business and for individuals. We can clearly see now that the Baltic companies have been able to mitigate the impact of the Russian sanctions. Life and Investment Management reports slightly lower operating profit, down 4% against the 1st 9 months of 2015. And here, the stock market downturn during the year hit, of course, asset values and both base commission and performance based revenues decreased. And Stockholm's topic change turned upwards again during this quarter, which also, of course, helped assets under management. Our fund ratings from Morningstar have continued to improve, and we do maintain our leading position among the major players. Life business performance increases. We are the only bank with a complete savings offering, which is appreciated by our customers. And for us, it was therefore a significant token to now also be a selectable option within the traditional insurance with the SAS LOU agreement on the occupational pension side. In total, weighted new sales in life accounted to EUR 40,000,000,000 in 2016. And here, we are clearly building future value. Page 11. In addition to the growth, as a new business, we are focuses on transformation with 3 main components: customer experience and service, skills development as well as digitization and automation, and also for our internal processes. And this year, we have completed a number of major investments, IT investments worth about SEK 2 point 5,000,000,000 over the past 4 years to further lift our customer service. We have tried to move away from very large IT projects, which create complexity and instead work much more agile and make smaller launches more frequently and faster. And this will now finally be possible to accelerate further when these huge projects are finally implemented. Examples include an entirely new custody platform, a completely new fund management system, a brand new FX risk management via service called Driven. And just the other week, we launched our first employee, Amelia, who is based on artificial intelligence. Digitization is really starting to take shape and opens up new ways to enhance customer experience. Turning to capital ratios on Page 12. Our common equity Tier 1 capital ratio was 18.6 percent last quarter. The ratio decreases slightly between quarters due mainly to risk weighted assets having increased in the quarter. The ending volumes grew partly because the Swedish kroner has a weakening as the euro and the U. S. Dollar. If we calculate in the same way as the Swedish FSA does, our capital requirement totals 16.1% in Q3. On top of this, we can add 0.8% for changes in the maturity flow and corporate risk weights, which means that we end up at 16 point 9% at the end of Q3. And that means that our buffer is 1.7 percent. Continuing the balance sheet on Page 13. Credit quality remains very good, and the loan loss ratio is 7 basis points for the 1st 9 months. And we still have around a quarter of our balance sheet in liquidity reserves. To round up before taking your questions, customer expectations and behavior is changing rapidly. Our value for them, and that means we'll do that by service them in the best possible way. And in the current operating environment, the need for resilience and for well diversified business mix increases. SEB has that resilience, and we're also well positioned to support our customers. And I think we're all now ready to take your questions. Thank you. Your first question today is from the line of Matti Ahokas from Danske Bank. Please go ahead. Yes, good afternoon. Two questions, please. Firstly, on the large corporate division. There's been a substantial growth in the lending, especially during this year, but the margins have decreased quite a lot. Could you clarify a bit what's going on here? Is it a question of a mix effect? Or why has the margin come down so much? Question number 2 is on the commission income. The performance based asset management fees have been at the lower level for now for quite some quarters. Is this a kind of general performance fees just didn't come in? Matthew, I think on the first question there on the NII in, I'd say, 5, what you're seeing is really a little bit of an anomaly in a way. I mean, at least the way the NII works in LCFI is that you have corresponding vessels between NII and NFI to a large extent depending on the anatomy of the transactions done in the quarter. So I agree with you, it looks a little bit on that as volumes grow and we hold margins well on the lending side, it doesn't appear that way because some of the effects come through in the NFI line. That's one component. So it's the market's deal flow, customer driven deal flow in that comes through in NFI, which is the compensating effect. Another one to think about is that we talked about in the past that we've sort of, should I say, compensated the dilutions a little bit to the internal transfer pricing to hold and increase our deposit volumes. And we've done, I would say, so well on that, that we scale that back a little bit. So that's the other effect causing that. Then on the second question, which I think related to performance fees, right, I think it's just a result of previous high watermarks being so strong that it's in this stock market environment, it's difficult to surpass those. Fair enough. Great. Thanks. Thank you very much. The next question is from Johan Ekholm from Bank of America. Please go ahead. Thank you very much. Just a couple of things. Maybe if we can continue first on the corporate side. I think you mentioned in the press conference this morning and also in the report that there is some signs that credit demand is picking up. Can you talk a little bit more about where you're seeing that? I think you mentioned that it's more domestically focused. Is it on the SME or the large corporate side? And then maybe sticking with the corporate side, increase in capital requirements. Are you increase in capital requirements. Are you seeing that in the conversations you're having with corporates today that there has been a repricing in the market? And is this something that we should start to see already in Q4? Or is this a much more long term trend? And then maybe finally just on the cost cap, I think you mentioned as well this morning that you're clearly running well below, but historically you've been good at incorporating unforeseen charges within the cost Capa. And I think you alluded to the bank tax. Is that how we should think about it that you're keeping some room there for this bank tax and maybe post some other mitigating actions that doesn't Annika here, I could talk to Annika here. I can talk to the last one regarding the cost synergy. And I think, again, of course, at the moment, it seems like we have a lot of room for maneuver, and that's been actually very much on purpose because we also see still but steadily FTEs are leaving the bank, which we have which we also are forecasting. We also think that the higher bank tax, but we also know that taking care of all these IT launches with licenses. In the future, these investments will also be done. And all of that is thought to come in below the 22. So again, have the $22,000,000 ceiling, and we try to make sure that the $700,000,000 in extra tax is within that ceiling. So we try to do as much as we can at all times to keep the ceiling of 22. So we hope that we can also make room for the 700 within the ceiling. Then you asked about corporate lending. I think when we look at corporate and corporate and private, I mean, SMEs and mid corporates in Sweden, I think the less international you are and the more domestic you are, the better the climate has been. So we've been very active there. We've also been very active in constructive companies, I mean, the construction in Sweden. And that's something kind of we promised domestically, saying that when construction starts, we as banks must be able to support. And I think, Margin Kiel, you see that the market grew with 4% when it comes to kind of corporate domestic sector or corporate, and we grew with 11, so we're really keeping that promise, and we've been very, very active in that area. Do you want to add something, Henrik? No, think maybe in relation to the pricing power that you asked about and whether we're going to sort of offload the cost for increased regulation, the answer is yes. We're certainly going to do our best to do that. I think as we from the very largest corporates, it's going to be more and more it's going to be sort of easier and quicker to do it as you move down to mid corporate and SMEs. But on the larger corporates, you have an international market price. And I think it's going to take a little bit longer to do that. But that repricing, we will Perfect. That was all very clear. Thank you. Thank you very much. Your next question today is from the line of Yassie Tian from Citi. Please go ahead. Thank you for taking the question. I have a question more on the Vo Tech business. Obviously, it's very strong this quarter. I was thinking, are you taking market share? Or is this underlying strong economy there in the press interview that Anika mentioned that you think that none of the banks have sufficient capital and you still think that there are uncertainties. Could you please explain what are the uncertainties that is yet to be genuine growth. But we also see, of course, the genuine growth. But we also see, of course, the effects are coming out also. Of course, we are gaining from the uncertainty a little bit new bank of DNB in Nordea. So of course, a lot of customers are thinking about where is my long term home at the moment, and of course, we are very active there as well. So I think a little bit of both. I think we are taking a little bit of market share, but we're doing it carefully. But we're definitely growing, in particular, I would say Lithuania and Estonia, while a little bit slower in Latvia. Then on the second in Latvia. Then on the second question relating to regulatory uncertainty, there isn't so much of that left if we stay with the Swedish regulator for a minute. I mean, what they have now done is to finalize the extract process. And we have, as a result of that, the 80 basis points addition that Annika talked about earlier. They still include an element of standardized or sort a standardized surcharge at this point. And part of the process with the regulators to hand in a couple of models that need to be approved hopefully before year end. I can't guarantee that that's guarantee that that's in the regulators' hands. But I'm hoping that we will have approval on those models before year end, and in which case the 80 basis points may become lower than that. We'll just see how much lower, but that remains to be seen. So stay tuned for an update on that period. So other than the model approval and my impression is now with all the N factor and PD factor 80 bps being announced, the regulatory uncertainty is much lower than we went into beginning of the year. I was just thinking from big picture point of view, are there any other pending regulations that we should No, but I think if you follow on the press code, it was also the discussion regarding Basel IV because I think that is a big unknown. And I think we said in Sweden, depending on if that one grows in, will the finance inspection then look at other pillars that they could work with other buffers that might be changed. But it is a big known actually. It depends on who you talk to. But if you would have heard, of course, the head of the Boston committee talking, of course, you have a lot of respect for that process as well. So we will see how this plays out. But that one is a big unknown, even though we think it's far ahead and it will take some time. And most out of the Swedish regulator is already out there. But we are more than a Swedish bank. We also have to compete outside Sweden. Yes. I'm sorry to extend this answer even more. But I think just to add on to what Annika is saying, I think it is a big threat in Basel IV potentially what they're suggesting. But I think one has to, of course, a factor in the time horizon. As you say, Annika, and the fact that there will be before that has filtered through European Commission and the Swedish or any national legislation, a number of years will not pass. I think the time available for banks to adjust the models, business models and for regulators to sort of compensate through Pillar 2 arrangements, we'll be there. So I think we are actually fine. Okay. That's very clear. Thank you so much. Thank you very much. The next question today comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Hi, Jan Molten here, Credit Suisse. Thanks for taking the questions. Just a couple of follow ups after the conference in Stockholm this morning here. So you mentioned activity has been picking up. And just do you feel that there is a larger shift in any way in fundamentals leading to a sustained increase in activity levels? I think you comment on better levels, especially at the end of the quarter. So that's my first question. And the second, I think the bank is comfortably above new regulatory requirements here and we've had now the corporate risk weight. So it's clarity on that. And I know it's a Board decision, but is this time to act or think about excess capitalization? Is that too early? Thank you. Well, if you ask me, I think to talk about excess capital, it is too early. I think so. I just think we are comfortably above our own buffer, including actually what the finance inspection is demanding from us. But the year has not ended yet, and we need to see a little more about that. Now Janek looks very worried, so I'll ask him to add on some comments here before I say too much. I don't look Thank you. And the question around if you feel there is a larger shift fundamentally leading to a sustained increase in corporate activity level based on what you've seen? No, I don't think you can say that yet. I think what we did see I mean, of course, we have now created some of our own kind of we can track where we are active and we can see that everything that is moving actually FBS has some kind of lean position into that and that is what we are tracking. Unfortunately, it's not that much. There have been some bigger ones. I think actually there's still a lot about confidence. There's still a lot about worry about negative interest rates and where is Europe heading and what is going on. So on the M and A side, for example, we haven't really seen a lot. But we are working on a lot of stuff as usual. So of course, you don't know if that would materialize. I think it's a little bit we need a little bit more sense of confidence. I think we feel actually that we could do more. And I think at the same time, the business has not been that active. We are investing all our time, in particular now, I think in organizing ourselves off the customer segments, we can see that we have a completely different agenda the way we talk to our customers and understand their needs. So I'm quite optimistic that we can take the business activity did pick up in September. If that emanates into all the way into Q4, it's too early to tell. Okay. Many thanks for your help. You're welcome. The next in line is from the line of Anton Kvaichak from UBS. Please go ahead, sir. Good afternoon and thank you for the presentation. The presentation. A couple of quick questions, please. Firstly, to come back on the net interest income in the large corporate division. Going forward, The second question happen in Q4 and maybe Q1 next year? The second question please on dividends. Can you remind us whether you're still committed to having a growing DPS year on year? And what is growing DPS for you? By how much do you think it needs to grow in order to satisfy your requirements for progressive cash return? And finally, a third question or rather clarification, cap and the cost cap doesn't move? Thank you. Okay. On the first question on NII, I think, yes, I think you should probably see a little bit of rebounding for one more than the other. I think on the treasury side, the fact that we have been reducing the subsidization of deposits gathering in LCFI, that effect will not be there to the same extent next time around. But the other component, which is basically the trading patterns in markets, is more difficult to predict. But I would probably put my money on an improvement on that for next time around. On the DDS question, I think even if we said just now that we don't have excess capital in the sort of traditional sense of thinking about that. And the ambition is certainly in the bank to have a growing DPS stream. And we've always been quite clear on that, and we've delivered that for a long period of years, and that ambition stays the same. Then how much we can do and the discussion around that is something that we will need to lead to the Board to think long and hard about, but no change in our mission there, of course. And on the bank tax question, yes, you did hear us right that we aim to cover the bank tax increase by SEK 700,000,000 the SEK 22,000,000,000 cap. So we're aiming to absorb that through internal efficiency. The next question is from the line of Omar Keenan from Deutsche Bank. Please go ahead. Hi. Thank you very much for taking the question. I just had a follow-up question on net interest income. I was hoping to explore after a good increase in mortgage margin what the front versus back book dynamic is on mortgages? But then secondly, what level of corporate repricing you think is required to maintain? 80 basis point impact of higher corporate risk weights? And do you think that will be kind of achievable in the next 2 years? And then the second part of my question, also on net interest income, it's a little bit more short term in nature. Is what do you think the quarterly ambition, more or less done with headwinds from short term rates, which I guess is always a dangerous thing to say. But I guess kind of going forward from here, you mentioned that the positives are volume growth and maybe a bit more mortgage margin and the change in how you treat the deposit costs in the division. But against that, I guess, there's a higher resolution fee of €600,000,000 annualized or €150,000,000 a quarter. Do you think all the positives can offset that €150,000,000 headwind? Well, Omar, on the mortgages, the number we actually talk about is the back book and that's at 119 basis points and the same truth. It's that new sales are quite a bit above that and the rollover rates are also higher than the back book rates. So I won't give you numbers on those, but what I would say is that the repricing of the back book will continue in the quarter, I think, certainly for another year. We may not be able to keep the pace we've done this year, which will be, I think, very close to 20 basis points. So we're down 15 in 9 months. So it looks like we're executing for another year. On that second question on how much do we need to refrice the cover for the 80 basis points. Well, let's see whether the 80 basis points end up first, I think. I mean, hopefully, through the modeling approvals and the buffer on risk weighted assets that we've put aside and quarter after that we've put aside. And at last year end, we can bring that number down. And in the mean time, we will start to reprice to cover for standardization of the risk weights. And the 2 ends will probably meet at some point here in the future, and we'll just have to see when. But those rules will be positive, I think. Then on the quarterly ambition and the signaling of what's going on, I think the especially we're just seeing a more sustained pattern developed in that loan demand generation is a little bit slower, but customer driven trading is strong. I think we're just seeing how that's continuing. And I think what's going to change in that, well, maybe in a few weeks' time when we pass the U. S. Election and perhaps a little bit further down the road, the U. S. Might even have interest in increased its interest rate. Those two things are, I think, fairly important milestones that the solution fund fee, we're going to have to carry on the solution fund fee, we're going to have to carry, it's more like $700,000,000 $750,000,000 or more than $600,000,000 a year in addition, unfortunately. But we will certainly do our best to cover for that and for other such outs loaded onto the bank, including bank tax and non deductibility for subordinated debt interest and the like. Okay. And how is it easy is it to reprice for the resolution fund fee? I mean, I guess because yes, I mean, on a quarterly level, it's kind of €150,000,000 kind of per quarter or maybe a bit more than that. Is it easy to pass that price on? And who should pay the price? It's never easy. I don't think it's easy at all, but it's another cost of doing business. And I think there are all sorts of charges that are being put on to the international sector from the authorities here. And it's I mean, there are variations that we've seen here. I mean, the bank tax is actually a the Russian, it's the cost of producing financial services in Sweden, and that's the cost of raw material for industry. And that's something that I think any industry wants to try to compensate for and financial industry is no different. Whether we call it resolution fund fees or bank tax, it's all the same. I look at the resolution fund fee actually as tax. It goes straight into the balance of the debt budget. Thank you very much. Due to time constraints, could we please ask the remaining participants to ask just one question only? Thank you very much. The next in line is Ricardo Revere from Mediobanca. Please go ahead. Yes, thanks. Thanks for taking my question. Just one from my side. When it comes to Basel IV, in whatever forms it will be adopted in Europe, do you think that the Swedish regulator will opt for a softer or a harsher version of whatever is going to be approved in Brussels? We think it's going to be softer, Ricardo. And in fact, I think the Swedish regulator has been fairly open on that. If it becomes harsher versions of us before, they will be willing to look at the Pillar 2 buses they introduced. Very clear. Thank you. Okay. And the next question is from Daniel Doossoy from JPMorgan. Please go ahead. Hi, thanks for taking the question. Just one on deposit margin. So when it comes to the $400,000,000,000 of deposits that you have within large corporates and financial institutions, on what proportion of those deposits are you currently charging negative rates? And is there any scope to improve margins here, I don't know, by either widening the net or increasing the charge? I think, Daniel, the number of deposits in the large corporate and financial institutions is, to a small extent in Swedish kroner because there's a lot in other foreign currencies. We are charging on, I would say, the predominant Swiss francais deposit in within LGNFI. But there more mitigation on the sensitivity. And so I think and then we also have we have the floor working in our favor on the asset side. So that's how it is. On almost all Swedish krone deposits, did I hear that correctly? For the large corporate financial institutions, yes, we have some kind of compensation. I'm not saying that we're compensating fully. Then I'm also saying that the total amount of Swisscronor deposit in that division is substantially lower than in the other parts of the bank. Okay. Pulp Arq, 50%, 60%, 70% of deposits or can you give any We haven't disclosed the details on that deposit date. And our last question today is from the line of Jacob Kruse from Autonomous. Please go ahead, Mr. Kruse. Hi. Thank you. I just wanted to ask the Swedish bank tax, does that change the way you look at your operations in terms of where you put your staff and back office technology, etcetera? Or do you think you will just have to etcetera? Or do you think you will just have to live with the situation as it is and work with your cost in other areas? Thank you. I think the Swedish Bankers Association is out actually very actively trying to log this into exactly what you are after that, of course, if you have a special tax just focusing on people within the banking and financial industry, we have asked the Copenhagen Business Institute to calculate on that in financials. We're talking 16,000 500 jobs at stake, of which 7,200 in the large banks. So of course, this will lead to that FTEs that anyway is on its way down will go down in a much faster pace. I guess, the digitalization and processes in a much faster pace than we have done before. So I guess for Sweden, then the tax that they hope to get might not need a tax because there will be a lot of redundancies. So I think actually it's a very tough thing to come out with now trying to do this very easy way. I guess you should compare banks with the media sector and see how quickly it goes. So hopefully, they will take some impressions from that. But we definitely argue and what we can see from external firms' capital, this will need to jobs of approximately 16,500 jobs that will be gone from Sweden. And is that consistent with you, if you are, let's say, 20% of the Swedish banking market? Is that consistent with what how you look at your staff levels? Yes, very Yes, very much so, I think. Okay. Thank you very much. Thank you. Okay. Thank you, everyone, for this telephone conference. I'm very sorry that we have some flights to catch, but thank you. Thanks. Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may now disconnect your lines.