Earnings Call: Q3 2015

Oct 21, 2015

Thank you for standing by, and welcome to the Q3 2015 Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to your speaker today, Annika Falkenbrand. Thank you. Please go ahead, ma'am. Thank you. Welcome to the presentation of our results for the Q3 2015. Today, we present an operating profit of SEK 4,300,000,000. The 3rd quarter always contains certain seasonality. This year, they were greater, and this is after the Q2 when we saw unusually high activity levels. Slide 2, it has been a very special quarter, and I think it's I'd like to highlight 3 things: 1, the increased market uncertainty 2, as a consequence, customers were more cautious and 3, in this uncertain environment, we continue to strengthen our resilience. 3, Page 3. Here, I show our reported results on the right. For simplicity, I will continue to present the results of the underlying operational results, I. E, excluding one off effects in Q2 2015 and Q3 2014, so you can see how the bank is actually running. Total operating income increased by 3 percent during the 1st 9 months. Operating expenses increased by 2% and the operating profit increased by 5%. Return equity was 12.8%, and our common equity Tier 1 capital ratio increased to 17.8%. We now go over to the Q3, which always tends to be seasonally weaker. This year, that trend is even clearer, marked by global concern over lower asset values and lower activity after a very strong second quarter. Total operating income decreased by 11% from the same quarter last year. Operating expenses fell slightly, and operating profit was 19% lower than last year. Net interest income decreased by 4% compared with the 1st 9 months of 2014 and was broadly unchanged from the 2nd quarter. The customer driven net interest income decreased by 3% compared with the same period last year, mainly due to the introduction of a negative interest rate. At the same time, deposit volumes are up, which increases pressure further. Lending margins are slightly up. Lending volumes increased compared to last year and were stable in the 3rd quarter. Funding and other decreased compared with the last year as a result of lower interest rates. Net fee and commission income remained strong and amounted to BRL 12,800,000,000 in the 1st 9 months, an increase of 9 percent compared to last year. The high customer activity from the beginning of the year slowed in the Q3, at the same time, we had falling stock market values and as the wave of IPOs stalled. Wealth Management continued to attract good inflows and the quarterly average of assets under management are higher than last year. Net financial income is clearly better compared to last year, up by 46%. During the year, customers have chosen to hedge their flows given the exceptional volatility we have seen. Within fixed income, activity was high at the beginning of the year given the developments on fixed income markets. In the 3rd quarter, customers reduced risk taking and the activity level was much lower. We have even during the 1st 6 months of the year had market valuations with us, which we all know can vary between quarters. And in the Q3, they were more or less 0 compared to plus SEK 342,000,000 in Q2. Turning to Slide 5. We have set a business plan that should work in many different market conditions. We continue to show a clear long term trend and stability. We are deepening our relationships with our customers and attracting new customers. Cost remains stable. And even this year, we have had headwinds from higher pension costs and currency effects. It's no noteworthy to you, but so far, it's DKK 646,000,000 year to date. So they are significant. Our operating profit continues to increase despite the change in external condition. In 2012, if you remember, the repo rate was 1%, and today, it's actually minus 0.35%. Our cost cap coming in below SEK 22,500,000,000 is unchanged for this year and also for next year. I will now briefly comment on the division's Slide 6. They all show a profit of at least 13 but had slightly different results for the 1st 9 months. Looking at Merchant Banking, the result for the 1st 9 months is 12% better than the year before. The underlying business continues to perform well, even if customers were more cautious during the summer and demand for financing has been low all year. The result for the Q3 was a little more than SEK 2,000,000,000. The credit quality continued to be very good and losses were low, DKK 209,000,000 during the 1st 9 months. Retail in Sweden have headwinds from the negative interest rates and net interest income drops. Operating income is 5% lower compared to the 1st 9 months of 2014 and 3% lower compared with the Q3 last year. We have grown more slowly on mortgages. We have individual pricing on mortgages and have long been the only bank that's been transparent with the pricing. We advise our customers to amortize and, in principle all new loans with a loan value over 70% amortized today. Our loan takers must also be able to cope with an interest rate of 7% and may not borrow more than 5x gross income. We have adjusted our pricing to better reflect our actual funding for 6 years for mortgages that was previously 4 years. And even after the change, we have a good mortgage offering, which you might be able to see in the reported average interest rates from various banks and mortgage institutions. Both Life and Wealth reported a better result for the 1st 9 months, up by 1% and 16%, respectively. In the 3rd quarter, lower asset values and rising interest rates, particularly in Denmark, contributed to a drop in life's result. New sales in both Wealth and Life remained strong. The performance based revenue in Wealth, which was strong in the 1st 2 quarters, is not materialized in the 3rd quarter. And in the Baltics, operating profit was 17% lower in the 1st 9 months, mainly due to write downs in real estate. Banking operations were down 9%, but showed a return on business equity for nearly 19%. Also here, the interest rate environment and low lending demand has an impact, even if we can see some increased new lending at the latest quarter in both Estonia and Lithuania. However, volumes are decreasing slightly in Latvia, and credit quality remained good. Before I wrap up, a few words about our balance sheet, which was further strengthened in the quarter. Current quality remains very good. Nonperforming loans continue to decrease. The net credit loss was 6 basis points during the 1st 9 months. We still have around onefour of our balance sheet in liquidity reserves compared with around 10% in 2,009. Our common equity Tier 1 capital ratio was 17.8% compared with 11.7% in 2,009. The Swedish FSA has issued its final Common Equity Tier 1 capital requirements on us, 15.4%. But please allow me to get back to you in the next quarterly report on how we view our capitalization. We still lack puzzle pieces regarding regulation, for example, FSA's view on corporate risk plan with a focus on our customers. We operate in a rather unique external environment with negative interest rates and where underlying global growth has not really taken off. We are in the deals that are made and that we also want to be part of. We feel it is a very challenging situation and that calls for reflection and also caution. This is not really a normal situation. We all have a strong financial position, and we are well prepared to continue growing together with our customers. And with this, let's open up for questions. Thank you. Thank you. And your first question comes from the line of Omar Keenan of Deutsche Bank. Please ask your question. Good afternoon. Omar Keenan from Deutsche Bank. Thank you very much for taking the questions. I had a question firstly on net interest income and then secondly a question on capital and regulation. So firstly on net interest income. I think the positive in the numbers was that the customer NII development was quite good. And particularly in Swedish retail, you saw good sequential NII development. I'm just wondering, how does the mortgage margin jaws look coming out of the Q3? And do you see the headwinds from market and treasury abating? So can we expect a more positive momentum on net interest income for the Q4 over the Q3? So that's my first question for NII. My second question on capital and regulation. I wanted to ask you, how are you going to communicate to the market higher capital requirements as you expect them? And I'm thinking specifically the fundamental review of the communicating roughly what the number is going to be. And we already have some peers like Credit Suisse communicating roughly what the number is going to be. So are you going to be in a position to do that early next year as well, given SCB has got more trading business than other Nordic banks? My second part of that is also given that SEB is the only bank that uses the AMA for op risk and Inves said that, that is going to disappear. Could we also I guess, how are we going to be guided on that as well? Omar, Jan Erik here. On your first question on NII, I think you're absolutely right in saying that the retail bank is seeing positive developments from the price changes we made through Q3 that was done on the 16th September. And I think you should see that coming through in Q4 or the main effect from that will come through in Q4. So I agree with you that, that should mean that NII should move up in total during Q4. The only caveat I'd add to that is to pick up on what Annika said in the press conference here in Stockholm today is that there is margin pressure on the merchant bank and the large core business. It's not huge, and we're holding up quite well, but there is some margin pressure there. So bottom line, I still think that we will be able to hold on to that and that the net effects will be positive. In terms of the capital and the requirements there, I think it's difficult to say what the effects are going to be on this at the end of the day. And hopefully, we will have more clarity to communicate at year end and when we do the annual accounts. Financial review of the trading book is certainly going to come along. The effects of that is difficult to assess today. But in some shape or form, it will come. And I think that's something we are well prepared for. In terms of arm and off risk, I think it's clear that Mr. Ingers wants that to be taken out. And I think the I think it's there's a clear indication from the regulators that PDP is given less regulatory credit for some offering in the future. That's also something that's not news for us. And what's been stream has said in Lima on that topic that we were well prepared for. So Basel IV, if we can call it that as a package, is something we are aware of as a package. And I think the individual components, we understand this well, entirely well, even though to put it into numbers today, I saw some other banks speculating on what the impact might be from things like corporate risk rate. That's in our view too speculative today. Thank you. And your next question comes from the line of Johan Ekblom of Bank of America. Please ask your question. Thank you very much. Just wanted to follow-up on 2 things. First, I mean, clearly Q3 was disappointing in terms of corporate activity, and I think you've covered that. How would you characterize the outlook if you look 6, 12 months out? I mean, has the concerns around China commodities, etcetera, in any dramatically way changed your outlook there? Or should we view Q3 more as a temporary slowdown? And then if you could just comment on the Wealth Management business, the sale of the German business, what P and L impact should we have or expect to see from that? Or if you can give us maybe an indication of what the gross margin of those assets were? Okay. Johan, let me start with the outlook, which is always very difficult. But what I said at the press conference in Stockholm was that Q3 was weak. But I mean, the bank is actually doing well. We don't really have any dogs in any corners anymore. So I think if the rest of the bank continue, we had kind of 0 in performance fees, for example, in Q3, where we usually at least have something in Q4. So even if we pay it down, of course, we would have some performance fees in Q4. And going forward, we don't need so many event driven deals to actually make quite a difference. So of course, if a few of these corporate deals that we're working on, if they materialize, that could make it quite different in Q4. And that is what we are focusing on. We don't want to play down, but I think it's important to be open with that October started kind of in a row of a slow phase. Not bad, but I mean it started pretty slow as well. We don't see a dramatically different stock into Q4. On the other hand, we have more than 2 months to go. So it might not be the same as Q3, which it rarely is. But again, it's the corporate activities that is kind of the missing piece. Therefore, I think going further ahead of sort of speculate about the spring of 2016, that's a bit early, I think. And Johan, perhaps on your second question around the Wealth business in Germany, that takes out about SEK 75,000,000,000 of assets under management and a bottom line effect of broadly SEK 100,000,000 a year. Now you should keep in mind when I say that, that's a business we saw as being eroded gradually over time. So it's something that we wanted to leave as a result of that and also a core sort of strategy fit going forward. Perfect. Thank you very much. Thank you. And your next question comes from the line of Christopher Rokwis of Barclays. Please ask your question. Hi, this is Christopher from Barclays. Thank you for taking the questions. Just two questions. 1 first on the merchant bank trading and fee income and secondly on Wealth Management. Just wondering if you could help us understand a little bit better the sort of harmony between the trading income and the fee income. I think in some quarters like Q4 and last year in Q1, we saw sort of a complementary nature where volatility in the markets sort of subdued fee income generating events, but on the other hand, was very beneficial for the trading line. And it seemed to be in the same situation this quarter. So I was wondering if there's an opportunity for you to in the Q4 to grow the trading business, your risk management business, and if sort of to balance continued modest events? Or is there a worst case scenario where there's actually corporates don't do transactions and there's also stable financial markets, meaning little hedging needs. So just if you could help us understand if what sort of the best case, worst case scenario looks like here and what your room for what your flexibility is? The second question on Wealth Management was we had the Minister Per Boland a couple of weeks ago speaking about regulation and intervening and sort of restricting the fees that U. S. Wealth managers are allowed to charge your customers depending on the value you add. So I was wondering how you feel that your various products are positioned or how you are what your position is to explain to the regulator the value you add and or if you might find yourself in a similar position as some of the Swedish banks have had to adjust their pricing? Thank you. Hello. Hi, we're back again from SEB. Apologies for that. We were trying actually to adjust the volume here, but didn't do very well. Apologies. Christophe, on your question on trading in the merchant bank, I think your relationship between fee income and the trading line. We I think when we met last time around Q2, we talked about swings and roundabouts. And this is, I think, related to that. I think the fee income line was depressed this quarter as a result of the low activity levels in the market overall, whereas the higher volatility levels that we saw in the Q3 resulted in better net trading income. So I think that's where that basically is. Maybe if I can make another comment to, I think, the deviating net financial income line in SEB compared to some of the competition, I think we do see a testament of our purely customer flow driven business this quarter. We produced close to SEK 1,000,000,000 on that line this quarter in a market which feeds hedging needs into our customer base. And we live with that, and we don't have large fixed income portfolios that's out in this sort of market. And I think that's something we made a point on several times and it comes very clear this time. And but is that income are you is that income line completely subject to customer demand? Or is the number that we saw in this quarter also subject to sort of the capital that you deployed to that business? If you wanted to grow it to offset muted demand in other parts, you could if you reallocate the capital, for an example? Not so much. I think it's much better analogy to think of it as purely customer flow driven. Then over time, of course, we can allocate capital and increase the size of that business compared to flow driven. And I suppose you've in the press conferences you spoke about the fee activity being low in October. Can you say anything about the trading? Sorry, can we say anything about the trading? The trading? No, I don't think that we should yet. I think we'll refrain from that at this point. So we'll come back to that in Q4. Thank you. The only other comment that I can repeat from this morning that I think I made was that the first few days or week or 2 into October, I think, has been more a continuation of the market that we saw in September. So that's just a repetition from the market. Okay. Thank you. Then perhaps on the wealth and Per Boland topic, Annika, do you want to No, but I think it's more kind of political rhetoric that we hear a lot. I think when it comes to wealth, the discussions we're working with all is MiFID II to comply. And actually from a large bank perspective, we think we can make this to a competitive edge doing this right and making it to advise our clients and do this correct. That could actually be beneficial for a large bank like ours. But I think you will hear a lot more from Boonan regarding these other things. It's the same thing on regarding funds, etcetera. So no need to comment on that one. Okay. I understand. Thank you. Thank you. And your next question comes from the line of Jacob Kruse of Autonomous Research. Please ask your question. Hi, thank you. It's Jacob from Autonomous. Just a couple of questions. Firstly, there was some discussion that you will come out with relatively minor sorry, it sounds like it was a relatively minor event, but maybe you could just make any kind of comment around that. And secondly, could I ask about your strategy in the SME space? Are you seeing any material growth there? And what kind of market share are you do you feel like you could get to? And then just lastly, on the FSA review of corporate risk weights, there's been the discussion around the maturity parameter in that and the potential for some increases from that. But are there other areas? What happened? Excuse me, we have lost this gentleman. One moment, I will read it in for you. Thank you. Sorry, we do not have this gentleman now online. Can I please go to the next question for you? Thank you. I'm sorry about that. Thank you. And your next question comes from the line of Riccardo from Mediobanca. Please ask your Just one question from my side. On top of the what the regulators are trying to do on the credit risks, market risk, operational risks, do you see any possibility that the regulators could do something more, maybe Pillar 2 or whatever, given that for the time being, all the measures that they have taken to try to cool down the real estate market are proving ineffective. 1 of your competitors before saying that supply side and construction is improving, but still lagging the demand. So should we expect tightening also on that side? What's your thoughts on this? Thanks. Well, hi, Riccardo. I think the mortgage market is a difficult one and the building in society is large or the building activity has been suffering, as you we all know, for the past 20 years. I think there's no silver bullet for curing the housing price appreciation. And I think the topic on people's mind today is the interest rate deductibility in taxation terms. And that's being discussed. And I think we're probably moving towards a higher likelihood on that being introduced during next year or somewhere in the future. But I think we should all be aware that if it's introduced, that's going to be phased in over quite a long period of time and it won't be solving the problem either. It will so there's a combination of the effect that Annika described earlier, amortization, interest rate, LTV and interest rate deductibility and building more. Today, in the Swedish papers, there is a debate raised by the companies to actually build apartments. And I think there is problems, I think, in the profitability for some of these companies to actually go into new builds today with housing regulation and rent regulation in this country. So it is a tricky situation, but I think the banks are jointly assuming a lot of responsibility in trying to contribute to curbing this development today, but it needs political incentives as well. Okay. Thanks. And if I may ask another thing. They're also trying to review the impact or the capital required for interest rate risk on the banking books, given that rates are negative in Sweden. So I don't know, maybe one day they will go up again. And if that happens, maybe the magnitude of the movement could be not immaterial. Do you have any idea on where they are heading to or what could be the impact for SEB on the from the proposals from the consultative papers they have published months ago on this topic? No, I think we'll refrain from starting to quote effects from that today. It gets just highly speculative. I think there's just too many moving parts. And hopefully by the annual accounts, will be able to give more clarity on that. But it's really that the all the stars needs to align a little bit better terms of the regulatory framework before we can quantify. Okay, okay. Thanks. Thank you. And your next question comes from the line of Anton Krakow of UBS. Please ask your question. Thank you. Good afternoon. Just two questions please, both on revenues. Firstly, on net interest income, you have commented that you're seeing some corporate margin pressure and this is in line with some of the rhetoric that was communicated by one of your peers today on a conference call as well. I was wondering, are you surprised to see corporate margin pressure during a time when the regulator is actively discussing higher corporate risk weight? And do you think that is an indication that we might struggle to see repricing in the corporate lending segment even if risk weights go up? Or do you think that this corporate margin pressure is a temporary phenomenon and linked to very specific parts of the market? And the second question, please, if I may, on fees. Just to understand your around what has happened in Q2 and the outlook for Q4 a little bit better. Is it fair to assume that because corporates have done so much in Q2, Q3 was a seasonally weaker quarter? Or do you think that Q3 was seasonally weak and therefore, we should have a rebound as corporates return to the markets to issue debt, do transactions that might be in the pipeline at the moment in Q4, Q1. Sorry, that's slightly vague, but I'm just trying to get a sense whether strong Q2 was one of the factors contributing to weak Q3 or whether weak Q3 is driven by market only? Okay. Let me start with the yes, I think when you look at, particularly, many Swedish banks, we're all extremely well capitalized. We are also actively in an area of the world that is doing fairly well. So of course, competition for kind of the little corporate lending that is there is, of course, extremely intense. On the other hand, I think what we find is that the risk premiums are almost non existent today because, of course, there is so much liquidity in the market and willingness of banks to lend. I think what we also experienced is not only that, it's also that the structures are extremely weak. And we feel that we cannot participate in extremely weak structures the way we don't really do banking. I think that's very important for us, because that is also a culture question of what would the people in the bank say if we suddenly started to approve deals with very weak structures the way we don't really do business. So we have lost part of it. But I think, I mean, we are on we see everything that's going on, but we don't want to take on weak structures or having something that will not yield a long term return of 15%. That is our ambition. I think Automotive Bank has been very clear now bringing up the return on the division, the cost of capital. So they've been quite clear on that. So again, we don't see we're missing out really. We see everything, but of course, we've been quite clear if we enter a deal, it has to be long term profitable deal also for the bank. I don't think we can answer your Q4 questions better than we have before, but of course, we don't need that much of event driven business to make a good quarter because the rest of the bank is doing fairly well. If that holds up, of course, we can hope for some performance fees, so we can hope the Deutsche Bank can do get a few of these things through. But again, I'm saying it's too premature to promise anything and that's why we've been cautious to do that. But of course, we anticipate that and we said that we need another $2,000,000,000 bottom line every year to make the business plan. So of course, we still have hopes to achieve the business plan, and we still have high hopes that it can support some activity in Q4. But again, the starting weeks of October, we haven't really seen that. So I don't think I'd like to promise anything more than that at the moment. The world is what it is, and we try to do our best. But let's see. But if there is business that's going to be done, I can promise you that SV will participate in it. Very clear. Thank you. Thank you. And your next question comes from the line of Ronit Ghose of Citigroup. Please ask your question. Hi, thank you. It's Ronit from Citi. Just two questions. Annika, can I just pick up on that last comment you made about corporate structures and I guess talking about covenants or pricing or are you seeing aggressive structuring across a range of different corporate lending segments or is it very concentrated in say 1 or 2 lending segments? And is it still that in this cycle, it's the domestic Swedish banks that are 1 or 2 being aggressive? Or is it someone outside the big four Swedish banks? And separately, a small question of detail. On the Baltic business, obviously, in the context of very low loan losses and generally good asset quality, there's a slightly elevated level of provisioning in Latvia. And again, it's only in the context of everything else looking really good in the Baltics. Is there anything any other color you can give us there in terms of when I look at the top down macro numbers, again GDP growth seems to be better in Latvia than some of the neighboring countries. I'm just wondering what was going on in terms of your loan loss ratio in Latvia particularly. Thank you. First of all, Ron, it's on the weak kind of governance and structure. I think actually it's overall. I think we all want to grow with SMEs. We all want to go with large corporate structures and covenants are weak to be able to participate. So I think going on I think it's not only the big 4 in Sweden. It's actually some neighbor banks, I dare say, of who are I don't really understand how they do the metrics of getting the deals acceptable on a return focus. I think another thing is where we see growth, it's been very much in the real estate sector. And I think, again, we've been managing our portfolio. We have less than 50% of the portfolio real estate. That's important for us, while other banks might have their portfolio up 70%, 75% is kind of CRE or real estate kind of connected with mortgages and everything. So I think, again, it's a CRE business where we've been even more cautious, I think, from thinking long term. So I think that's something I can say on that one because, of course, we could have improved the revenue a bit by participating in some real estate deals that we just passed on. Latvia has always been the weakest country for us, the smallest country for us, but the weakest. They're closer to Russia. They get more pain from Russia import and a lot of other issues regarding that. So I think it's just a minor thing, but we look through the portfolios very regularly and make sure we want to make the provisioning very early. But I think it's more a sign of that. It's not really like a big deterioration at all. It's more they are suffering a little bit more than the other 2 on the closeness to Russia. Right. Thanks for that. And just to go back on the competition, we're talking about Nordic competitors, right, not people from outside the Nordic region? They could sometimes be a German bank and they could sometimes be another bank. So it's not particular. But of course, if the U. S. Investment bank is usually not the one that come in with the cheapest tickets. But I guess it may be be. But German banks are actually here. Okay. That's not just okay. Thank you. Thank you. And the last question from this call is from the line of Jakob Khrush. Please ask your question. But I think we remember your question, Jacob, of the Vistra 20 25. Are you there? Paul Jacob, he got lost again. We should answer it anyway? Yes. Yes, okay. And hopefully, you can get yes. I think what we say here is that we've been working with since a year actually about the Vision 20 25 to really challenge and kind of disrupt ourselves to start to see what if what will the clients look like, what will demand, what kind of services, how would the bank look like, what about all the niche plays that is coming up and all these fintech companies and all that. And that has led to, I think, for kind of a challenging vision for the bank, saying how do we transform ourselves and what should we do more or less of. And we said that we will talk about that already in November to staff. This is kind of an evolution, trying to also hear staff in the bank, what do they think? This is how we are looking at things, what are they seeing, etcetera. So that's how we try to play it, but really trying to change ourselves and change together with the people in the bank and our clients and really daring to really understanding customer needs in the future. So that's been how we challenged ourselves. And we will, of course, come up with that more also in Q4, how we see upon it. But it's not a plan. It's more kind of a challenging vision. But of course, it boils down to a plan of what you will see for the new plan from 2016 to 2020. So we have, of course, taken a lot of influences from this vision. SME sector is extremely important for SME. We have today a market share of 14.3%. We want to grow it long term to 20%, which is, of course, a long struggle. We added 7,015 corporates this quarter. That's actually quite a good development of ourselves. We only calculate customers where we get the home cash management. We don't do we do business, of course, with many, many more, but we only calculate those who we call as the kind of the core bank customers of ours, extremely important segment. It starts even below SME with entrepreneurs. And just for you to know that every third entrepreneurs or newly started corporate in Stockholm, Gothenburg and Malmo is an SEB client. And every 4th new start company in all of Sweden is an SEB client. And that's equivalent then to, I guess, a market share of 25% or 33%. Of course, we have big hopes that things longer term here will look very, very different. Very important sector for us. And just to make sure that we don't have any because this is going to be transcript that we have year to date, 7,000 customers not in the quarter isolated. And then Jocop, on your final question, I think that's related to corporate risk rate and what's going on there. And we haven't heard firsthand, obviously, but through you guys, I suppose we've heard that there was discussion with 1 or 2 banks on the indications of that. And I think we feel that it's just much too early to be able to quote numbers on the impact of copper trees quite floors. We just don't know enough for that today to be able to quantify. But we'll come back as soon as we know. Okay. Thank you very much for the interest in this teleconference. And then, yes, we will see you then in London on Wednesday morning when we will be there. 1 week from today.