Thank you for standing by. 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, at which time, if you wish to ask a question, you will need to press Star 1 on your telephone keypad. I would now like to hand the conference over to our speaker today, Annika Falkengren. Thank you. Please go ahead, ma'am.
Thank you. Welcome to the presentation of our results for the third quarter 2015. Today we present an operating profit of SEK 4.3 billion. The third quarter always contains certain seasonality. This year they were greater, after the second quarter, when we saw unusually high activity levels. Sorry. Slide two. It has been a very special quarter. I think I'd like to highlight three things. One, the increased market uncertainty. Two, as a consequence, customers were more cautious. Three, in this uncertain environment, we continue to strengthen our resilience. Three. Page three. Here I show our reported results on the right. For simplicity, I will continue to present 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% during the first nine months.
Operating expenses increased by 2%. The operating profit increased by 5%. Return on equity was 12.8%. Our Common Equity Tier 1 capital ratio increased to 17.8%. We now go over to the third quarter, 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. Operating profit was 19% lower than last year. Net interest income decreased by 4% compared with the first nine months of 2014 and was broadly unchanged from the second 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 third quarter. Funding and other decreased compared with last year as a result of lower interest rates. Net fee and commission income remained strong and amounted to SEK 12.8 billion in the first nine months, an increase of 9% compared to last year. The high customer activity from the beginning of the year slowed in the third quarter. At the same time, we had falling stock market values as the wave of IPO stalled. Wealth management continued to attract good inflows. 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 third quarter, customers reduced risk-taking and the activity level was much lower. We have even, during the first six months of the year, had market valuations with us, which we all know can vary between quarters. In the third quarter they were more or less zero compared to plus SEK 342 million in Q2. Turning to slide five. We have set up 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.
Costs remain stable. Even this year we have had headwinds from higher pension costs and currency effects. It's known already to you, so far it's the SEK 646 million year to date, so they are significant. Our operating profit continues to increase despite the change in external conditions. In 2012, if you remember, the repo rate was 1% and today it's actually -0.35%. Our cost cap coming in below SEK 22.5 billion is unchanged for this year and also for next year. I will now briefly comment on the divisions. Slide six. They all show a profit of at least 13% but have slightly different results for the first nine months. Looking at merchant banking, the result for the first nine 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 third quarter was a little more than SEK 2 billion. The credit quality continued to be very good and losses were low, SEK 209 million during the first nine months. Retail in Sweden have headwinds from the negative interest rates and net interest income drops. Operating income is 5% lower compared to the first nine months of 2014 and 3% lower compared with the third quarter 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 five times gross income. We have adjusted our pricing to best reflect our actual funding for six years for mortgages that was previously four years. Even after the change, we have a good mortgage offering, which you might been 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 first nine months, up by 1% and 16% respectively. In the third 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 remain strong. The performance-based revenue in Wealth, which was strong in the first two quarters, did not materialize in the third quarter.
In the Baltics, operating profit was 17% lower in the first nine months, mainly due to write-downs in real estate. Banking operations were down 9%, but it 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 remain good. Before I wrap up, a few words about our balance sheet, which was further strengthened in the quarter. Credit quality remains very good. Non-performing loans continue to decrease. The net credit loss was six basis points during the first nine months. We still have around a quarter of our balance sheet in liquidity reserves compared with around 10% in 2009.
Our Common Equity Tier 1 capital ratio was 17.8%, compared with 11.7% in 2009. The Swedish FSA has issued its final Common Equity Tier 1 capital requirements on us, 15.4%. 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, the FSA's view on corporate risk weight. Rounding off, we stick to our long-term business 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. With this, let's open up for questions.
Thank you. Ladies and gentlemen, as a reminder, if you do wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. That is star and one to ask a question. Thank you. 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. 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 third quarter? Do you see the headwinds for market and treasury abating? Can we expect a more positive momentum on net interest income for the fourth quarter over the third quarter? 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?
I'm thinking here specifically the Fundamental Review of the Trading Book, which we're expecting to have a finalized version at the end of the year. We already have some peers like Credit Suisse communicating roughly what the number's going to be. Are you going to be in a position to do that early next year as well, given SEB's 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 Ingves said that is going to disappear. I guess how are we going to be guided on that as well? Thank you.
Hi, Omar. Jan Erik here.
Hi.
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 fee that was done on the 16th of September.
I think you should see that coming through those in Q4, or the main effect from that will come through in Q4. I agree with you 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 corporate business. It's not huge, and we're holding up quite well. There is some margin pressure there. Bottom line, I still think that we will be able to hold on to that and that the net effect 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.
Hopefully we will have more clarity to communicate at the year-end and when we do the annual accounts. Fundamental Review of the Trading Book is certainly going to come along. The effects of that is difficult to assess today. In some shape or form it will come, and I think that's something we are well prepared for. In terms of AMA, I think it's clear that Mr. Ingves wants that to be taken out. I think there's a clear indication from the regulator that we will be given less regulatory credit for AMA in the future. That's also something that's not news for us and what Mr. Ingves said in Lima on that topic, I think we were well prepared for.
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 understand it fairly 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 weight that's, in our view, too speculative today.
Okay, great. Thank you very much.
Thank you. 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 two things. First, 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? Has the concerns around China, commodities, et cetera, in any dramatic way changed your outlook there? Should we view Q3 more as a temporary slowdown? If you could just comment on the wealth management business, the sale of the German business. What P&L impact should we have or expect to see from that? If you can give us maybe an indication of what the gross margin of those assets were.
Okay. You wanted me to start with the outlook, which is always very difficult. What I said at the press conference in Stockholm was that Q3 was weak, but the bank is actually doing well. We don't really have any dogs in any corners anymore. I think if the rest of the bank continue, we had zero in performance fees, for example, in Q3, where we usually at least have something in Q4. Even if we play it down, of course, we would have some performance fees in Q4. Going forward, we don't need so many event-driven deals to actually make quite a difference. Of course, if a few of these corporate deals that we're working on, if they materialize, that could make quite a difference 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 in a rather slow pace. Not bad, but it started pretty slow as well. We don't see a dramatically different start into Q4. On the other hand, we have more than two months to go, so it might not be the same as Q3, which it rarely is. Again, it's the corporate activity that is the missing puzzle piece. Therefore, I think going further ahead and speculate about the spring of 2016, that's a bit early, I think.
Johan, perhaps on your second question around the wealth business in Germany, that takes out about 75 billion of assets under management and a bottom-line effect of broadly SEK 100 million a year. You should keep in mind when I say that's the business we saw as being eroded gradually over time. It's something that we wanted to leave as a result of that and also a poor strategy fit going forward.
Perfect. Thank you very much.
Thank you. Your next question comes from the line of Christoffer Rokqvist of Barclays. Please ask your question.
This is Christoffer from Barclays. Thank you for taking the questions. Just two questions. One 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 harmony between the trading income and the fee income. I think some quarters, like fourth quarter and last year in the first quarter, we saw a complementary nature where volatility in the markets subdued fee income-generating events, but on the other hand, was very beneficial for the trading line. It seemed to be in the same situation this quarter.
I was wondering if there's an opportunity for you in the fourth quarter to grow the trading business, your risk management business 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? Just if you could help us understand if what 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 Bolund a couple of weeks ago speaking about regulation, intervening and restricting the fees that you as wealth managers are allowed to charge your customers depending on the value you add.
I was wondering how you feel that your various products are positioned or what your position is to explain to the regulator the value you add, or if you might find yourself in a similar position as some other Swedish banks that have had to adjust their pricing. Thank you.
Ladies and gentlemen, please continue to stand by. Your conference will resume shortly.
Hello.
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. Christoffer, on your question on trading in the merchant bank, I think your relationship between fee income and the trading line. I think when we met last time around Q2, we talked about swings around about, 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 third quarter resulted in better net trading income. 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 produce close to SEK 1 billion 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 suffer in this sort of market. I think that's something we have made a point on several times, and it comes very clear this time. Is that income line completely subject to customer demand, or is the number we saw in this quarter also subject to the capital that you deploy to that business? If you wanted to grow it to offset muted demand in other parts, you could if you reallocated capital, for an example?
Not so much. I think it's a much better analogy to think of it as purely customer flow-driven. Over time, of course, we can allocate capital and increase the size of that business compared to the proportion it's got today. Quarter to quarter, that's customer flow-driven.
I suppose in the press conference, since 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. We'll come back to that in Q4.
Okay. Thank you.
I think there's a comment that I can repeat from this morning that Annika made was that the first few days or week or two into October, I think, has been more a continuation of the market that we saw in September. That's just a repetition from the morning.
Okay. Thank you.
Perhaps on the wealth and Per Bolund topic. Annika, do you want to pick that up?
No, I think it's more political rhetoric that we hear a lot. I think when it comes to wealth, the discussions we are working with are it's MiFID II to comply. Actually from a large bank perspective, we think we can make this actually to a competitive edge, doing this right and making it to advise our clients and do it correct. That could actually be beneficial for a large bank like ours. I think you will hear a lot more from Bolund regarding this other thing. It's the same thing regarding funds, et cetera. No need to comment on that one.
Okay. No, understood. Thank you.
Thank you. 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 would come out with a strategic plan for the next 2 years in early 2016 with Q4. It sounded like it was a relatively minor event, but maybe you could just make any comment around that. Secondly, could I ask about your strategy in the SME space? Are you seeing any material growth there, and what kind of market share do you feel like you could get to? 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. Other areas
What happened?
Excuse me, we have lost this gentleman. One moment, I will re-get him for you. Thank you.
One moment. Thank you.
Sorry, we do not have this gentleman now online. Can I please go to the next question for you?
Yes.
Thank you. I'm sorry about that. Thank you. Your next question comes from the line of Riccardo from Mediobanca. Please ask your question.
Yes. Good afternoon to everybody. Just one question from my side. On top of 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. One of your competitors before saying that supply side and construction is improving but still lagging the demand. 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 at large, or the building activity, has been suffering, as 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 minds today is the interest rate deductibility in taxation terms. 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. 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. 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 who actually build apartments. I think there is problems in the profitability for some of these companies to actually go into new builds today with housing regulation and rent regulation in this country. 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. It needs political incentives as well.
Okay, thanks. 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. 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 from the proposals from the consultative papers they have published a month 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 are just too many moving parts, and hopefully by the annual accounts, we will be able to give more clarity on that. It's really that all the stars need to align a little bit better in terms of the regulatory framework before we can quantify.
Okay. Fair. Thanks.
Thank you. Your next question comes from the line of Anton Kryachok 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, 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 rates? Do you think that is an indication that we might struggle to see repricing in the corporate lending segment, even if risk rates go up? Or do you think that this corporate margin pressure is
A temporary phenomenon and linked to very specific parts of the market. The second question, please, if I may, on fees. Just to understand your rhetoric 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 market to issue debt due to 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 markets only. Thank you.
Okay. Let me start with that. Yes. I think when you look at, in particular, maybe Swedish banks, we are all extremely well capitalized. We are also actively in an area of the world that is still doing fairly well. Of course, competition for 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 experience 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 been 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. We have lost business, part of it. I think 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 also Merchant Bank is very clear now on bringing up the return on the division, the cost of capital. They've been quite clear on that. Again, we don't feel we are 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 profitability 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, and we can hope the Merchant Bank do get a few of these deals through. Again, saying it's too premature to promise anything, and that's why we've been cautious to do that. Of course, we anticipate that, and we said that we need another SEK 2 billion bottom line every year to make the business plan. Of course, we still have hopes to achieve the business plan, and we still have high hopes that there can spur some activity in Q4. Again, the starting weeks of October, we haven't really seen that.
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. Let's see. If there is business that's going to be done, I can promise you that SEB will participate in it.
Very clear. Thank you.
Thank you. 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 you're talking about covenants or pricing. Are you seeing aggressive structuring across a range of different corporate lending segments, or is it very concentrated in, say, one or two lending segments? Is it still that in this cycle it's the domestic Swedish banks that are one or two being aggressive, or is it someone outside the big four Swedish banks? 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 any other color you can give us there in terms of Because when I look at the top-down macro numbers, again, GDP growth seems to be better in Latvia than some of the neighboring countries. Just wondering what was going on in terms of your loan loss ratio in Latvia particularly. Thank you.
First of all, Ronit, on the weak covenants and structure, I think actually it's overall. I think we all want to grow with SMEs, we all want to grow with large corporate structures, and covenants are weak to be able to participate. I think it's not only the big four in Sweden, it's actually some neighbor banks, I dare say, of who 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. I think again, we've been managing our portfolio. We have less than 50% of the portfolio in real estate. That's important for us. While other banks might have their portfolio up to 70%-75%, is kind of theory or real estate's kind of connected with mortgages and everything.
I think again, it's a theory business where we've been even more cautious, I think, from thinking long term. I think that's what 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 lots of other issues regarding that. I think it's just a minor thing, but we look through the portfolios very regularly and make sure to make the provisioning very early. I think it's more a sign of that. It's not really like a big deterioration at all. They are suffering a little bit more than the other two on the closeness to Russia.
Right. Thanks for that. Just to go back on the competition, we're talking about Nordic competitors, right? Not people from outside the Nordic region.
They can sometimes be a German bank, they can sometimes be another bank. It's not particular. Of course, if the U.S. investment bank is usually not the ones that come in with the cheapest tickets, but I dare say maybe. German banks are actually here.
Okay. Thank you.
Thank you. The last question from this call is from the line of Jacob Kruse. Please ask your question.
Yes. I think we remember your question, Jacob, of the Vision 2025. Are you there? Poor Jacob, he got lost again. We should answer it anyway?
Yeah.
Okay. Hopefully he can get. I think what we say here is that we've been working since a year actually about the Vision 2025 to really challenge and kind of disrupt ourselves and start to see what will the clients look like, what will demand, what kind of services, how will the bank look like, what about all the niche players that is coming up and all these fintech companies and all that. That has led to, I think, for a challenging vision for the bank, saying, how do we transform ourselves and what should we do more and less of? We said that we would talk about that already in November to start. This is the kind of 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, et cetera.
That's how we try to play it, 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. That's been how we challenge ourselves. We will of course come out with that more also in Q4 how we see about it. It's not a plan, it's more kind of a challenging vision. Of course it boils down to a plan of, as you will see, for the new plan from 2016 to 2020. We have of course taken a lot of influences from this vision. SME sector is extremely important for SEB. 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 corporate this quarter.
That's actually quite a good development of ourselves. We only calculate customers where we get the whole cash management. We do business of course, with many more, we only calculate those who we call as a kind of a core bank customers of ours. Extremely important segment. It starts even below SME with entrepreneurs. Just you to know that every third entrepreneurs or newly started corporate in Stockholm, Gothenburg and Malmo is an SEB client, every fourth new started company in all of Sweden is an SEB client. 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 different. Very important sector for us.
Just to make sure that we don't have any, because this is going to be transcribed. We have it year to date, 7,000-
Yes
customers, not in the quarter isolated.
Jacob, on your final question, I think that related to corporate risk weight and what's going on there, we haven't heard firsthand obviously, but through you guys, I suppose we've heard that there was discussion with one or two banks on the implications of that. I think we feel that it's just much too early to be able to quote numbers on the impact of corporate risk weight floors. We just don't know enough of that today to be able to quantify. We'll come back as soon as we know.
Okay.
Okay. Thank you very much for the interest in this teleconference. We will see you then in London on Wednesday morning when we will be there.
One week from today.