Thank you. Welcome all to the SEB Q3 call. With me in the room, I have Annika Falkengren, the CEO, and Jan Erik Back, CFO, and we are ready to go. To you Annika.
Welcome to the presentation of our financial results for the third quarter 2013. We report an operating profit of SEK 4.6 billion, which is 20% up compared to the third quarter of last year. On page two, you see in the past quarter we saw increase in corporate activity. Despite the continued high uncertainty around us, our corporate clients showed an increasing optimism. This is also evident in our CFO survey, published as recently as in September. In general, the response is more positive compared to the last survey, which was made in February. On the other hand, financial markets have been characterized by low turnover and low volatility, which is also shown in the results reported by the international investment bank. We have also been affected, but to a lesser extent, since customer activity is the main driver of our business. Slide three.
I would like to highlight three areas from today's results. First, that the improved corporate environment has translated into an increasing number of transactions, both in terms of M&A and in the bonds and syndicated loan markets. We are involved in most of these transactions and continue to have a market-leading position. Second, we continue to deliver on our business plan. SEB's customer base continues to grow, and so does income. Third, there is continued uncertainty around the development of new regulation, and still no thorough analysis of the implications for customers, investors, and the real economy has been made yet. On page four, you see the financial summary. The operating profit of SEK 4.6 billion reflects an income growth of 7% compared with the same quarter last year, and a cost decrease by 3%.
Asset quality continues to be strong, and credit loss levels remain low at eight basis points. Non-performing loans continue to decrease. Meanwhile, our reserve ratio, the buffer against future credit challenges, has strengthened. Operating profit for the first nine months this year is SEK 13.1 billion, an increase of 15% compared to the same period in 2012. Net interest income has increased during the first nine months by 5% and shown a stable improvement as you can see on slide five. In this quarter, net interest income was SEK 4.8 billion, which was up 7% versus the same quarter last year. This development is driven by larger volumes. Lending volumes are up by SEK 43 billion since September 2012, with improving margins. Deposit volumes are also up SEK 111 billion, but margins are under pressure due to lower short-term interest rates. Other net interest income decreases slightly compared to the previous quarter.
Despite lower funding costs, the low interest rate environment keeps the yield on our liquidity portfolio low. This picture is clear on the next slide six. The upper part shows the development of the difference between the average lending rate and the average deposit rate. Two years ago, that difference was 161 basis points. Today it is 180 basis points. It means that we have been able to reprice lending and include the increased cost of new regulation. At the same time, we have extended duration of our funding and invested more in liquid resources. We today have around 25% of total assets in liquid resources. The average cost to us was 61 basis points in the third quarter compared to 18 basis points two years ago. The increased drag follows the harsh view on corporate deposits and the cost to meet the LCR at the same time.
In summary, net interest margins have improved slightly to 102 basis points compared with 99 basis points two years ago. Net fee and commission income on slide seven is up 17% in the third quarter versus the same quarter last year. On a nine-month basis, it has increased by 9%. This reflects primarily higher income in the credits and loans syndication markets. Customers are more active, and we have seen a few deals on the pipeline materialize. SEB is an activity-driven bank, and the commission development reflects that. We also see increased income in wealth management as a result of higher assets under management. Go to slide eight. Net financial income decreased in the third quarter by 24% compared to the same quarter last year. Our customers have taken a more hesitant stance, especially institutional customers.
Split into different activities, you can see from the slide that all areas have seen a decline. FX was lower due to low volatility and flow. Fixed income works in a market with very low turnover. This is reflected in the lowest average daily turnover of Swedish government bonds this summer, the lowest in 10 years. Equities also saw low turnover. Page nine is a bit of a favorite of ours as it clearly summarizes our thinking. More customers and increased breadth in customer relations lead to higher average quarterly profitability. This page shows the stable improvement achieved since 2010. Our investments in the Nordic region and Germany make important contributions, together with the stability of our Swedish retail operations. At the same time, we are making clear improvements in efficiency and productivity.
All of this contributes to some SEK 500 million improvement in our quarterly profitability and strengthens our financial position further. The bank's cost-income ratio this quarter is 0.53 versus 0.58 a year ago. Moving over to the divisions, as you can see on slide 10. Merchant banking had a strong third quarter, and operating profit increased by as much as 32% compared to the same quarter last year, and is up 9% in the first nine months of 2013. Retail banking in Sweden continues to develop well. Operating profit increased by 34% versus the same quarter last year, and is up 30% in the first nine months. Corporate lending increased by 11% the last year, and the SME market share is now over 13%. The pace of new mortgage lending has slowed down, and our market share of new lending is now in line with our share of total lending.
Wealth management increased operating profit by 37% in the third quarter compared to 2012, and 39% during the first nine months. Assets under management increased to SEK 1,341 billion, the highest level ever. Private banking continues to attract new customers and new volumes, with SEK 23 billion in new assets under management. Life operating profit decreased by 3% in the third quarter compared to 2012. Unit-linked values and premium income have increased by 14% during the first nine months compared to last year. The result is down 10% due to the traditional life business in Denmark in particular. Last but not least, the Baltics operating profit increased by 29% in the third quarter compared to the third quarter 2012, and by 5% for the first nine months of the year.
We see an improvement in the general market environment in the Baltics, Corporate lending in local currency has started to recover across all three countries. Looking at a snapshot of our strong balance sheet on slide 11, you can see that we are moving in the right direction in all dimensions. NPLs are decreasing, the loss ratio is stable at eight basis points, we have some 25% of the balance sheet in liquid reserves, the structural liquidity measure core gap increased to 118%, and we are continuing to build capital. To sum up on slide 12, this has been a strong quarter for us, which reflects an improved business environment for our customers. Our financial key ratios have developed well. Profitability is now around 13% versus 11% a year ago.
Meanwhile, we have strengthened our capital position further through profit generation and improved asset quality, which reduces risk-weighted assets. Our Basel III Common Equity Tier 1 ratio is now 15%. Earnings per share is up by just under SEK 1 compared to last year, mainly as a result of improved productivity and continued low credit losses. Our long-term ambition is to be the leading Nordic corporate bank and the best universal bank in Sweden and each of the three Baltic countries. High customer satisfaction creates opportunities to attract more customers and support organic growth. We continue to address costs and maintain a very high asset quality. We continue our work to become the obvious choice for our customers as a long-term financial partner in our market. Thank you, We will now open up for questions.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star 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. Your first question comes from the line of Ronit Ghose. Please ask your question.
Hi. Thank you. I had a couple of questions. One was on Merchant Banking and one was on the Baltics. You've given us some great color in your presentation, Annika, about the trends. I just wanted to check within the coverage and investment banking bit of the Merchant Bank, are there any one-offs at all in the revenue number in the third quarter, the SEK 2.5 billion up from SEK 2.1 billion, or is this all underlying client pickup? That was our first question. The second question is on the Baltics. Excluding real estate holding companies, the return on equity has already moved up quite nicely to about 18%. What do you think a steady state ROE is in this business? Obviously, Latvia still looks like it's underearning. Just wondering how much higher it can go. My final question is a very small one. It's on the balance sheet.
It looks like you've halved your repo exposure quarter-on-quarter. I just wondered if you had any comment to make on that. Thank you.
Okay, thank you for your questions. No, actually, Merchant Bank's results was pure business. There are no one-offs in the results. It's a really good result for them. They're really benefiting from the uptick in the market for market activity that we had hoped for a long time. When it comes to the return on the Baltics, firstly, we see it as a higher risk than the Scandinavian business, so they should have a higher return than the rest of SEB. That's our ambition. We hope that we can keep this level or even above that going forward.
Your third question on the repos. I think the only reduction we really see on the asset side is that we have reduced the repos from business with other financial institutions or credit institutions. On the repo side that we do with, let's call it customers in the general public, we're actually maintaining around SEK 82 billion-SEK 83 billion of repos in the market. It's not really that we are actively reducing the exposure there.
Great. That's clear. Thank you.
Thank you. Your next question comes from the line of Nick Davey. Please ask your question.
Yes, good afternoon, everyone. A couple of questions, please from my side as well. One of them is now a little bit of a follow-up. The first one's on the funding cost. You've talked a little bit about how you've benefited this quarter from lower blended funding costs. If I look at page 11 in your fact book, you very helpfully split out where that's trending. I suppose I would have expected it to show up in corporate center NII. Clearly that's been on the decline this quarter. My question is, have you changed your fund transfer pricing model this quarter? Has some of that lower funding cost been allocated out to some of the divisions? If so, where? Just so we can get a sense of some divisions that have seen some NII pickup, how much is due to that and therefore sustainable.
The second question please, maybe a bit of a follow-up now from a different angle. Just to please dig into the fee and commission income line in a bit more detail and specifically on the lending commission number, which is very strong this quarter at around SEK 800 million, up SEK 400 million year-on-year. Could you please just talk us through exactly the nature of that commission? Is this committing the balance sheet? Can we read into this as a bit of an early warning signal of corporate credit demand? Just to get some sense please of what's driving that and the outlook, please. Thirdly and finally, just to come back on the Baltics. Obviously you've seen this NII pick up on the quarter. Can we please just get a bit of commentary about where you're having some success on the repricing side?
Why now, I suppose from some respects as far as seeing the NIM expansion coming through after a period of compression, excluding the interest rate impacts, just why things have suddenly turned more successful on the repricing side. Thank you.
Hi, Nick. Jan Erik Back here. On the funding cost, no, we haven't really changed our ISBP transfer pricing principles at all. Obviously, they vary with market rates, but no change to principle. I think what you're seeing there is also the fact that we have increased our funding efforts a bit during the quarter. We have brought in some SEK 30 billion of funding in Q3, and that's reflected in there as well. On the second question on fee and commission, it's really things like acquisition finance that's filtering through. The way those deals work is that there are quite a bit of upfront fees coming in as you sign transactions like that. I think you're right in saying that it's reflecting the fact that activity levels have picked up, and that's a good sign, obviously. On question three, the Baltics, Annika, will you-
On the Baltics, I think we can say that actually corporate demand is increasing in local currencies actually in each of the three countries. We do see positive signs there that probably will continue and some repricing of that. We don't see any more of lowering deposit rates. You could say the repricing of deposits is also slowly but steadily going in the right direction.
Okay. That's really clear. If I could ask just one, sorry, quick follow-up on the funding cost point, which is an interesting point you've made there, that the funding costs on average have got lower, but that you've then, let's say, overissued. We can see that in your core gap ratio. Just if I could get a flavor from you then of, I suppose from one angle, why you decided to lengthen the core or heighten the core gap ratio and where it might head to, because I know you've been pretty explicit about your views of the NSFR and its shortcomings. Should the core gap ratio really be 100% over time, or is there some other threshold that you think it should be at which point you'd be comfortable to let lower funding costs start to hit the P&L? Thanks.
I suppose it's a mix of many different things, and you mentioned some of them or most of them. I think one wants to balance opportunistically the opportunity to bring in funding at reasonable pricing against cost of carry. Also the fact that the NSFR it's coming at some point, so it'll probably be recalibrated. I think we want to migrate slowly to something which is more about directional change rather than taking large steps at each time. It's a balancing act, and it's a judgment call every quarter. I think in these market conditions, we've just wanted to take the opportunity to bring in a bit more.
Okay. Very clear. Thank you.
Thank you. Your next question comes from the line of Claire Kane. Please ask your question.
Oh, hi there. Could I maybe just ask a question on capital? Clearly, you have quite a nice boost in the ratio now at 15% at the end of this quarter. Can I maybe ask you to give us some update on what you think the regulatory outlook has perhaps changed over the last few months, what you think the prospect is now of a countercyclical buffer coming in, and whether you think that the mortgage risk weights will go up? Just really on your mortgage strategy, whether you are like peers seeing a bit of stabilization on the front book pricing and whether or not you're now happy just to stay with the front book market share being in line with your back book. Thanks.
Hi, Claire. I think if I try to walk through those. The capital ratio of 15% is clearly strong, as you say, and as you all know, with a 15% mortgage risk weight, if we had to include that in Pillar 1 and deduct it from an equity Tier 1, we'd have to knock off some 60 basis points. That's clearly a lot more with the larger participants in the market. That's something one needs to keep an eye on just to get comparability. In terms of the countercyclical buffer, our interpretation is that the Swedish authorities will want to turn it on, and they will want to turn it on with an underlying mechanism, which means it'll be moving slowly. It won't be very volatile.
We don't think that it will be turned on at a very high level, but it will be turned on at some point, and sort of left at that little bit higher level. It remains to be seen what that level is, and I don't really want to speculate. I think it's close to pointless to speculate about the levels at this time. If we ask the regulator, I think they say that early at that year-end, we will know something on the construction of that. When it comes to the mortgage risk weight, they are at 15%, as you know. We don't think that an increased mortgage risk weight is around the corner. I think they will want to stay with 15% and see the effects filtering through from that. I think they are of the opinion that it has taken effect and the market is not cooling off.
It's not heating up. It's starting to level off. Perhaps on the retail bank and the expansion in the retail bank, I think they've done very nicely. They have focused on profitability, and they've addressed things like scale issues, and they are clearly showing a much more profitable and professional retail bank today. We don't have any market share targets as such. We are all about acquiring new customers with whom we can deepen the relationship and have a lot of profitable relationships, i.e., product penetration. That's the name of the game in the merchant bank, and it's the name of the game in the retail bank. It's all about profitability, and they're doing well.
Great. Thank you. That's really helpful.
Thank you. Your next question is from the line of Sophie Peterson. Please ask your question.
Yeah. Hi, here is Sophie from JP Morgan. I was wondering if you could just discuss a little bit your business in Germany and how growth there is proceeding, also in general, growth opportunities that you are seeing across the different markets. Lastly, a few weeks ago, there were some press rumors about SEB having approached Danske to discuss a potential merger. Do you have any comments on this, please? Thank you.
Germany is, as Magnus Carlsson today pointed out at the press conference, where in Stockholm it is going according to plan, 76 new Mittelstand clients in and slowly but steadily growing that business. I think now the more we can focus on just purely the corporate business, the better we get. It is not much more to report there. After Q4, we try to show again, as we did last quarter, showing a number of product clusters per client. There is no news really on that topic in this particular quarter because it moves very slowly, but it moves definitely in the right direction.
Other questions about rumors, it is getting quite tiresome, I think I mentioned hopefully seeing now what we are delivering today, that we have a very strong organic plan, and we will try to keep our focus on delivering on the plan that we promised the market.
Okay. Thank you very much.
Thank you.
Thank you. Your next question is from the line of Jeff Dawes. Please ask your question.
Hi, good afternoon, everyone. Jeff Dawes here from Société Générale. A couple of questions from myself. First of all, if you look at the mortgage margin outlook and guidance that you give, it's very much at odds with your more downbeat Swedish peers. I know there are a number of reasons for that. Can you just elaborate on what the most important of those is, whether it's mix or the fact that there is more new mortgages on the books and so on? Second of all, on the ECB's comprehensive assessment. I know the materiality is small, but you do have some subsidiaries involved. Are you likely to do anything by way of moving NPLs around, changing risk weightings or anything else? Just to give us a feeling for what the ECB are requesting from you rather than materiality to your own group. Those are the two questions.
Thank you.
Hi, Jeff. I think on the first one, the mortgage margins, the reason we can have different trends is of course, that we have been very consistent in the way we have priced our mortgages over the last few years. You have seen an increase of the average margin on the back book with one basis points basically every month as such. When the others hiked their margins relatively a lot, we stayed
To our strategy and increase it and continue to do it in a slow but steady manner. The others have had to lower their pricing in the market and get more competitive, in particular, a few competitors. That means that they have average in their book, which is higher than ours, and which they are now probably losing out a little bit on in terms of lowering the prices. We're coming from the other way, where we have a lower average in our book. When we have rollovers two years later and looking at the margins and prices we had in September 2011 compared to today, we get an uptake on our mortgage book. I think it has to do with seasoning and the way you have been or haven't been consistent in the pricing strategy on the mortgage side.
That's clear. Can you just talk about the mix between two-year and three-month variable products as well?
Nothing really has changed. The Swedes tend to be relatively strategic in their view on the interest rate side. We saw a little bit earlier that they moved more towards fixed rate products. Given the signals being sent by the central bank, that they will keep rates very low for a long time and so on, you could see today that the Riksbank didn't hike the rates, and they actually put the rate part down. Of course, people read into that it's probably not a good use of your money or time to lock into rates today, but rather to keep on with variables. We've seen a little bit of an increase on that one. I think it's not really that people tend to go 5 to 10 years, unless you really want to lock into a long-term rate.
It tends to be 3 months to maybe up to 2, 3 years, but it's all more a play, I would say, on the interest rate curve as such.
Got it. Thank you.
Jeff, on the ECB, I think it's clear. I think you all know that. Basically, the 130 banks that are targeted primarily. It's three parts. It's the risk assessment, it's the AQR, and it's the stress test. They intend to publish in October 2014. We will, as domiciled outside of the Euro area, not be in that primary group. The EBA has at the same time asked for similar exercises with banks in areas outside of the Euro area. We will be doing a similar exercise. In fact, we have already started with the Swedish supervisor. In a similar fashion, our larger subsidiaries who are sort of sitting in the Euro area, even though they belong to us, will be subject to similar exercises. That means our German subsidiary, our Baltic banks will be included.
Thank you. Your next question comes from the line of Riccardo Rovere. Please ask your question.
Good afternoon to everybody. I have two, three questions, if I may. First of all is on the risk-weighted assets, which, if I remember correctly, are down SEK 19 billion. I was just wondering if you can add a little bit more color. What is driving that, given that assets are more or less unchanged? There is also a little bit of volume growth. The second question I have is, again, on the ECB AQR and stress test. What kind of NPL, let's say, inflation are you expecting, if any, from the AQR? The last question I have is on the leverage ratio. This quarter, you're guiding to 4.1%. If I remember correctly, the previous number you provided us in the second quarter was 3.8%. It's a 30 basis point jump. I see assets more or less stable at a consolidated level.
I was wondering what has changed in the group to see a 30 basis point improvement in a quarter, if I remember correctly. Thank you.
Hi, Riccardo. On the risk-weighted assets side, I think it's of course a little bit helped by the stronger Swedish krona that brings a foreign currency effect that is positive for us in terms of the risk-weighted assets. That's one thing, but it's probably seven, eight. I think it's included in the fact book. Of course, on the other hand, we have positive mix effects from risk migration on the client side, where we, as you heard, we are improving the average credit quality in the book, not only by reducing the NPLs that we have on the book, but also by continuing to lend to customers that have a little bit better credit quality than the average in the book. One of the mix effects, of course, being the mortgage book, but not only that, but also lending to corporates of investment rating standard as such.
It doesn't reflect any modeling as such in the numbers. It's more a question about the way the credit portfolio is developing and then a little bit of an FX effect on top of that. Lastly, we also have lower market risk risk-weighted assets, given that volatility has been lower during the summer as such. A few things that can come back, but the asset quality side should remain very solid, and therefore, we don't expect to see risk-weighted assets really moving up very quickly.
On the AQR, I think, Riccardo, it's just too early to speculate on what's going to come out of that. I don't think it's meaningful really, but we'll just have to see. The exercise hasn't really started yet. It'll take a few months from where we are now before we know anything on that.
Okay. I understand. Thanks. On the leverage ratio, if I may?
The leverage ratio, it's difficult to point to any single specific factor. One factor is that
We have raised the discount rates on the calculation or the valuation rather of the pension liabilities. That means there's quite a bit of equity coming back through that. It's about SEK 3.5 billion pre-tax and SEK 2.5 billion post-tax.
Got it. Thank you very much. Very clear.
Thank you. Your next question is from the line of Jacob Kruse. Please ask your question.
Hi. Thank you. I just had one question on your merchant banking division or on the commission income generally. The growth in commission income this quarter seemed to be mostly to do with these lending arrangement fees. I just wanted to understand, to the extent that your merchant banking strategy has been about new client acquisition and penetrating those clients, would you say that the strength we've seen now this quarter and last quarter is evidence of that working, or has it more to do with market movements here and basically volumes coming through specifically on origination? Thank you.
I think, as I said, that we try to show in Q2 that 10% of Merchant Banking revenue is now clearly dedicated to the 350 new clients that they have acquired the last three years. We can clearly see that there is revenue growth from the new clients, even though they don't really use too many product clusters yet. I would say that 50% of the commissions in this quarter will be from new, but also from a slightly better market environment, actually, that activity did pick up, and we should, when activity picks up a big portion of that market. I think this really shows where the large corporates go when they want to do things. I think this also showed that there was a much better sentiment in Q3. If that prevails, we don't really know yet. We hope it does.
Again, Magnus Carlsson, who runs Merchant Banking, has been pretty positive regarding the pipeline as well. You never really know if the pipeline would materialize through the P&L or not. It was a lot of arrangement fees that did come in in Q3.
Okay. Thank you. Just to follow up, when you say that's where the large corporate moves, do you see anything to suggest that you are lacking Nordic scale, or are you sufficiently big with what you have to compete for large Nordic corporates?
I would dare to say today that I've been brought up in this bank, we never had capital. We always had this scarcity with capital, that was worrisome, I would say, five to 10 years ago. That was challenging, not being able to offer the large corporates the balance sheet and at the same time having all the ancillary products. We've always been extremely competitive when it comes to ancillary products. I think I dare say today that today we do feel that the balance sheet is clearly big enough to cater for the large corporates and then finding innovative solutions when they want to do really big stuff because no one really puts on all the debt on the balance sheet today. It's much more about syndicating private placements, bond issuance, et cetera, where we are a clear number one.
I feel comfortable actually with the size. I think the whole size issue has come in a very different light today after the crisis than it was pre-crisis. I guess it is much more challenging today being a large bank than being a very strong regional bank.
Okay. Thank you very much.
Thank you.
Thank you. Your next question is from the line of Jan Wolter. Please go ahead and ask your question.
Yes, good afternoon. Jan Wolter here, Credit Suisse. Just to follow up on today's meeting in Stockholm. What amount of lending volume has been repriced or being repriced this quarter, roughly? That's the first question, please.
Jan, we didn't catch the end to your question. Could you repeat that, please?
Yes. I just wondered, you mentioning repricing especially of corporate lending volumes as a driver of the NII this quarter. I wondered what kind of amounts have been repriced to the lending volume has been driving the NII. Get a feeling for that, please.
I think that's an ongoing process. I think we said because a year or two ago it was mentioned that some banks had repriced their whole portfolios, et cetera. For us, that is an impossible exercise because things mature when they mature, and we do new loans all the time. It's a kind of ongoing process to reprice. Of course, a lot of loans that were done in the old times, they had a smaller margin than the new ones that we do now. I guess that's what we tried to say today, that new loans have a better margin than old ones, but you can't really say that the whole portfolio is repriced because it takes a long time.
Do you then see a continuation of the repricing of the corporate loan book, or is that largely over now?
No, I would say it continuously. On the other hand, there are many loans that we are renegotiating into syndicated market instead or bond issuance instead. It's not like all is done. I would say that yes, some of it is still to be done.
Okay. Thanks for that.
I can't answer it more clear than that, Jan. It's impossible, but sorry.
No, that's fine. Thanks anyway.
Thank you.
Thank you. We appear to have no further questions at this time, so I hand the conference back to you.
Thank you very much, and thank you all for your questions. We wish you all a nice day. We'll be presenting at Chemistry tomorrow morning, and maybe we'll see some of you there. Have a good day. Bye