Earnings Call: Q3 2013

Oct 24, 2013

Thank you. And welcome all to the S and B Q3 call. And with me in the room, I have Annika Falkingren, the CEO and Jan Erik Vak, CFO. And we are ready to go. Please Annika. Welcome to the presentation of our financial results for the Q3 2013. We report an operating profit of SEK 4,600,000,000 which is 20% up compared to the Q3 of last year. On Page 2, you see in the past quarter, we saw increase in corporate activity. And despite the continued high uncertainty around 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 3, I would like to highlight 3 areas from today's results. First, that the improved corporate environment has translated into an increasing number of transactions, both in terms of M and 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. 2nd, we continue to deliver on our business plan. SMB's customer base continues to grow and so does income. And 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 4, you see the financial summary. The operating profit of SEK 4,600,000,000 reflects an income growth of 7% compared with the same quarter last year and the cost decrease by 3%. Asset quality continues to be strong and credit loss levels remain low at 8 basis points. Non performing loans continue to decrease. Meanwhile, our reserve ratio, the buffer against future credit challenges, has strengthened. Operating profit for the 1st 9 months this year is DKK 13,100,000,000 an increase of 15% compared to the same period in 2012. Net interest income has increased during the 1st 9 months by 5% and shown a stable improvement as you can see on slide 5. In this quarter, net interest income was $4,800,000,000 which was up 7% versus the same quarter last year. This development is driven by larger volumes. Lending volumes are up by $43,000,000,000 since September 2012 with improving margins. Deposit volumes are also up $111,000,000,000 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, Slide 6. The upper part shows the development of the difference between the average lending rate and the average deposit rate. 2 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 3rd quarter compared to 18 basis points 2 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 margin has improved slightly to 102 basis points compared with 99 basis points 2 years ago. Net C and commission income on slide 7 is up 17% in the 3rd quarter versus the same quarter last year. On a 9 month basis, it has increased by 9%. This reflects primarily higher income in the credit and loan syndication markets. Customers are more active and we have seen a few days on the pipeline materialize. ECB 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. Turning to slide 8. Net financial income decreased in the 3rd quarter by 20 4% compared to the same quarter last year. Our customers have taken a more hesitant stance, especially institutional customers. And split into different activities, you can see from the slide that all areas have seen a decline. FX was lower due to lower volatility and flows. Fixed income was 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 And equity is also for low turnover. Page 9 is a bit of a favorite. It's ours 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 DKK 500,000,000 improvement in our quarterly profitability and strengthens our financial position further. The bank's costincome 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 Planting 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 1st 9 months of 2013. Retail Banking in Sweden continues to develop well. Operating profit increased 34% versus the same quarter last year and is up 30% in the 1st 9 months. Corporate lending increased by 11% the new lending is now in line with our share of total lending. Wealth Management increased operating profit by 37% in the 3rd quarter compared to 2012 to 39% during the 1st 9 months. Assets under management increased to DKK 1341,000,000,000, the highest lever ever. Private Banking continues to attract new customers and new volumes with DKK 23,000,000,000 in new assets under management. Life operating profit decreased by 3% in the Q3 compared to 2012. Unit linked values and premium income have increased by 14 percent during the 1st 9 months compared to last year, but the result is down 10% due to the traditional Life business in Denmark in particular. And last but not least, the Baltics operating profit increased by 29% in the 3rd quarter compared to the Q3 2012 and by 5% for the 1st 9 months of the year. We see an improvement in the general market environment in the Baltics and corporate lending in local currency has started to recover across all 3 countries. And 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 8 basis points. We have some 25% of the balance sheet in liquid reserves and the structural liquidity measure core GAAP 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. And 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 DKK1 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 3 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 markets. Thank you. And we will now open up for questions. Thank you. 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 in the Baltics. If I look at the you've given us some great color in your presentation Annika about the trends. Just wanted to check within the coverage in Investment Banking bit of the merchant bank, are there any one offs at all in the revenue number in the Q3, the SEK2.5 billion up from SEK2.1 billion? Or is this all underlying client pickup? That was the 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 sort of steady state ROE is in this business? Obviously, Latvia still looks like it's under earning. So just wondering how much higher it can go? And 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, MultiBank's results was pure business. There are no one offs in the results. So it's 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, I mean, firstly, we see it as a high risk than Scandinavian business. So they should have a higher return than the rest of SEB. That's our ambition. So we hope that we can keep this level or even above that going forward. And then your third question on the repo. 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 82,000,000,000 SEK 83,000,000,000 of repos in the market. So it's not really that we are actively reducing the exposure there. Great. That's clear. Thank you. Thank you. The next question comes from the line of Nick Davy. Please ask your question. Yes. Good afternoon, everyone. A couple of questions please then from my side as well. One of them is now a little bit of a follow-up. The first one is on the funding cost and you've talked a little bit about how you 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, but clearly that's been on the decline this quarter. So my question is, have you changed your fund transfer pricing model this quarter? Has some of that lower funding costs been allocated out to some of the divisions? And 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 may be a bit of a follow-up now from a different angle, but 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, very strong this quarter at around €800,000,000 up €400,000,000 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 in this as a bit of an early warning signal of corporate credit demand? Or just to get some sense please of what's driving that and the outlook please? And thirdly and finally just to come back on the Baltic Box you've seen this NII pickup 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 suddenly turn more successful on the repricing side? Thank you. Nick, Jan Erik here. On the public cost, no, we haven't really changed our ICP transfer pricing principles at all. Obviously, they vary with market rates, but no change in principle. I think what you're seeing there is also the fact that we have increased our funding efforts a bit during the quarter. So we have brought in some €30,000,000,000 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. So 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. Then on question 3, the Baltics, Annika will you? Yes. On the Baltics, I think we can say that actually corporate demand is increasing in local currencies actually in each of the 3 countries. So we do see positive signs there that probably will continue and some repricing of that. And we don't see any more of lowering deposit rates. You can see 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. So the lower the funding cost on average have got lower, but you've then let's say over issued and we can see that in your core GAAP ratio. So 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 GAAP 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 GAAP ratio really be 100 over time? Or is there some other threshold that you think it should be at at which point you'd be comfortable to let lower funding costs start to hit the P and L? Thanks. I suppose it's a mix of many things, and you mentioned some of them or most of them. I think one wants to balance the opportunity to bring in funding at reasonable pricing against cost of carrying, but also the fact that the NSFR, it's coming at some point. It will probably be recalibrated. But I think we want to migrate slowly to something which is more about directional change rather than taking large steps at each time. So it's a balancing act and it's a judgment call every quarter. And I think in these market conditions, we 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. Hi, there. Could I maybe just ask a question on capital? Clearly, you have quite a nice boost in the ratio now at 15% 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 accounts cyclical buffer coming in? And whether you think that the mortgage risk weights will go up? And 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 kind of front book market share being in line your back book? Hi, Claire. I think if I try to walk through those, the capital ratio at 15% is clearly strong, as you say. And as you all know, with a 15% mortgage risk rate, 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. So 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 on with a mechanism, an underlying mechanism, which means it will be sort of slowly it will 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 plus the point is 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 that and the construction of that. When it comes to the mortgage risk rates, they are at 15%, as you know. We don't think that an increased mortgage risk rate 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. And then 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 we're showing a much more profitable and professional retail bank today. And 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. And that's the name of the game in the merchant bank and it's the name of the game in the retail bank. So 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 JPMorgan. I was wondering if you could just discuss a little bit your business in Germany and how kind of growth there is proceeding? And also, in general, growth opportunities that you're seeing across the different markets? And lastly, a few weeks ago, there were some press rumors about STV having approached Danske to discuss a potential merger? Do you have any comments on this please? Thank you. So Germany is, as Magnus called, some today pointed out at the press conference where in Stockholm, it's going according to plan, 76 new Mittelstand clients in and slowly but steadily growing that business. So I think now the more we can focus on just purely the corporate business, the better it will get. So it's not much more to report there. After Q4, we try to show again, as we did last quarter, showing a number of kind of product clusters per client. But 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's getting quite tiresome. But 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 Dorsey. Please ask your question. Yeah. Hi, good afternoon, everyone. Jeff Dorsey here from SocGen. 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, I guess, 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 new more new mortgages on the books and so on? 2nd 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 change in risk weightings or anything else? Just to give us a feeling for kind of what the ECB are requesting from you rather than materiality to your own group. Those are the 2 questions. Hi, Joe. 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. And you have seen an increase of the average margin on the back book with 1 basis points basically every month as such. And when the others height their margins relatively a lot, we stayed to our strategy and increased it and continued to do it in a slow but steady manner. Now the others have had to lower their pricing in the market and get more competitive, in particular a few competitors. And 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, whereas we're coming from the other way, but we have a lower average in our book. And when we have rollovers 2 years later and looking at the margins and prices we had in September 2011 compared to today, we get an uptake on our mortgage books. I think it has to do with seasoning in the way you have been or haven't been consistent in the pricing strategy on the mortgage side. That's clear. And can you just talk about the mix between 2 year and 3 month variable products as well? It's I mean nothing The Swedes tend to be relatively strategic in their view on the interest rate side. And we saw a little bit earlier that they moved more towards fixed rate products. But then given the signals being sent by the Central Bank that they will keep rates very low for a long time, So I think you could see today that the Riksbank didn't hike the rates and they actually put the rate path down. Of course, people read into that, that it's probably not use a good use of your money and time to lock into rates today, but rather to keep on variables. So we've seen a little bit of an increase on that one. So I think it's not really that people tend to go 5 to 10 years unless you really want to 16 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. Then Jeff, on the ECB, I think it's clear. I think you all know that. So obviously, the 130 banks that are targeted primarily and it's 3 parts. It's the risk assessment, it's the AQR, it's the stress test and the intent to publish in October 2014. And we will as domiciled outside of the euro area not in that primary group. But the EBA has at the same time asked for similar exercises with banks in areas outside of the euro area. So we will be doing a similar exercise. In fact, we have already started with a 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. So 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 2, 3 questions, if I may. First of all is on the risk weighted assets, which if I remember correctly, they are down kind of €19,000,000,000 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 on again on the ECB AQR and stress test. What kind of NPL, let's say, inflation are you expecting, if any, from the AQR? And 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 Q2 was 3.8%. It's a 30 basis point jump. I see assets more or less stable at consolidated level. So I was wondering what has changed to in the group to see 30 basis point improvement in a quarter, if I remember correctly? Thank you. Hi, Riccardo. On the risk weighted asset side, I think it's, of course, a little bit helped by the strongest Swedish krona that brings foreign currency effect that is positive for us in terms of the risk weighted assets. That's one thing, but it's probably 7%, 8%, I think it's included in the fact book. Then 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 and 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. So it reflects 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. And then lastly, we also have lower market risk, risk weighted assets given that low that volatility has been lower during the summer as such. So 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. Then on the AQR, I think, Garbo, 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. I mean, the exercise hasn't really started yet. So it will take a few months from where we are now before we know anything on that. Okay, okay. Understand. Thanks. And on the leverage ratio, if I may? Yes. The leverage ratio, it's difficult to point to any single specific factor, but one factor is that we have raised the discount rates on the calculation or the valuation rather of the pension liabilities. And that means and there's quite a bit of equity coming back through that. That's about SEK 3,500,000,000 pretax and SEK 2,500,000,000 first 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 I guess had one question on your Merchant Banking division or on the commission income generally. So the growth in commission income this quarter seemed to be mostly to do with these lending arrangement fees. And 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, Kaseya, that we tried to show in Q2 that 10% of merchants revenue is now clearly dedicated to the 350 kind of new clients that they have acquired in the last 3 years. So 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 you, 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. So I think this really shows where the large corporate go when they want to do things. So I think this also show that there was a much better sentiment in Q3. If that prevails, we don't really know yet, But we hope it does. And again, Magnus Carlsen, Rausch Orchard Bank has been pretty positive regarding the pipeline as well, but we never really know if the pipeline would materialize through the P and L or not. But it was a lot of arrangement fees that did come in, in Q3. Okay. And just to follow-up, where you say that's where the large corporate moves, do you see anything to suggest that you are lacking Nordic scale? Or is 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 and we never had capital. We always had viscosity with capital. And that was worrisome, I would say, 5 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'd 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 real 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, etcetera, where we are a clear number one. So I feel comfortable actually with the size. I think the size the whole size issue has come to in a very different light today after the crisis than it was the pre crisis. I guess it's 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 a follow-up on today's meeting in Stockholm. You mentioned that you're able to re price Annika. And what amount of lending volume has been re priced or being re priced this quarter roughly? That's the first question please. We didn't catch the end to your question. Could you repeat that please? Yes. I just wondered you mentioning especially of corporate lending volumes as a driver of the NII this quarter. And I wondered what kind of amounts are that have been repriced to the lending volume has been driving the NII? Get the feeling for that, please. I think Jan, that's an ongoing process. And I think we said because a year or 2 ago, it was mentioned that some banks had repriced their whole portfolios, etcetera. And for us, that is an impossible exercise because things mature when they mature. And we do new loans all the time. So it's kind of an ongoing process to reprice. But of course, a lot of loans that were done in the old times, they had a smaller margin than the new assets that we do now. But I guess that's what we try to say today that new loans have a better margin than old ones. But you can't really say that their own portfolio is repriced because it takes a long time. Okay. And 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's continuously. On the other hand, there are many loans that are renegotiated into syndicated market instead or bond issuance instead. So it's not like oil the number. But I would say that, yes, some of it is still to be done. Okay. Thanks for that. I can't answer. It's more clear than that, Johan. It's Johan. It's impossible. 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. And we wish you all the nice day. We'll be presenting at chemistry tomorrow morning and maybe we'll see some of you there. Have a good day. Bye.