Good morning, and welcome to our telephone conference regarding our growth opportunity in Skåne. Five years ago, we took a very important decision to focus on our four home markets and to exit our operations in Ukraine and Russia. We have, during the five last years, worked hard to restore the balance sheet, reduce risk, and restore profitability. During these five years, we have seen a different environment and new regulation. All of this has created a unique opportunity for us and three savings banks to form two new structures in the southern part of Sweden, which is a significant growth area, if you look at the connection to Copenhagen. We call it the Öresund region. We will acquire Sparbanken Öresund, and we will also participate in the formation of a new, strong savings bank, which will be named Sparbanken Skåne.
Göran will now go through the transaction in detail. It's rather complex, and we will then, after Göran's presentation, open up for Q&A.
Thank you, Michael. As Michael said, it's a rather complex transaction involving a few steps with different parties. I will try to be as simple as possible in describing it. As Michael said, Swedbank will acquire 100% of Sparbanken Öresund. We will then sell 8 branches of Sparbanken Öresund onwards to the newly formed bank between Färs & Frosta and 1826. Those are the 8 branches that reside within their geographical area. We will pay SEK 3 billion for Sparbanken Öresund, and we will onward sell the 8 branches for SEK 1.8 billion.
The reason for a rather high selling price on the onward selling of the eight branches is that we are guaranteeing the converting of all customers into the Swedbank platform, that 1826 and Färs & Frosta already have today, which Sparbanken Öresund does not have. At the same time, we acquire one branch in Lomma from Sparbanken Skåne, which will be an increased geographic reach for Swedbank. After the sale of these eight branches, there will be a another transaction with a rights issue in Sparbanken Skåne, and one of the selling foundations, the Foundation Öresund , will become an owner in the newly formed Sparbanken Skåne.
So the ownership situation in Sparbanken Skåne will be that, the , 1826, and Öresund will each oFoundation Färs & Frostawn 26%, of that bank, and Swedbank will own 22%, and it will be by far the biggest savings bank in, Sweden. I will try to give you the geographic, picture of it through describing here. On this picture, you can see the red one being 1826 today, the blue one being, Färs & Frosta savings bank. The green one, the green dots are Sparbanken Öresund's, presence today, the bank that we are acquiring, and, the orange ones are Swedbank. After the consolidation and the acquisition that we acquire Öresund, the picture will look like this. That you will have two strong players, instead of four more fragmented ones. And Swedbank will remain with 16 branches of the 24.
What is the business rationale of this transaction then? It's of course for Swedbank that we increase our reach in a growth area of Sweden that is very interested and where we've been slightly underrepresented earlier. We do get a stronger client foothold in new areas, and we do get a lot of new clients, so that is a very important driver for us. And we do get that both through the effect of acquiring more clients into Swedbank directly, but also as an indirect effect in the ownership that we have in Sparbanken Skåne. Of course, we are bringing Sparbanken Skåne, that has been operating outside of the Savings Banks Agreement, into the agreement.
So all the volumes that are currently residing outside of the Swedbank system, so to say, will be brought into the system. Then the financial upside will be significant for both parties, Sparbanken Skåne and Swedbank. There will be considerable cost synergies, overlapping operations, as you can see from the map, both for Sparbanken Skåne, but not the least for Swedbank, and I will come back to trying to quantify part of that for you. Over time also that we hope to see capital synergies as Sparbanken Öresund are operating with risk weights, slightly above 100%. One important factor to understand in this transaction is that we have guaranteed a cost level on the eight branches, that we onward sell to Sparbanken Skåne, and we do stand all transaction and integration risk in Swedbank.
We now have the job in front of us to integrate all of Sparbanken Öresund, see to it that we make all of their operations more efficient, and can meet the obligations that we have given to the eight branches that we onward sell. Looking at the financial aspects of this, I mentioned a few already. We pay SEK 3 billion for Sparbanken Öresund. We do get SEK 1.8 billion for the eight branches that we sell. We will have an increase in Swedbank of 16 billion risk-weighted assets as an effect of lifting in the lending portfolio into Swedbank, consolidating that. As a consequence of that, we do get a negative impact on quarter one on 60 basis points.
We will be able to book an initial upfront provisions of accumulated 1.5 billion SEK without having a P&L effect in 2014. The reason for that is that as we are onward selling the eight branches with an uplift, the remaining 16 branches, you could say, has a large undervalue or bad will that we can mitigate the upfront provisions. The provision constitutes of three elements. 400 million is that we have taken a charge relating to the lending portfolio being wrongly priced. So we will, over the next coming four years, dissolve that reserve in a linear way, with roughly SEK 100 million each year on the income line.
The remaining SEK 1.1 billion is relating to restructuring and cost-related issues in the transformation and integration of Sparbanken Öresund. The effect for the 2014 P&L statement will be an income uplift of SEK 800 million, cost increase of SEK 650 million that you should add on to the previous guidance, and a roughly net profit impact of SEK 200 million. Looking further out, now the work starts, of course, to integrate and make the operations between Öresund and Swedbank as efficient as possible. Our estimated guidance on the incremental profit increase you can see on this slide.
We do think that during 2016, we will, on this transaction, meet our ROE target on 15%, and gradually, the profit, net profit contribution of the tax will reach a level that is higher than SEK 500 million. Sometime during 2016, 2017, it will be 350, increasing to 450. Everything depending on how successful we are in delivering the synergies and the transaction benefits. In the end, the incremental return on equity will be, say, about 25% on this transaction. We do have a couple of finalization steps. We need the approval from the Swedish Financial Supervisory Authority.
We also need the approval from the competition authorities, and last, we do need the selling parties or the boards in the savings foundations will take a decision after having met their what do you say? Huvudmän. Huvudmän in the next coming two weeks. So the transaction are all conditioned on these three aspects happening, which we all expect to happen sometime in the beginning of the second quarter. And as the deal do become finalized, then we will start the integration work immediately, and we are now sort of in a planning phase of that. I think I stop there and open up for questions.
Merci beaucoup. We have a first question from Mr. Rickard Henze, Nordea.
Yes, hi, good morning, Rickard from Nordea Markets. Just two questions from my side, please. Firstly, if you could, when you mentioned that the positive impact is SEK 350 million-SEK 450 million in 2016, 2017, is it possible to break that up in order for us to understand where this is coming from? What kind of assumptions are you making regarding cost cuts and synergies... loan losses, volume growth, et cetera, et cetera. That would be really helpful. And secondly, you mentioned this guarantee of conversion of clients and also a guarantee on cost level. It seems quite complicated, but is it reasonable to assume that you will actually be burdened by this?
How is the risk profile here? Is it very likely that you will have to pay something, or is it very unlikely? Thank you.
To start with, I think it's very difficult to give you all our assumption details, because it entails a lot of moving parts in a transaction like this. So we will try to give you as much, as much breakup as possible later on. At this stage, we cannot do that because we need to increase our knowledge ourselves in many smaller aspects of things. But you should bear in mind that the main value driver in this transaction is cost reductions, since there is clearly overlapping operations in, in a number of areas. So that's how you should view the transaction, I think. We will then...
Another element that you should think about is that, of course, Sparbanken Öresund has given all the mortgage lending towards SBAB, and that constitute SEK 33 billion in Sparbanken Öresund totally today. That mortgage lending is something that both Swedbank and Sparbanken Skåne will reclaim from the existing clients, so to say, and that will be a value driver as well over time. The risk picture, I think, it's, of course, always a risk when you sort of promise to do something. But you must remember that we are servicing 60 different savings banks already today, and we are gonna just increase that with eight more branches. The important thing, so the actual delivering of that services will not be any problem at all.
The important thing for us is how quickly we can dismantle, really, Sparbanken Öresund and all the agreements in there and substitute them with our own agreements and our own product, production, et cetera, et cetera. And then over time, there will be capital efficiency as well as they, we migrate things into our, sort of credit process and risk measurement.
All right. Thank you very much.
Thank you. The next question is from Mr. Jacob Kruse, Autonomous.
Hi, thank you. First, firstly, could you just go back and explain the... You take a SEK 1.5 billion loan charge and restructuring charge, and then you say that will be offset by a reversal of bad will. Is that, is that how I read it? Sorry, if you could just explain why there is no impact on the PNL and the capital of these things.
The reason for that is mainly part of that will be sort of mitigated by bad will coming in the transaction. And the reason for that is that we do sell onwards the SEK 1.8 billion we get for eight branches is, of course, a very high price because we have factored in that we deliver cost at a much lower price. So of those eight branches, we do get a very high price. So the remaining part of the 16 branches that Swedbank keeps will have a much lower value. And from that sale proceeds, you could say SEK 1.8 billion, we need, we can actually book a charge against delivering that cost assumption, which will be part of the charge, the SEK 1.1 billion of cost charges.
Okay, and the targeted cost synergies that you will get out of this when fully integrated, they are how much?
Specify the cost synergy target for you to read; it's included in the net profit. You can only get it from the net profit guidance that we are giving, since cost is one element, but it's not all elements. We will, as we work ourselves through the transaction, I would hope to give you more, a much better picture of sort of the transaction on a standalone basis compared to our running costs in general in the bank, later on. But we, at this point in time, cannot give you that.
Okay, and that's around closing in Q2, we, we could expect more information. Is that about right?
Absolutely. We need to have the closing firstly, and then, and then, at that point in time, we will be better equipped ourselves.
Okay. Thank you.
Thank you. The next question is from Mr. Magnus Andersson, ABG.
Yes, hi. Just wondering, first of all, to follow up a bit on a previous question. Out of the SEK 800 million in estimated income and SEK 650 million in estimated cost for 2014, can you say how much of that is recurring income and costs? Because I guess that it could be some non-recurring items in those numbers. So what are the underlying numbers we should have as a base going into 2015 and 2016 in terms of income and cost, respectively. Secondly, out of the risk-weighted assets increase of SEK 16 billion, you said that they are above 100% risk weight, which implies that they are on the standardized method. What do you expect-...
You have turned them into IRB, your IRB model. And thirdly, you mentioned mortgages of a total of, I think you said more than SEK 30 billion that was in SBAB for Sparbanken Skåne. How much of that will be in Sparbanken Öresund, i.e., how much of the more than SEK 30 billion will become directly Swedbank loans?
If we start with the last one, Sparbanken Öresund today have SEK 33 billion of mortgage loans. Roughly, if we take how many of those that resides with Swedbank, respectively, Sparbanken Skåne's clients, you could say that 17 goes to Swedbank, and 16 goes to Sparbanken Skåne, as and when we can sort of bring that volume back from SBAB. That was that question. The other one was non-recurring items in the income and cost guidance for this year is SEK 300 million on each side. So there is a bad will of roughly SEK 300 million, and there is a restructuring part of SEK 300 million in the cost figure that you see impacting 2014.
Uh, okay.
Then you had a third question, which was, which we have forgotten.
Risk-weighted assets, you say SEK 16 billion, but then I guess they are on the standardized method. So what will it be eventually, when you have implemented to your models?
Eventually, of course, once we have closed down Sparbanken Öresund, eventually, which will take many years, it will be Swedbank's current risk rates because these clients and transactions will be incorporated into our credit culture and our modeling and so forth. But it's more at what is the timeframe for doing that? And that relates partly to the timeframe from converting clients, and also how many clients can you... Of the corporate clients, can you, you transfer as you document or you refinance them, and they have, have come into different agreements and so forth. So, it's very, it's very difficult to give guidance on how, how that journey will happen over time. I—you should not expect big, quick capital gains in there from that perspective.
It's a time-consuming effort to go through all of the loan book over time, definitely.
Okay. Thank you very much.
Thank you. The next question is from Johan Bäckman, Danske Bank.
Yes. Hi, it's John Bäckman from Danske Bank. Two questions, please. First, if you can just help me understand the mechanics of the transaction, because you're paying SEK 3 billion for Öresund for 100%, and they seem to have equity of SEK 3 billion as per September, at least 2013. And then you get SEK 1.8 billion, so I guess you pay net SEK 1.2 billion, but for how much equity? That's the first question. And the second question is, when, if you get all the necessary approvals, do you expect this to be finalized, i.e., when do you expect to be consolidating Öresund? Thank you.
We expect to consolidate Öresund if everything goes according to plan during Q2, so the half-yearly result should show a consolidated picture. It's true, we pay book value for Öresund. When we onward sell the eight branches, that is not done without capital. So the capital remains with Swedbank. It's what you in Sweden call inkråmsaffär.
Okay. And is it correct, just, sorry, just to follow up, is it correct that you pay net SEK 1.2, or are there any other items that I'm not including?
There are other items, since we are also increasing our share in Sparbanken Skåne. You remember that bank is growing as well, and our sort of investment in then, that one is growing, as well. So the net investment for the full transaction, the cash flow for us is SEK 1.7 billion in this transaction altogether.
Okay. And, do you have a figure, sorry, just to follow up on the equity that will reside in the new Sparbanken Skåne?
There is no equity being transferred from us further on. Sparbanken Skåne will do a rights issue to improve their equity position as they buy a lot of assets and branches, and that will be financed by Swedbank and also some of the sellers of Öresund. I would like to leave that to Sparbanken Skåne to comment on their financials.
Okay, thank you.
The next question is from Mr. Riccardo Rovere, Mediobanca.
Good morning to everybody. I have just a couple of questions. The first one is, am I correct in saying that the 60 basis point impact on capital is including the recognition of the bad will, and what would be the impact if no bad will is recognized? And still related to that, what makes you so confident that valuing assets and liabilities at fair value under IFRS is going to result in bad will in all this transaction? And the second question I have is, we have seen recent comments from politicians in Sweden... payouts, and is this going to be another way of redeploying capital in the future rather than focusing only on the dividend side? Thank you.
I think this transaction is highly value creative for Swedbank shareholders. We are increasing our footprint in a very interesting region, and I think the return numbers, risk-adjusted or without risk-adjusted, are going to be fantastic in this transaction since they are so good, cost synergies in there. I think it's very much in the interest of the shareholders to do this transaction. I do also think by the end of the day, it doesn't consume a lot of capital since we do sell things onwards.
You could say what we are getting is a lot of cost synergies, and also the fact that we are converting Sparbanken Öresund clients onto our product framework that we have with all savings banks is sort of a synergy that Swedbank owns, and we'd get the benefit for doing that during this transaction. So I can't see it affect the dividend policy as such either. Your first question was relating how bad goodwill, as I said, was roughly SEK 300 million here. We have other when you integrate the sort of the balance sheet of Öresund, you have a lot of other components in there as well.
But the main reasoning for having goodwill is that we can promise to do the conversion and then onwards sell the 8 branches at a much higher price than what we are buying Öresund from.
Okay. Okay, and the Bad will is SEK 300 million that you're expecting from this transaction?
Yes.
The next question is from Mr. Johan Ekblom, Bank of America.
Coming back to the synergies. I mean, you're saying you're booking SEK 1.1 billion restructuring charge, and no matter how I sort of twist and turn it, it sounds like that will be a pretty hefty multiple of the expected synergies. So I know you don't have a clear plan, but can you just talk a little bit about how costly it will be to achieve these synergies? And then finally, just on the capital. So if I put in the SEK 16 billion of risk-weighted assets, reverse the SEK 300 million of goodwill, what other adjustments do I need to make? I mean, clearly, these restructuring charges, even though they don't go through the P&L, should impact capital, I would assume, which would give me something more than 60 basis points.
On the capital side, there is a lot of different traffic in the capital component, and because there are multiple of sort of assets and liabilities that are affected accounting-wise, we're not going to give the breakup of that because it will just be too complicated at this point in time. So that was. What was your first question there?
I'm just trying to get a sense. I mean, you say you're booking SEK 1.1 billion of,
Oh, yes, sorry, sorry.
Of restructuring costs.
Yeah. It's, of course, it, it's quite complicated to convert from an IT perspective the large number of clients. Sparbanken Öresund do have 200,000 private clients and 16,000 corporate clients. And you need to convert all of them into our platform and our products and so forth, and it's, it's about IT integration is a very hefty component of that. So there is a lot of IT-related costs in that restructuring charge, as well as there is, of course, a lot of charges relating to staff redundancies as well, as we will have a lot of central staff functions that are clearly overlapping, and as well as we have branches.
We will release the cost over the integration period, which we expect to be finished the majority of that period after 36 months. A big value driver here going forward is, of course, can we do this quicker? And by doing that quicker at a lesser cost than expected. So, and it's a lot of work entailed in expecting that. What we are presenting today is our best guess of where we stand in all of this process.
Yeah, let me just follow up on that. I mean, you said the underlying cost for 2014 is expected to be SEK 350 million, so the 650 minus the SEK 300 million non-recurring. If we assume that's for somewhere between two and three quarters, given you expect the Q2 consolidation, that would imply full-year costs of just north of SEK 500 million. So I mean, even if you take out 40% of that cost base, we're talking about paying five or six times or having a payback of five or six years on the cost synergies, which seems to be rather extreme. What am I missing there?
You, I mean, you're missing one of costs that relates to IT programming and IT work that is needed in this process... You are missing also that there is a lot of agreement that might cost money to break up somewhere here and there.
So, as I'm not wrong in saying, it's a five to six years payback on the restructuring charges taken?
No, I think we expect to have it a quicker process than that. But, I mean, the tail end of things can be longer, but the majority of it should be definitely shorter.
Understood. Thank you.
The next question is from Miss Sofie Peterzens, JP Morgan.
Yeah, I realize you can't give all the details around the rights issue in Sparbanken Skåne, but your 60 basis points capital impact guidance, does that also include the participation in the Sparbanken Skåne rights issue? And could you also comment on what your market share will be in southern Sweden post this acquisition? Thank you.
The 60 basis points is with full impact and everything. The market share after the transaction, I actually, I don't have that number, so I can't give it to you. I will try to get it to you.
I'm wondering how big is your market share in southern Sweden?
Sorry, we didn't catch your question there.
How big is your market share currently in southern Sweden?
We don't really, we haven't disclosed that, where the market share we have in different regions in parts yet. So, before I come back, before I answer these questions, I would like to think a little bit how we do that.
Okay, thanks.
Another way to look at it, it's Michael here, is to say that we add a significant customer base to an already good customer base. We will be able to offer Sparbanken and Öresund's corporate clients a much wider capacity, be able to sort more complex needs. And if you look at the private individuals, we'll be able to onboard them to our digital platform, and other structures. So there are significant possibilities for our customers to get an improved offering overall. And of course, the joint resource will increase our competence base in this region as well.
Great. Thanks.
Thank you. The next question is from Mr. Matthew Clark, Nomura.
Hi, a couple of follow-up questions. Firstly, back, going back to the SEK 1.1 billion restructuring charge, could you just confirm whether that is a kind of a for cash payments that you expect to have to make in the future? Or whether there's a significant component from write-down or accelerated depreciation of things like existing IT intangibles and leasing and renting and other kind of capitalized items that would represent a kind of a non-cash charge? And then secondly, just trying to understand this SEK 200 million after-tax impact on 2014. I guess, firstly, does that represent a kind of a run rate baseline?
So am I right to think that all the positive and negative one-offs from the bad will asset and restructuring, et cetera, will offset? And secondly, is that a full year impact? So implicitly, are you backdating the transaction to the first of January, twenty fourteen? Just trying to, yeah, understand where that SEK 200 million comes from and how it fits into the SEK 150 million of pre-provision profits implied by the SEK 800 million and SEK 650 million figures. Thank you.
We are not gonna give you sort of the granularity of how the 200 million. Yeah, I can say it's the transaction will not be sort of backdated. It will be as it is fully or as it is concluded, the effect is the 2014 expected effect as we see the transaction be concluded. The part that is cash versus non-cash in the restructuring, I don't have in my head. I would just speaking on top of my mind say that most of it is cash expected, but I need to come back on that one.
Okay. Thank you.
Following question is from Mr. Omar Keenan, Deutsche Bank.
Good morning. Thanks very much for taking the questions. I just had a question on the capital efficiencies that you hope to realize. You said earlier that there's no reason why, over time, that the portfolio can move on to Swedbank's risk weights. Are you talking about Swedbank Group or kind of Swedbank Retail, where you look like you have roughly 22% risk-weighted loans? And can you give us a sense of timeframe? Is it a matter of just kind of sort of bringing customers onto your sort of new model, or is there some kind of regulatory approval of sort of the model where they step hopefully need? Thanks.
There is no regulatory approval process needed in that. In terms of the risk weights, you should look at the Swedish retail operations when you compare what we've done today. That's the compare, the sort of where you should have the comparison.
Okay, great. And, do you have a kind of a sense of timing then?
Timing for,
Moving on to Swedish retail risk weights, so that's kind of a-
I said by the end of the day, it will be—we will come on towards Swedish re-risk weights. I said it will be... Don't expect it to happen very quickly. That's rather time consuming to do that. I, I'm not gonna be able to give you any better guidance than that, at this point in time.
Okay, great. And I just had a second question on the SEK 800 million of revenues. Could you give us a split between NII and other income? And we've talked about the cost synergies, but are there kind of any sort of revenue synergies from sort of cheaper funding costs or anything like that you expected? Thanks.
The cheaper funding cost has been a very little component in this one, very small component. I don't have the breakup of the revenue lines in front of me. I would say they correlate quite well, except for the bad will, with what Öresund has in the report, and we can perhaps come back to you later on with that one.
Okay, perfect. Thank you very much.
We have a final question from Mr. Pavel Wyszynski , Nordea.
Yes, hello, Pavel here from Nordea. Just a question on all of these, one-off costs. How should we view them for the 2014 dividend? So I mean, what should we include or what should we exclude from that?
Now, I mean, if we have made the right assessment of things here, everything that is booked cost-wise on the balance sheet should be offset by unexpected outside cost coming in. So the important thing for you is to look at the capital position now and also the incremental net profit guidance that you are getting from us.
Okay, so no one, I'll just look at the bottom line then?
Yeah.
Thank you. We have no further questions.
Well.
Then we thank all participants, and, I guess we will follow this transaction for a foreseeable future, and we'll give you more and more updates as it moves along. Now we'll focus on getting the approvals and getting the leadership appointments, so that we have clear leadership in running the operation forward. So once again, it's a great opportunity for us to position ourselves in a growth area, both through our own structure and through Sparbanken Skåne. With that, thank you.