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Edited Transcript of SEB A.ST earnings conference call or presentation 30-Apr-18 9:00am GMT

Q1 2018 Skandinaviska Enskilda Banken AB Earnings Call

Stockholm Apr 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Skandinaviska Enskilda Banken AB earnings conference call or presentation Monday, April 30, 2018 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jan Erik Back

Skandinaviska Enskilda Banken AB (publ.) - Executive VP & CFO

* Johan Torgeby

Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director

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Conference Call Participants

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* Adrian Cighi

RBC Capital Markets, LLC, Research Division - Equity Analyst

* Geoff Victor Charles Dawes

Societe Generale Cross Asset Research - Equity Analyst

* Jacob Max Kruse

Autonomous Research LLP - Partner, Scandinavian Banks

* Jan W. Wolter

Crédit Suisse AG, Research Division - Head of European Banks Research

* Kim Bergoe

Deutsche Bank AG, Research Division - Research Analyst

* Nick Davey

Redburn (Europe) Limited, Research Division - Research Analyst

* Paulina Sokolova

Barclays Bank PLC, Research Division - European Banks Analyst

* Riccardo Rovere

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Willis Palermo

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to SEB Q1 2018 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Johan Torgeby. Thank you. Please go ahead.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [2]

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Thank you. Welcome, everyone, to this conference call that relates to SEB's First Quarter Result. This is Johan Torgeby speaking. In the room, I have Jan Erik Back, our CFO; and Christoffer Geijer, our Head of IR.

We thought we'll start with just spending maybe 5 or 10 minutes on the top themes for the quarter and then open up for Q&A.

So on the first page that we call navigating a fast-changing environment, we have tried to summarize what was going on in the first quarter in SEB, and it was actually quite challenging, as many moving parts had opposite effects in our financial results. But we ended up saying that we see the normal seasonal slowdown in the Q1 result versus Q4. However, it was accentuated by weaker equity markets ending up 4% down year-on-year.

We see unchanged corporate activity. All that being said, we had some areas that did a little bit better and some did a little bit worse, and we still see decent business sentiment and a broadly supportive microeconomic environment, an exceptionally strong capital, low credit risk and good cost control.

But we also said that this first quarter, we did get volatility to be reintroduced in -- particularly into the equity markets, not so much in fixed income or in the currency market, but we also had a slight negative tendency on stocks that did not help us in the quarter. We saw an elevated discussion about trade barriers and even trade wars. And we also follow the geopolitical situation carefully, which seemed in the quarter to have some heightened tension to it. And we've also used an indicator here for the Swedish, call it, PMI to say that we've gone from super positive growth to positive growth, so a little bit of nudging down from these record level, however, still very supportive.

This is also the first quarter we have MiFID II, IFRS 9 and the resolution fund fee that has changed to 12.5 basis points. And we just wanted to point out that MiFID had a couple of effects. One is, of course, it's not free, for free to drive a product like that. We also had a divisional split of income that has been affected of the -- post-MiFID II way of handling the divisional splits. And IFRS 9 was really no news, other than we now record extremely low credit losses of 2 basis points, and that the resolution fund fee has hurt our P&L in the first quarter.

Flipping to the next page, which is really a summary of our financials. We can just conclude that the operating income fell by 4% on a yearly basis. Net interest income came up by 6% year-on-year. Net fees and commissions went down 1%. And the theme was really around the investment bank not performing as well as in the fourth quarter or in the quarter, similar quarter in 2017. So we had SEK 200 million to SEK 300 million less of income from M&A, ECM, DCM. But the other lines performed okay, custody and mutual fund payments and Life Insurance.

Then we had a 29% drop in NFI, and here, we've come down to SEK 1.5 billion in the quarter, and we had 2 themes we'd like to just point out. One was that we had an exceptional Treasury income in Q1 2017 of SEK 400 million that was not replicated in Q1 2018. But we see -- and we say it's about SEK 300 million of difference between Q1-on-Q1 just because of that effect.

We also used in the past the VIX Volatility Index as a proxy for when one would

(technical difficulty)

expect the NFI to go better in our trading and in our business with our clients. But despite having the spike in equities, we didn't really see the line pick up from being around the historical average. And under that line, we could see a decent performance where one would expect, mainly in equities, secondary equities which was up 21% year-on-year, but rates and currencies did not really have a meaningful impact in a positive sense. And one can also see that the actual volatility

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we used the EU swaption and the euro SEK currency did not really move, so they've been continued partly at a quite low level.

I also think we should mention on the NII, the resolution fund fee effects. And we say that we are now, in the first quarter, recording SEK 225 million -- SEK 235 million more of overall cost of regulatory fees. And we're paying SEK 625 million for the first quarter in total, which is, of course, now the peak year for the resolution fund fee at 12.5, and we expect that according to plan to start falling off beginning on next year.

We can start with LC&FI, and that was -- then recorded a return on equity of 8.8%, which is a very disappointing number, whereas the operating profit fell from SEK 2.1 billion to SEK 2.9 billion compared to last year. Again, the line weaknesses here were in the markets areas not relating to equities and the disappointing quarter for the investment banking when it comes to booking of fees. The loan book grew by close to 8%, but remember, more than half of that came actually from a depreciation of the Swedish krona and wasn't really loan growth. I will come back to that in a bit.

So that's really the operational weaknesses that we saw. Other bits and pieces are actually performing okay. However, one should point out that the resolution fund fee, the internal transfer pricing mechanism that we use between LC&FI and Treasury and that we moved out some of the discontinued business in Germany, those 3 effects: resolution fund fee, internal pricing transfers and that we have a discontinued business, affected this quarter negatively by SEK 300 million.

Going on to corporate and private customers. Same thing, we're down 1% in return on equity of 13.7%. And here, the internal transfer mechanism, the resolution fund fee and MiFID, because we've taken some of the income away from here in that line item, affected this quarter SEK 200 million negative. These things do not matter for the group results, but they do matter for the

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specific financials.

We also continued to marginally increase our market share on SMEs. We came up to 160,000 new -- or roughly 160,000 SME and mid-corp clients. In our mid-corp space, we'll continue to develop different digital innovations.

Next page, we just look through Baltics, which continues its very good and strong performance, both offering good growth and improved credit quality. A flattish performance, but with improved return on equity to 33.8%. However, here, we've had roughly SEK 100 million reallocated from [CPC] it its benefits. Assets under management grew by SEK 24 billion in the year to SEK 1,854 billion. But again, the currency had a meaningful effect, so SEK 8 billion was really the net number currency adjusted of new sales.

(inaudible) slide, and that is just saying that we have stable development in the long run on our income. Q1 2017 was a good quarter. We've just went through that we're down from that. But we're up 6% the first quarter this year compared to 2016. So we still have a little bit of medium-term growth even though we did not reach the level we had in Q1 2017.

Costs are under control, and operating profit, as an effect of operational leverage, is expected to

(technical difficulty)

Now we have a slide where we talk a little bit more about the growth on the balance sheet in our lending books. And if you might remember, we did see a little bit of an embryo to a pickup after several quarters of just being stable despite very accommodative macroeconomic environment. So also this quarter, we're up [7% to 8%] when it comes to corporates. However, more than half of that is related to currency, so think [about] 2% to 3% for large corporates and around 4% for SMEs. Household, which is really the mortgage book, grew by 4%. The market is growing (inaudible) in a bit, so this is a similar picture as we've had over the last 4 or 5 or 6 quarters, where we're growing but a little bit less than the average in the market. And we can see that real estate had a little bit of a flattish performance year-on-year even though we came up 2% compared to the fourth quarter.

House prices seem to have peaked in September 2017. And we've come down approximately 10% from the peak. The last couple of months, it looks like it has stabilized. And we also look at the SEB housing price indicator, and the same pattern can be seen there, which is really about expectations for the future

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being everyone expecting higher real estate prices. In fourth quarter last year, it dropped down to actually being marginally negative, and it's kind of stabilized around 0.

SEB's macroeconomists view this to go down another 4%, which would mean a 10% reduction on average prices 2018 versus 2017.

And the final slide is just to show the balance sheet and the asset quality. And again, we have this exceptional low credit loss level of 2 basis points, but SEK 100 billion in -- of more deposits, which did affect our NII negatively and went into negative territory for the contribution from deposits. Core equity Tier 1 dropped from 19.4% to 19.0%. However, one should note that the weakening of the Swedish krona contributed to a 50 basis point deterioration of this measure, and that is likely more than we actually show. And the approval of the corporate risk weight models lowered the minimum capital requirements from 17.2% to 16.7%

(technical difficulty)

the subsequent effect that our buffer is intact to a bit higher at [2.3 %].

So I think I'll stop there and open up for Q&A. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Willis Palermo.

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Willis Palermo, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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The first one I have is on corporate loan growth. I heard the comments this morning, but just in terms of wording and your thinking around the business sentiment that you see. In 4Q, you were mentioning a very optimistic climate for corporate and now you point to a more negative sentiment whilst the macro indicator are very strong. So what has changed? And what do you think is needed for growth to materialize?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [3]

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Thank you for the question. Our aim in Q4 was to say that we saw, from a very long period of time, no growth at all, that we actually saw, experienced some growth, and that's the same message we will send here. There are some -- it's very fragile, and we're not calling the market to a different really meaningful level, but there is some encouraging sign. I think the mystery has not been that we actually now grow with some type of 3% to 4% when you have a GDP of growing 3% in the global economy, very supportive where foreign trade and export-oriented companies do well. It's rather been why didn't we grow before? And here, we are speculating that capacity utilization is starting to come up to a level for the Nordic corporates to actually merit a little bit more of buildup of capacity, and that typically has a strong correlation with asking us for some capital to build out. But it is very weak, and we continue to be a little bit perplexed why the loan book has not grown more on the corporate side. So it looks promising, but it's really too early to say that we will have any meaningful contribution. And again, FX did a huge difference this quarter. So all the estimates that we do on what's underlying are always, as I say, estimates. So we'll see where this goes.

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Willis Palermo, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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All right. The second question is on the management change that you mentioned this morning and in the report whereby, Christoffer Malmer, which is an Executive Board member, is heading a new project with an interesting name, SEB X. So just in terms of -- to understand, could you give a bit more color on the magnitude and da aim of that project? It seems substantial to have, as I was saying, Executive Board Member, to take the lead on this.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [5]

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Yes, I don't think you should read in too much that we are actually putting an Executive Board Member into a product like this. It's not relevant when you think about the magnitude. This is a very tiny project when it comes to the staff and the cost or budgets right now. It's Christoffer Malmer. He is a very progressive, very innovative thinker about how we as a bank can transform ourselves, our bank and our relationship with our clients. And he is excellent in this field. He's done a lot of good work for the CPC division, and he really burns for this so we've asked him to do it full time, and we'll get back to you once we have something more concrete to say what it will entail. But it is really an interesting big decision from a strategy point of view but not a meaningful, call it, when we do the financials, you won't see it for a while.

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Operator [6]

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And our next question comes from the line of Geoff Dawes.

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Geoff Victor Charles Dawes, Societe Generale Cross Asset Research - Equity Analyst [7]

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It's Geoff Dawes here from SocGen. A couple of questions from my side. First of all, on the trading income, and I think this might apply to fee income as well, you made the comment in the report that the second half of the quarter was better than the first. Can you just give us a little bit of a background behind that, what kind of run rate change did you see? And how does that feed through into the second quarter? And then a slightly related question, if I look at the main divisions, the revenue run rate is now quite substantially below the 2017 level. What needs to change for you to actually report revenue growth in the main operating divisions versus 2017 once we get more into the year? Those are the 2 questions.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [8]

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Thank you. I would like to play down the change during the quarter that was at the end versus the beginning. There was a few things in the beginning, with particularly MiFID II on the trading side and also, I mean, the whole relationship with our institutional client base on the market. That was a bit tentative. People redirected their flows. There was cost and charges and fees and commissions and research, et cetera. So we had a little bit of that. Also, the volatility was strong there in the middle. And it actually feels like, towards the end of the quarter, it stabilized a bit, and that has more to do on the fee and commission side that you did see a little bit of a more cautious approach to launch in transactions in DCM, ECM and M&A and that could explain it. But it's 1 quarter, and it's SEK 200 million, that's not many transactions that needs to happen to compensate for it. So we're not calling a change in pattern versus the past, so it's still optimistic. For, let's say, the weakish Q1 to be recovered, I mean, we really need to get the client activity up for the rest of the year. And the obvious areas that we could think of is that the investment bank continues to perform. They were one of the stronger contributor last year, to show a little bit marginal income on the top. They've made the difference. We definitely have hopes that the kind of loan book continues to grow in conjunction or in tandem with our clients who do very well right now; and then that there's no more regulatory fees being introduced because this is really a heavy year for us. We paid SEK 625 million in this quarter, so we would love for those things to come back. And also, many of them are hurting income as a negative income.

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Operator [9]

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And our next question comes from the line of Kim Bergoe.

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Kim Bergoe, Deutsche Bank AG, Research Division - Research Analyst [10]

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It's Kim Bergoe from Deutsche Bank. I think Geoff just asked one question about this sort of intra-Q change. Secondly -- my second question would be in the Life Insurance, you mentioned that SEB life has now become a provider to the Swedish sort of general pension fund scheme. What is the opportunity there? Is that something that we should -- where there is a larger opportunity or is it a smaller thing? Yes, I think that was it. Or also given that the revenue outlook is still looking a bit more challenging, is there a -- is there reason to revisit the SEK 22 billion cost target now where income is a bit softer? And is there potential for that?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [11]

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Okay. On the successful landing of being part of the ITP in Sweden, I wouldn't put it as meaningful to change the kind of outlook for Life. It would rather be the opposite. If we didn't get one of these, it would have hampered the outlook. So we're very glad that we at least got this part for our classic, so that's just it on that point. On the SEK 22 billion cost cap, I mean, as far as we like to communicate, we would stick to that for 2018 and not communicate any change. If we close Denmark in what is planned to be a closed deal in the summer of this year, of course, we will reduce some cost. We also have an FX effect that will come in and be hurting us on the cost line, as many of our staff and costs are incurred in Other, and you only have 1 quarter of (inaudible). So we will say something around a revised view on the SEK 22 billion, without indicating what it's going to be once we close Denmark.

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Operator [12]

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And our next question comes from the line of Jan Wolter.

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Jan W. Wolter, Crédit Suisse AG, Research Division - Head of European Banks Research [13]

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Jan Wolter here, Crédit Suisse. Just a follow-up from the press conference in Stockholm this morning here. Regarding the commission cost, if you had any more data around those? If we look at the level there, roughly SEK 1.5 billion in fee expense in the quarter, which looks to be a little bit on the high side compared to previous quarters. And if there's anything extra booked there in the quarter? And secondly, do you expect any further cost or funding cost benefit for 2018, so lower funding cost for the bank overall? And then related to that, if you have any data on the impact from the -- on the AT1 which matured in December, EUR 500 million, how much that impacted the NII in the quarter?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [14]

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Okay. If I do this, I'll start with your second and then I'll ask Jan Erik to go through the commission cost. So on the funding cost, I mean, generally, I don't think we will have a meaningful tailwind coming from lower funding cost. There is, of course, the deals that we did in 2007. Those bond deals were all setting very nice levels for the bank, both between bond we did the dollar and the euro. And of course, but the whole benefit, we're riding this credit spread to come down. It's being -- it's tailing off and most of it is there. There will be a divisional little subsequent flow between Treasury and the others. And of course, it was very nice to see that we got upgraded to Aa2 by Moody's about a week ago. But as spreads are fairly compressed right now and differentiation is low but, of course, for the long run, we are hoping that it will give us some future benefit on credit cost.

(technical difficulty)

Jan Erik, who's got all the points here on commission cost.

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Jan Erik Back, Skandinaviska Enskilda Banken AB (publ.) - Executive VP & CFO [15]

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So Jan, for those of you on the line, I think Jan, you are now on Page 12 in the Fact Book, and I think you're looking at the table on net fee and commission income. Is that right?

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Jan W. Wolter, Crédit Suisse AG, Research Division - Head of European Banks Research [16]

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Correct. The roughly SEK 1.5 billion, just fee and commission expense there in the Fact Book and any detail around that. It looks a little bit high compared to the previous quarters here when we look at the proportion vis-à-vis your total fees.

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Jan Erik Back, Skandinaviska Enskilda Banken AB (publ.) - Executive VP & CFO [17]

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Yes, that's right. So for those of you who've got it in hand, if you look at Q1 2018, I think Jan's comment is on the fee and commission expense line, SEK 1.496 million, which seems perhaps a little bit high. I think that line, if you move over to the left and look back towards Q1 2016, you can see it has [net] a bit. So I'm not sure it's all that high, Jan, but I admit it's a little bit higher. And a related question, before I get to the answer here, is -- it came this morning I think from Magnus Andersson who said, well, what if I do take the payments, cards, lending, deposits, guarantees and others, which is SEK 2,628 million, a little bit above it, and deduct where our payment and card fees and where lending, I guess to a number which is sort of 200-ish higher than in the previous quarters. And so the question is sort of twofold: why is it a little bit higher on the income line, payments, cards, lending or rather on the other, and why is it high on expenses? And the answer is that it's a grossing up effect, it's an accounting effect partly, and it's relating to derivatives clearing, which we used to do in London that has now been moved back to Sweden. That's part of the explanation, that it's gone from net accounting to gross, but it's also and importantly, that it includes the accounting for emission rights and e-certificates which are booked gross. So that's why both those numbers are a little bit higher. So with that answer, I'm hoping to address both, Jan, your question and Magnus' question earlier from this morning.

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Jan W. Wolter, Crédit Suisse AG, Research Division - Head of European Banks Research [18]

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Okay, that's very clear. And any details on how much the AT1, which matured in December, impacted the Q1 NII? Since it could be fairly meaningful on a quarterly basis at least.

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Jan Erik Back, Skandinaviska Enskilda Banken AB (publ.) - Executive VP & CFO [19]

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Jan, I don't think that's a huge effect. We don't have the exact number here, but it's not a material effect.

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Operator [20]

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And our next question comes from the line of Jacob Kruse.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [21]

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Jacob from Autonomous. I just wanted to ask on the trading side. I think in the last quarter, you talked about the SEK 1.3 billion to SEK 1.5 billion as a sort of normalized level of trading income per quarter. And now you're pretty much delivering on that. But I get the impression you feel this was a poor trading environment. So I just wanted to try to square this, is that -- is this the kind of run rate we should expect? Or is that earlier guidance not really valid?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [22]

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Yes, I see your question. Let me try to explain why the tonality that you correctly have heard is there. And that's not so much about the SEK 1.3 billion, SEK 1.5 billion. That stands. That is kind of assuming we know what our business do on the client side, but there is volatility in this number as you will have to assess all the different types of market movements because it gets hurt here. It's the credit book on the cross-currency derivatives, book that we have at CVA, and there's -- even for us, it's very difficult to assess because you need to assess every currency, every rate, and every share price. However, our slightly more defensive tone is that with this volatility that we so often have been pointing to as a reason it's not higher in the client side, it's a little bit disappointing that we actually got a real spike, and it didn't spike up. We actually came down a bit. And that's really why the comments are there. Looking into LC&FI's contribution to NFI, the wholesale division that could have, in theory, benefited more, you will see a flat development from Q1 last year. But there were better, on the face of it, trading circumstances for Q1 2018, and it didn't materialize. That's why we also showed a couple of more volatility than, say, there was in equities. We saw it in equities, but we actually had lower contribution from other areas so we can compensate for it.

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Operator [23]

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And our next question comes from the line of Paulina Sokolova.

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Paulina Sokolova, Barclays Bank PLC, Research Division - European Banks Analyst [24]

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I have just 1 question left. You mentioned that the results in LC&FI are down to the higher resolution fund fee, lower investment banking activity but also the German business activities being discontinued. Could you please give us an idea of how big the effects from closing the German business was? And if it's now done or will it continue to be a headwind for the rest of the year?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [25]

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That effect will not be recurring, so that was a one-off. And it's really that Germany that is part of our continuous operation is remaining under the business area, LC&FI. But as some of the things will be shut down, it will be a positive contribution for the group as we will take out these costs from the legacy banks to making it a branch, so it's not going to be recurring. We don't quantify that in itself. But I'll just repeat the number. The resolution fund fee, this shutdown of the discontinued business of Germany in the LC&FI division, we put it out now on the central level, and we'll wind it out, together with a lagging effect on the transfer pricing; that together is SEK 300 million, those 3.

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Operator [26]

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(Operator Instructions) And our next question comes from the line of Riccardo Rovere.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [27]

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Two, if I may. The first one is with the old merchant bank, let's call it this way, accounting for 40% to 45% of the revenue of the group, are you happy about that? Are you happy with the current breakdown of the different business divisions? Or would you prefer to see some other areas being, let's say, more important than today? This is my first question. The second question I have is, during the press conference a couple of hours ago, you mentioned that Q1 was affected by some cyclical factors. I didn't get exactly what you were referring to, if you may clarify. That was not clear to me.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [28]

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Okay. If we talk about the business mix in LC&FI, or old Merchant Banking, representing I think it was up to 50% at some time, it's not -- from a strategy and management point of view, we don't manage the size of, let's call it, Retail Banking versus wholesale banking with this percentage in mind. What I would like to say is, we don't limit anyone to do the right thing by their clients or to grow because that ratio is something. Now our heritage is relatively large wholesale, and we are happy with that. So it's not that we need to take it out for the sake of it. However, we have had the fortunate trend for many years, and that is really because of the market that Retail Banking has grown better. It's been better in profitability, and it's particularly the mortgage market in Sweden has really helped. So we have, for several years now, had a mass-market banking or Retail Banking outgrowing the wholesale and corporate banking. But no problem as such that these -- things. Then that being said, we would love to see wholesale banking coming back in force as we still believe in that part of our business. And then I don't know exactly what you refer to when it comes to comments around cyclical behaviors in the first quarter, but I'll say what I think. There is a seasonal effect, but it's more than a seasonal because I look at the year-on-year number of minus 4, and we would love to have had a little bit of growth there. That would have meant that you needed to compensate for increased resolution fund fee immediately, which is very, very difficult to do when they just hiked the price on the regulatory fees that we pay. But we'll still try.

Hello? Anyone there? Operator? Operator? Anyone on the line?

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Operator [29]

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Sorry, this is the operator. (Operator Instructions) Okay, and our next question comes from the line of Kim Bergoe.

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Kim Bergoe, Deutsche Bank AG, Research Division - Research Analyst [30]

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It's Kim Bergoe. Actually, I think my question has been answered, so nothing new for me. Thanks.

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Operator [31]

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(Operator Instructions) Our next question comes from the line of Riccardo Rovere.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [32]

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Actually, my questions have already been -- I've already asked what I wanted and have already been answered. Thanks.

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Operator [33]

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Our next question, in that case, comes from the line of Adrian Cighi.

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Adrian Cighi, RBC Capital Markets, LLC, Research Division - Equity Analyst [34]

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One follow-up question on net interest income, please. So the Swedish mortgage margin remained flat this quarter, but you mentioned there was some slight positive dynamics in the overall margins, implying some expansion on the corporate loan side. one of the discussions last year when the FSA increased the capital requirements for corporate exposures, was the expectation that some of these loans might reprice higher. Do you see this coming through? And should we expect this is a tailwind to margins? Or is this maybe less of a benefit that you had expected at the time?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [35]

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Thank you. So it's correct, we say margins on the mortgage book is flat, but we also say margins are flat for the corporate in general. So if you look at the price that we actually charge, I would say there's not been any meaningful difference from the past, and it's in line with our expectations. And one needs to consider that the funding cost of the bank also moves the margin one -- a couple of basis points up and down as the actual funding price get accounted for. But in general, I would just indicate this quarter, we have no different outlook for the future. It looks stable on both accounts. And we had a little bit of a volume increase both on the mortgage side and on the corporate side that benefited the NII.

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Adrian Cighi, RBC Capital Markets, LLC, Research Division - Equity Analyst [36]

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I see. So you would say that it's more difficult to pass on the increased capital requirements to the corporates than it was to, let's say, household, household customers?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [37]

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Well, not more; it is difficult and it takes time. And so far, we haven't had, really, the market repriced to increase margin because of this. And as we will have Basel to consider for the long term in the future but also a benefit from the resolution fund fee, which really has been a negative disadvantage being up in this part of the world on the corporate side, which is much more international competition around, there has been a limited ability to go away from what is generally deemed to be a world market price for debt, given a company's credit rating and international outstanding bonds, et cetera. So it is difficult, and it will take time, but it's no change in our perception of the ability to do so.

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Operator [38]

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(Operator Instructions) Our next question comes from the line of Nick Davey.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [39]

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Two questions, please. First one, if I could just ask for a few more comments around the fixed income results in the quarter. I take your point about tough operating conditions. And then you've mentioned MiFID and a few other sort of broader market trends, but it does seem that the fixed business had a really tough quarter. Seemingly, revenues down around 50% year-on-year, if I get my ruler out in your Fact Book. So can you just talk specifically to that trend? And if there are any sort of nonrecurrings in Q1 last year, which meant you were over earning. But just trying to understand that headline decline, which is obviously worse than what we've seen from most Europeans? And then the second question, please, just understanding you mentioned I think this is the first quarter where your deposit contribution to net interest income is negative. I guess there's a sort of gap between your deposit rates and STIBOR, but STIBOR was up on the quarter, so I'm just trying to get my head around...

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [40]

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(inaudible) Sorry, could you just repeat the second half of the question? The first one, I got with fixed income dynamics.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [41]

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Yes, the second part is the deposit contribution to net interest income, which I think you said in your opening remarks was now negative, and I think you have a split in your Fact Book on Page 12 on the same point. I'm just trying to understand that way of thinking about the deposit margin. Is this sort of deposit rates versus STIBOR? And if it is, I thought STIBOR was up on the quarter. So I'm just trying to understand I guess how you think about that deposit impact to NIM? And if there's any (inaudible) by putting liquidity further down the curve?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [42]

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Sure, I'll ask my colleagues to help me on the deposit. On the fixed income market, I think it's a very valid comment. It surprised us, so we did spend quite a lot of time in the last week to understand it. And we are speculating why this is the case. And I'll give you a few reasons here. Firstly, we are more exposed to the Swedish krona govy market than European peers because we also saw that the fixed income didn't really follow the European trend. Consider the following fact: 50% of government bonds are owned by the Swedish Central Bank. So even if you would've had a similar tendency to trade, when things move around and the loan yield in the U.S. hits 3%, you would still have only half of the free float compared to years back were all in all fact with institutional investors of ours, clients of ours. Now we've also seen -- so that's one very strong indicator that there's just less volume out there. Fixed income investors and many institutional investors, they've given up on these negative rates and increased, if you look at the proportion where they invest, quite a lot in alternative asset management and infrastructure, which is much more illiquid, take-and-hold stuff. So we've seen this transition for years now that credit has increased compared to the govies and illiquids have increased to govies. So it is a little bit of a structural change in when things move and rates move, that it's a little bit more sitting on your hands and having more as a proportion of your fund parked. And the other bit is really that in the hunt for yield, full stop, it's more of a sense that they have partially done this low-yielding assets, including investment-grade bonds. So even if you would have had the same inclination to trade, we actually think we had less. So the asset class, as such, has been very much more stable, and that could be a portion that leads to -- explains why our fixed income results was a little bit lackluster. On the deposits, I'll just start off on the top of my head to try to describe it. So it's not really STIBOR, LIBOR, HIBOR, as each simply just taking -- we use internal transfer prices or Treasury puts a price on deposits in our bank depending on what strategic value can be had, if it's sticky or not and can it be redeployed in what shape or form and what currencies for lending purposes. But there is very different dynamic. For households, that's where most of the leakage come from. So the negative contribution to the P&L is very skewed towards the domestic deposit base for retail because we offer them all 0 and the reference rate is minus 0.5%, and that's at least 50 basis point one can refer to as the negative theoretical margin. Then we can pay internally for that deposit to come, which is better than minus 50 as we have means to redeploy it. Then you have corporate, and corporate is a very mixed bag. Small corporate, tiny, tiny volumes. We don't really need to charge for. Large institutional corporate clients, they -- we charge them, we charge -- we think they have the same institutional market at their disposal as we do. And financial institutions, we treat as if they were like us, professional all of them and there is a bilateral [renegotiation] on all potential deposits in those instances. So these 3 things move around, and as deposit comes in, I mean, none of them is really more than cost cover. So when they increase, it is also important to understand the dynamics between the 3 buckets, but they're all kind of neutral to negative.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [43]

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That's very clear. Just on the retail deposit side, I mean, if you treat them like they have a negative 50 bps margin, I guess you are then comparing them to STIBOR. When I get some other European banks think retail deposits are very sticky, and all their models tell them they'll be within the 10 years. So time to use deposits and buy something longer-dated than the overnight rate at the Central Bank. So if you could make any comments about, I guess, how you treat those deposits and how you are treating them as very short liquidity. If the yield curves steepen, will you be tempted to lengthen the duration of any liquidity holdings?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [44]

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Yes. So we don't really reference the deposit base with the minus 50 to STIBOR. We reference them to the Central Bank rate, the repo rate. But then I think your question is about how we book it as well, and that is a different thing. And obviously, Jan Erik -- or [Martin] is here as well, our new Finance Director.

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Unidentified Company Representative, [45]

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Well, our view on retail deposit is that they are sticky, so we treat them as long term. And so typically, 5 to 7 years -- that's typically our view on the duration of deposits from retail clients.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [46]

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So that's a positive effect for anyone. And a business person who brings in a deposit that is deemed to be sticky, we actually don't have the minus 50 for our internal governing structures. We have something more beneficial. And if it's not, you don't get that benefit.

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Operator [47]

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Thank you very much. We have no further questions at this time. (Operator Instructions) We have another question that comes from the line of Riccardo Rovere.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [48]

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Just in your opinion, is there anything in these set of numbers that should be considered kind of, let's say, one-off, or maybe not by its nature, but maybe by magnitude, something that came despite conditions came softer than expected but -- or better than expected? Anything that you could classify as kind of one-off?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [49]

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No, no, Riccardo, I wouldn't say so, not over and beyond what we've mentioned. I mean, one could argue that a Swedish domestic resolution fund fee way and above, above everyone else who has acting in this market. If you're a U.K., American or Italian bank, you might not have those. Those are, to me, at least, they're one-off nature. They are not symbolic of what business we conduct or how relevant we are in the long run for our client base. But otherwise, I wouldn't point to any particular big item in positive or negative terms -- positive or negative for this quarter.

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Operator [50]

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Thank you very much. We have no further questions at this time. Please continue.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [51]

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Then we would like to round up and say thank you, everyone, despite the little coffee break in the middle. We're very happy that you stayed on, and wish you a good start of May.

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Operator [52]

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Thank you very much. That does conclude our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.