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Edited Transcript of SEB A.ST earnings conference call or presentation 29-Jan-20 7:30am GMT

Q4 2019 Skandinaviska Enskilda Banken AB Earnings Presentation

Stockholm Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Skandinaviska Enskilda Banken AB earnings conference call or presentation Wednesday, January 29, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christoffer Geijer

Skandinaviska Enskilda Banken AB (publ.) - Head of IR

* Johan Torgeby

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

* Masih Yazdi

Skandinaviska Enskilda Banken AB (publ.) - Group CFO

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Conference Call Participants

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* Andreas Hakansson

Danske Bank Markets Equity Research - Research Analyst

* Jens Hallén

Carnegie Investment Bank AB, Research Division - Research Analyst

* Magnus Andersson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Maths Liljedahl

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Nicolas McBeath

DNB Markets, Research Division - Analyst

* Rickard Henze

Nordea Markets, Research Division - Senior Director

* Robin Rane

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [1]

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A warm welcome, everyone. Today, our CEO, Johan Torgeby; and our CFO, Masih Yazdi, will present the Q4 results for SEB. As always, this presentation will be followed by a Q&A session with equity analysts. And as customary, we will do bilateral interviews with media outside afterwards. The language for this forum is English, and I will direct the questions.

With that, I hand over to our CEO, Johan Torgeby.

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

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Thank you, Christoffer. And I also would like to extend a warm welcome to you all to this 2019 annual accounts presentation.

If I start with just setting the scene of the backdrop as we see it. We've had a formidable 2019 when it comes to the financial markets. That, of course, have put a context for conducting one's self in banking with some tailwinds. The stock market was up more than 30% during the year, not as much on averages, which might explain some things that we see in the financial accounts, but still a very strong equity market.

If we look at the credit spreads, the dark purple line is the higher quality names, the investment grade. That has really touched the lowest level we've seen recently during the year. And also the high-yield spread, the sub investment-grade credit spreads, actually reached new lows and came down from somewhere around above 300 to close to 200 in the last year. So both of these are, of course, indicating a very optimistic financial market, both on the credit side and on the equity side.

Maybe more importantly is that we had a strong reversal in the interest rate market during the fourth quarter. If you remember Q3, we had a deep fall in interest rates where we went into deep negative territory, which saw a very strong reversal, which also benefited the bank during the fourth quarter, where the negative interest rate environment both ended in the market rates, the long one I have on this graph. But also, of course, after 5 years with Central Bank, rates in negative territory also ended, which, of course, giving some tailwind going into 2020 if it is maintained.

Looking at SEB. This is how we would characterize the fourth quarter, we saw a strong operating income development, primarily driven by 2 factors: continued high client activity in more or less all areas and also the higher interest rates positively affected the results; two, a less positive development was that we have seen an increase in operating expenses during the year, and we saw an increase in credit losses during the fourth quarter. And let me briefly touch upon them, we will get back to them later in the presentation.

But on costs, we've spent SEK 450 million more than previous year on what we call the strategic initiative, according to plan when it comes to the business plan we launched December 2018. And we've also spent SEK 200 million more than we originally planned on regulatory issues, particularly with AML. And those 2 have been partly financed and explains most of the increase in operating expenses.

We do reiterate the previous target for 2021 of SEK 23 billion costs, adjusted for FX, plus/minus SEK 200 million, as we announced in December 2018. And so that means we are coming up and have a little bit of more headroom, but we will consume many of those initiatives that we started already.

On credit losses, we've had a year with slightly higher than previous year during the quarters, but it really doubled in the fourth quarter. That doubling, roughly SEK 500 million of an increase, is attributable to 2 specific engagements: one in Norway and one in Sweden. So those are not a sign of a broad-based deterioration. And we are indicating in my CEO comments today that the full year result of expected credit losses of 10 basis point is as good of a guidance as we had now for the coming year. So Q4 is not a representative quarter as we had 2 very specific events.

And lastly, just to point out that we are very happy with a strong capital base, and the capital buffer is 250 basis points.

Just doing the numbers. 9% increase in income, that's the full year '19 versus '18. 5% increase in cost. And we had 9% increase in operating profits before items affecting comparability but after credit losses.

Looking at the credit losses expected for the year, they're 10 basis points, they're up from last year. And this is a normalized level. Cost income improved marginally from 0.48 to 0.46. Core equity Tier 1 is broadly unchanged at 17.6% with the current buffer of 250 basis points. And return on equity increased by 40 basis points to 13.8%. And the Board has yesterday decided to propose a ordinary dividend per share of SEK 6.25, which is SEK 0.25 higher of an ordinary dividend compared to last year.

Now I will hand over to Masih to go through the financials in more detail.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [3]

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Thank you, Johan, and good morning, everyone.

So going into Q4 more in depth.

You can see that income is up around 20%, both versus Q3 this '19 as well as Q4 last year. And you can see that operating profit is also up 20% or so compared to the previous quarter and the same quarter last year.

Net ECL level, 18 basis points. And as Johan said, we believe that is an elevated level and a good indication of next year or this year's around the year -- full year level of 2019. Cost income ratio is down to 0.43. The CET1 ratio, common equity Tier 1 ratio is up to 17.6%, which is 120 basis points higher than last quarter. I'll comment more on that later. And then return on equity, 15.5% in the quarter.

Going to net interest income, it's up 9% year-on-year, mainly driven by volumes, but we also had tailwinds from the repo rate hike in December '18 from the reduced regulatory fees during 2019 and some positive FX effects. Some of this has been offset by margins coming down, mainly on mortgages. And I can mention that, when it comes to mortgages, the income from our mortgage book in '19 is down SEK 600 million versus 2018.

A couple of things going forward. On NII, we also had a repo rate hike in the end of '19. We expect that hike to have a positive impact of SEK 1 billion or full year effect in 2020 if you look at the gross impact. So that's the impact it will have on the liability side of the balance sheet. What the net impact will be depends on the margin development on the lending side, which we don't know at this point how that's going to develop.

The second thing is the resolution fund fee, that's going to be reduced again in 2020 from 9 to 5 basis points. And our best estimate is that, that will lead to reduced costs of SEK 600 million for this bank, plus/minus SEK 100 million, depending on the risk adjustment that the Swedish Debt Office will do. We usually find that out by end of April, early May.

Moving to commission income. It's up 2% year-on-year. What you should have in mind here is that in '18, we still had 5 months of SEB pension in Denmark in the numbers. It looks slightly better if you adjust for that.

It's been a strong year for advisory driven business within our LC&FI division. So ECM, DCM, Corporate Finance has done extremely well. And those fees are up 25% year-on-year. We also had a good development on lending fees as well as payment fees. On the other hand, asset management fees are down even though we've had a strong equity market. I think there are a couple of things you need to note there. The equity market has been strong. But if you look at the average AUM in '19 versus '18, it's only up 3% to 4%, something like that. But there's an underlying margin pressure within asset management. It's not mainly driven by us reducing prices. It's a mix effect of inflows coming into low fee-generating funds and outflows from high fee-generating funds.

We also generally in Q4 book an elevated level of performance fees. This year, we don't have that. The reason for that is that we have one big mandate in the bank where the majority of the performance fees are generated from. That mandate has had one holding that has had a very positive development for several years. But during '19, that holding was valued down significantly, which meant that we couldn't book any performance fees for that mandate. Now going forward, that holding has been reduced in size quite substantially and rebased at a lower valuation level. And we don't think that performance fees going forward will be different from the historical levels that we've shown.

Net financial income, a very strong number of SEK 2.8 billion in the quarter. I would say too that to a large degree, the strength you see in this slide is a reversal of several quarters of headwinds on this line due to the low and negative interest rate environment.

If you look at the underlying business, the main contribution this quarter comes from the rates business within FICC, so fixed income, commodities and currencies, which is up about SEK 300 million quarter-on-quarter. There's also a positive XVA effect of about SEK 400 million quarter-on-quarter. But for example, if you look at XVA for the full year, it's net 0. So this is, again, a reversal of earlier negative effects.

And then in addition to that, treasury has had a very good quarter, again, a reversal of earlier sort of negative effects. For example, we mark-to-market our German bonds that we had issued in the past. With rates falling previously, the mark-to-market of that has decreased valuation. But this quarter, when rates went up, the valuation of those liabilities came down, which was a benefit for the bank. And then in addition to that, there has been some positive funding activity during the quarter that has generated some of these profits.

Going forward, and we've said this on this line, we believe this line will be between SEK 1.2 billion to SEK 1.4 billion, excluding treasury and excluding XVA, and we reiterate that guidance.

So this is a slide that comes back every quarter, operating leverage. So in '19, we had an increase of the average quarterly income of SEK 1 billion. So even though at the cost level, it was up SEK 250 million or so per quarter, the operating income before credit losses was up SEK 750 million or SEK 800 million this year or in '19, which is the largest increase in the last 10 years in nominal terms.

Looking at different divisions. All divisions, all the major divisions showed an improved operating profit in 2019 versus 2018. Life is down. But if you adjust for SEB pension in Denmark, Life would have been flat.

In LC&FI, the improvement is mainly driven by a high activity level and strong corporate lending growth. As you can see, the return on business equity is not up as much as the profit. Obviously, some of that is due to credit losses coming up, but also that the profit has been generated on net interest income mainly, which is capital heavy.

Corporate and private customers have had a good year in terms of mortgage growth as well as corporate lending growth and also seeing some benefit from the repo rate hike in December '18.

The Baltics, we have a controlled, modest growth level, with margins improving, with positive fee generation and with very solid asset quality.

In the life business, sales picked up by the end of 2019, but there is continuous margin pressure there, with inflows being much lower margins than the back book.

Finally, investment management saw revenues pretty flat year-on-year even though performance fees declined quite a bit, but the cost level came up, same as management, showed slightly lower operating profit than in 2018.

A deep dive on costs this year. So we ended 2018 at a cost level of just below SEK 22 billion. During 2019, we've had a development where the Swedish kroner has weakened, which has led to increased costs of about SEK 250 million. And as Johan mentioned, we have spent about SEK 200 million more on combating financial crime, anti-money laundering during 2019. This is mainly an improvement of our capabilities during the year, but also, to some extent, the inquiries from the supervisors has led to more resources allocated to this. And I also say that we've had in the plan, obviously, that regulatory costs will go up, but the events during the year has accelerated that. So to some extent, the increased costs in '19 is just an acceleration of the plan.

The strategic initiatives, we said in 2018 we will spend SEK 1 billion more by 2021 than we did in '18. And we've spent SEK 450 million more in 2019. That's slightly below plan in terms of costs, but I would say, in terms of output, it's according to plan. And then everything else in the bank has seen SEK 95 million net cost inflation during 2019. We are slightly above the internal plan that we had. But we do reiterate the target of SEK 23 billion with 2018 FX rates by 2021. With the current FX rates, that's around SEK 23.3 billion.

Finally, some key ratios.

The first thing is the credit losses, 10 basis points. So even though credit losses in nominal terms doubled during '19, because of the strong balance sheet growth, in basis points, the increase wasn't as high. The capital ratio, I want to comment on, 17.6, up from 16.4 the last quarter. There are 2 drivers there, mainly. The first one is the very strong profit generation in the quarter. And added to that, the pension scheme where pension assets are going up and pension liabilities are going down because of higher interest rates. That's 50% of the increase of 120 basis points. The other 50% is the reduction of risk exposure amount, partly driven by market risk. That's come down quite significantly, partially driven by a couple of model approvals from the Swedish FSA and partly driven by FX in the quarter, with a buffer now of 250 basis points reduction compared to last year is mainly due to the countercyclical buffers going up during the year.

That's it. I'll hand back over to Johan.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [4]

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Thank you, Masih.

And as customary these days, we like to end on picking 3 or 4 focus areas or special interests to ourselves. And to just address those 4, I'll go a little bit fast.

We will start with just the corporate bond -- sorry, credit exposure of the bank. We've had a 14% increase in 2019 of corporate lending, corporate exposure, and we saw in the first -- the last quarter that this has come down a bit. So FX adjusted, we had a 1% growth in Q4, which is an annualized number of roughly 4, which is lower than we've had over the year. We've said that we've seen an exceptional expansion of the corporate credit portfolio, and this is probably going to be normalized to a somewhat lower level going forward. That also means by design, and as we are planning, to have slightly less balance sheet driven financial performance and ask the other non-balance sheet areas to now try to capitalize on what the balance sheet brings as a benefit for our customer relationships.

Households mortgages rose by roughly 5% in the market. Including the commitments that we do, we increased by 7%. So for the full year, we have grown roughly in line with the market, which means that we've maintained our position around 14% market share.

Regulatory update. There's been quite a lot of continued focus on regulation, regulatory compliance, et cetera. Here are 3 things. We have had a public announcement from the FSA in Sweden, that they are doing a sanctions evaluation process for our anti-money laundering investigation when it comes to governance and control. The process is such that from now and up until they have announced that they want to conclude this, which is no later than end of April, we are in constant dialogue to confirm and to clarify and answer any questions they might ask. We've also concluded the investigation in Latvia, which was a supervisory review on 2 areas in December. And thirdly, we have now put in a proposal for a law change to the government in order to make information-sharing much easier between financial institutions and between financial institutions and the lawmakers, the police force and other bodies that wants to control financial crime. This is a very exciting development because this is focusing on effectiveness, not only regulatory compliance, because regulatory compliance to us is a hygiene factor. You just have to do it. But if we could add and balance that focus with also trying to be effective in stopping financial crime, this is a key initiative to get that effect.

Once a year, we show the performance of the bank by geography. This is not something we do quarterly, but I just thought I'd point it out. And it's good to see that the stronger performance is broad-based. It's roughly the same in all countries. Norway would have had a fantastic year would it not have been for the credit losses. Denmark is, of course, including the SEB pension, so that's 15% up if we take out SEB pension out of 2018. Finland had a bit weaker performance, mainly driven because 2018 was exceptional and there was a couple of events that didn't repeat itself. Germany is now finally good to see, that we've increased it by 17%. And you remember, the U.K. initiative we had a few years back is also trying to say to us that they are performing well with a 29% increase. And lastly, the thing we don't talk that much about is the international network. This is the sum of Shanghai, Hong Kong, Singapore and New York, et cetera, and we've put them together, and they also increased by 7%.

And final theme is, a year ago, we stood here and launched the strategic initiatives. And we thank everyone who has been supporting us in the bank in order to do some future forward-leaning investments in a tricky environment for banking.

And this is the result for 2019. We've spent SEK 450 million in new initiatives for the future in these 5 areas that we announced last year. And I'll just point to a few. We've done good progress in automation, good progress in sustainable financial solutions development. I think we have done good progress in increasing our capabilities to fight financial crime, and here I have both an IT angle, but also cutting-edge using new technology and suppliers, and many other things that are progressing. So we say broadly in plan. Some are a little bit behind. Many of them are ahead. But we will continue this journey for the coming years. And so far, there has come very little income from these, those are coming a bit later in the future.

And with those comments, I would say thank you for your attention. And now I'll ask Christoffer to come up and see if we have some investor/analyst questions.

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Questions and Answers

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [1]

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Thank you very much, Johan. So again, I'll direct the questions. Please remember, it's English. And before you answer the -- before you ask your question, please state your name and the institution that you're representing. If we start with Rickard.

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Rickard Henze, Nordea Markets, Research Division - Senior Director [2]

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Rickard Henze from Nordea Markets. A couple of questions. Firstly, on the interest rate sensitivity of SEK 1 billion for the full year. Compared to last year, you have only increased the mortgage list price by 15 basis points compared to 20. So the net impact, are you expecting the net impact to be a lot lower than the SEK 1 billion or similar? If I read you right, the net impact was about SEK 400 million last year, SEK 1 billion less SEK 600 million from the mortgage book. Or if you can...

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

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That's a great CFO question.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [4]

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Yes. I'll take it. No. I mean last year, even though we increased list prices on mortgage by 20 basis points, the actual price to customers did not increase by nearly as much. So it's also very much due to what happens to discounts versus the list price, and that's very difficult to guess at this point. We'll have to see what competition does during 2020 to try to understand that. I think on average, maybe mortgage rates went up 5 basis points or something like that. So had it been 20 basis points, the impact would have been much less in terms of margin pressure on mortgages. So I think it's just too early to say. Yes. For now, list price is up 15 basis points, but the repo rate up 25. We'll see what happens to the discounts for the full year 2020. And we only know afterwards what actual net impact was.

I think there was one difference versus '19. Remember, in '19, we increased list prices in January, which had an impact in late Q1. So we missed a full quarter of mortgage repricing, which meant quite significant margin pressure in Q1 in '19.

If you look at our mortgage book, massive drop in income in Q1 '19 and then actually pretty flat Q2 to Q4. This year, we increased list prices earlier. So we won't have that quarter of a missed sort of even sort of exaggerated margin pressure. So I think in that sense, if everything else equal, margin pressure in 2020 would be less than 2019 because of that change when we increased prices.

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

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May I add? Big picture is that we are finding the competition increasing on mortgages. So we've had a constant elevated disruption from the start-up of fintechs, that maintains. But also with these 2 interest rate hikes we've had from the Central Bank, we are looking for the new equilibrium on mortgages, and we've had 2. And it's very clear that the competition is heating up and that we have seen a squeeze on the mortgage margins. And we have done the math that we have SEK 800 million less just because of the margin contraction on mortgages in this year's result compared to previous year.

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Rickard Henze, Nordea Markets, Research Division - Senior Director [6]

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Secondly, on AML. You have been quite confident historically that you have managed the AML risk in a proper way according to regulations. Do you have any update on your view on the FSA investigation that is expected to be published in April?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [7]

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First of all, we are never confident. It's always really, really sensitive. And here, we are trying to do a specific description of a 15-year history. So you can never guarantee anything. And every day, we find out more information that you need to act upon.

When it comes to the FSA investigation, we have nothing more to add. They have publicly announced we don't know more than anyone else, that they want to conclude this errand by the end of April. And now we're just working to achieve that goal.

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Rickard Henze, Nordea Markets, Research Division - Senior Director [8]

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Any contacts with U.S. authorities?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [9]

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We are in constant dialogue with all -- we are in 20 countries, and we have regulators in every country. So we are in constant dialogue with all of them.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [10]

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We can move to Magnus.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [11]

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Yes. Magnus Andersson at ABG. Just starting with NII and your spectacular corporate lending growth last year, 8% FX adjusted. Now it was annualized, 4%, but it was -- it was 8% last quarter, and I think 12% in Q2, and it can be a bit lumpy in the quarter. So you expect a lower growth rate with what you're seeing 2020 or '19, but is it closer to the 4% or is it still more elevated than normal so to speak?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [12]

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I mean, first, there is a market assessment you need to make. What do you think the market as such will do? And right now, coming home from meeting a lot of other bankers, et cetera, it looks pretty positive right now. So the momentum, the pipelines and everything we see, it's kind of reinforcing that we will continue on this little positive note that we've had. I get very worried that there's a lack of worry. There is very little things pointing to something going wrong. And I wouldn't say it's a bull market. Now we have always said that market share increase is part of the explanation. And we have gotten a lot of new clients in the last 18 months, and that's why we've outgrown the market, and therefore, taken market share on the corporate lending. It is not sustainable in the long run. It's very difficult to say that maybe we will have some of this. I don't know if it's going to be closer to 4% or 8%, but let's say in between.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [13]

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Okay. And just on capital. We had this question last year as well, 250 basis points management buffer. Your target is around 150. Feels more and more like a floor than around. On the back of that, because a SEK 6.25 proposed dividend is hardly looking aggressive. Is there something in this Q4 number that you regard as not being sustainable, for example, the market risk decline? Or is it being prudent to have the regulatory uncertainty? Or what's the reason for the 250?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [14]

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Well, in terms of market risk, it is typically a bit lower by year-end than it is sort of average during the year. So in that sense, if it sort of follows the historical pattern, it could potentially go up. But I think we are managing that quite well today. So I don't think it's going to be at the elevated levels it was in Q2 '19, for example. But we have to wait and see. It depends so much on the market as well. I would say, in the -- sort of addition to that, there's nothing extraordinary in the 250 basis points. As I said, it's more about sort of the numbers we had in Q1, Q2, Q3 that were sort of being impacted negatively by the market, and Q4 feels a bit more normalized. But obviously, there are a lot of regulatory uncertainty. We have the commercial risk rates, the floor that's going to come in, the impact on us is 60 basis points in Q3 '20. So the pro forma 250 is 190. And then the buffer versus our target isn't that high anymore. But then hopefully, we'll generate some capital in 2020. So we'll see sort of how this ends up by 2020. But looking beyond that, you have the EBA guidelines, the changes to IRB models. And then looking a bit beyond that, you have Basel IV. So there is still a lot of regulatory uncertainty, I would say. And I think 250 is -- given the volatility you had during 2019, we're at 270. It came down to 170 million. It feels like this could change quite quickly. So it's good to be where we are.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [15]

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And I would add what we talked about last time we had this discussion is that we are at a peakish feeling. We are doing very, very well. I mean we are also preparing from a conservative perspective for a rainy day. And the rainy day, we know people have a need for liquidity and they often come to the bank. So we are really happy to have this kind of dry powder, and we'd like to maintain it if we are allowed in order to service the clients in any type of cycle that we might meet in the next 3 years.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [16]

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Andreas.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [17]

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It's Andreas Hakansson from Danske Bank. A few question. If we start with volumes. On the mortgage side, it seems like you had very, very little mortgage growth in the fourth quarter, and you talked about the margin pressure. Weren't you actually one of the banks that were quite aggressive on margins, and you gained volume in that way? And I think you had a campaign in the beginning of the fourth quarter. And why didn't that drive loan growth in the fourth quarter?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [18]

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Well, I don't agree that we had a low -- we had SEK 8 billion of mortgage lending growth in Q4. And we had, I think, 22% market share in November with a back book of 14. So I definitely think that campaign worked in terms of driving volumes.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [19]

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I was just looking, in your fact book, you had SEK 519.6 billion of mortgages in the fourth quarter and you're at SEK 518 billion in the third quarter.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [20]

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I think that's credit exposure. So if mortgage commitments came down, that's going to offset the lending growth. But the lending growth was SEK 8 billion during the quarter. It is correct that the campaign itself had low margins. But in a sort of normal month, we grant mortgages net of SEK 2 billion, and we have a back book, as we said, of SEK 500 billion. So the margin pressure you can see with the campaigns don't really impact the back book mortgage margin of the bank.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [21]

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It was a short-lived campaign as well.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [22]

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Yes, I remember. The next question, on Germany. You said you had some extraordinary gains in Germany in the back -- in the part that's in runoffs. When should we expect that runoff to have an effect? And how quickly could the profits or revenues fall in Germany?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [23]

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Do you have a view?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [24]

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I have one. Yes. I mean we are benefiting all the time on net interest income because of Germany. So we're buying back old bonds with high coupons, with long maturities, and we keep doing that, which benefits NII. We have a cost reduction in the old SEB AG, that is benefiting the cost base. So I think we see that continuously. It will take a few years to fully wind down SEB AG. But I think in terms of delta of cost reduction and NII improvement, we've seen the biggest chunk, but it will continue to be a tailwind for the bank going forward couple of years.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [25]

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Couple of years. Last one. Just following up on the previous question on why don't you want to tell us if you're discussing with U.S. authorities? It's quite important for us.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [26]

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We are in discussion with U.S. authorities and we are always in discussion with U.S. authorities. If you're really asking if there is something around an ongoing sanctions evaluation or case, there is not. And we also have, as you know, a disclosure in our Q3, Q4 report where you can look on anything that we deem to be of the magnitude that we need to address publicly in order to have a very accurate risk description in the near term, and there's nothing on the U.S. there, and then you can make your own interpretation.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [27]

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And just quickly, relating to that, and that's the last question. You've taken SEK 205 million in AML-related expenses in '19. Swedbank, which is different, of course, but they're taking closer to SEK 2 billion. Are you worried that, that number is going to have to increase in 2020?

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

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If I start and you complete it. The SEK 200-and-something million is not the AML expenses. It's the increase above the SEK 1 billion we are -- billions we are spending on regulatory compliance. So that's just -- compared to the plan in December, we had -- we are increasing by SEK 2 billion to SEK 2.5 billion of spend in new initiatives, and we have a SEK 22 billion cost base to start allocating as we see fit.

Two things happened on the year on why AML went up. In December last year, we had a plan, we've increased that. A lot of financial regulators have increased the request for information. Last year, we had 60 ongoing investigations. We concluded more than 40 of them and still have 20 running. And those, of course, needs a lot of resources. And this is not a strategically difficult decision. You just do it. And that is the consequence of just doing what's right. It ends up being higher. I'd also say that many people are trying to compare these SEK 2 billion there, SEK 1 billion there, and I think it's incredibly difficult to say because it's like asking me how many minutes per day do I think about it and then allocating the costs for certain individual to this project.

So we've done the math. We have 15,000 employees in this bank. Every single one of them have to spend some time every year on getting more adept to fight financial crime, look for risk factors, red flags, try to learn where to report things if you suspect something is not right. We have mandatory trainings, 5 of them that everyone has to do. We have about 5,000 people that actively in their job description have some type of role working with these issues. And the costs for 5,000 people partially working with it is a lot of money. And then we have, of course, compliance, audit risk and everything else that happens on head office. So we are spending an adequate amount. That's a daily decision. We always review it. There are a lot of money going into regulatory compliance. They have more than doubled over time. And right now, today, we feel happy with continuing to commit to the SEK 23 billion cost target, that we can fulfill the road map for the next 23 months under that umbrella. But we have reallocated quite a lot. And if you see the consultancies, the spend went also up by SEK 50 million.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [29]

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Can we move to Maths?

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [30]

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Maths Liljedahl, Handelsbanken. I just wonder if you could -- first, if you could shed any more light on the credit losses. We got the countries, but in terms of sectors or anything. And then to Johan. You met a lot of, I think, players in the corporate market in the past couple of weeks. How do you see the sentiment if we look maybe not only January, but looking in the first 6 months or for the year? And do you have any insight in how you see it developing?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [31]

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I always wish I had any insight, but that's hard to gain. I'll start with the second part. I think it's a little bit hard to characterize the current kind of feeling amongst the corporates. I would say, the closer you are to financial market participants that you trade in the market, you're close to equities, the less of a risk scenarios are painted. So I can see this slightly lack of problem for anyone who is close to the financial markets.

If you go to other areas on potential risk adjustments, such as geopolitical risk, tension, political, cybercrime, sustainability analysts, there is a huge risk picture being painted. And I think those 2 are around -- about to -- how do we marry these 2? Why does the financial markets today really do not reflect what a sustainability analyst will talk about climate change or cyber risk will talk about national interference or geopolitical tension and with Iran and North Korea and U.S. and China and trade agreements, et cetera. So I think this is -- some of them are really preoccupied that the risk assessment on the left will have a financial dampening effect. And so -- but I don't see it right now. So I go with TINA and FOMO: There is no alternative and fear of missing out. So I'll just jump in, even though it looks a little bit rich.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [32]

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On the credit loss, also, I mean you can see in the fact book where you see the increase of Stage 3 loans. So typically, where things are in default and we reserve a bit more. If I remember it correctly, during '19, there's an increase in manufacturing, oil, gas, shipping and retail. So predominantly in '19, the increases come there. I think you can track it on a quarterly level as you can see where delta is in Q4.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [33]

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We can move to Jens.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [34]

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Jens Hallén from Carnegie. Yes, I think it was about SEK 500 million in manufacturing in Q4. Returning to the cost bridge and then I guess trying to go to 2021. Are you expecting the sort of other part to turn negative? Or that some of maybe the AML investments will, I guess, reducing during 2020 and '21?

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

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No. the other part will have to turn negative.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [36]

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Robin?

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [37]

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Robin Rane, Kepler Cheuvreux. Following up on the costs. How much in the quarter was driven by the high income sort of activity in the quarter? I'll start with that.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [38]

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Difficult to say I would say, I mean we didn't really mention that. But when you have this strong profit growth we've had in '19, especially in some advisory driven areas, that in itself creates some cost inflation. So you should be aware of that. If you look at the variable compensation for the bank, some of that is accounting, to be honest, but still, it's up a bit in the year because of very strong income line. And I think that's what we said in December 18. We said that, with the target we have of SEK 23 billion, we want to have sort of an interval around that of about SEK 200 million, because if the bank does extremely well, we want to be able to compensate people for that. So we've had that kind of a year in '19. In -- I would say, in Q4, most of the increase is a seasonal impact. It has to do with travel entertainment, with marketing, some other bits and pieces. And the seasonal impact in Q4 this year is greater than earlier years, but it's nothing really in addition to that. It looks high, but I think it's more seasonally. Maybe Q3 was a bit on the low side.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [39]

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I'd just add. This is, of course, we have smart analysts in the room. So I would welcome anyone, do a little bit of a benchmark on the variable costs for advisory areas. Because if we do 100 bond deals in 1 year, every single one does drive variable costs. It's just a small number, but it is clearly -- you don't generate 25% up on investment advisory areas without having a documentation, a legal advice. Every single transaction draw some type of variable cost. And that is, of course, reflected in the numbers, but hard to say how much of it is, but it's related to the income development.

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Robin Rane, Kepler Cheuvreux, Research Division - Equity Research Analyst [40]

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All right. And then back to the -- this big buffer to the capital requirements. How much did the current situation around the AML play into the decision to retain such a buffer?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [41]

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Well, when the Board discussed yesterday, I don't think that was mentioned. So I don't think it does.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [42]

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Nicolas?

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Nicolas McBeath, DNB Markets, Research Division - Analyst [43]

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Yes. A question on the NII sensitivity guidance that you provided. You basically say the same sensitivity on a gross basis as last year, SEK 1 billion. But given the -- that you have a larger balance sheet now, and also, I would assume that the offsetting impact from stable floors is not around this time because the risk was 0, if you could elaborate why or explain why the sensitivity is not higher now compared to one year ago?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [44]

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Yes. I mean you're correct in your comments. There are positive sort of negatives this year versus last year. The positive is that STIBOR is in positive territory. So the reference rate floors doesn't have as much of a negative impact and the balance sheet is greater. That's on the positive side. On the negative side, last year, bit technical now. When the repo rate was hiked by 25 basis points, 3 months STIBOR went up by 37. This time, STIBOR is up 23 basis points. And that difference of 14 basis points also has an impact on the sensitivity. But if you take the net of that, yes, you end up at approximately SEK 1 billion. And I mean we're not using any decimals, so -- but it's approximately SEK 1 billion again, yes.

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Nicolas McBeath, DNB Markets, Research Division - Analyst [45]

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Is there any benefit from the rate hike included in the Q4 NII?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [46]

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Very, very marginal. The list price on 3-month mortgages was raised sort of mid-December, so extremely marginal.

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Nicolas McBeath, DNB Markets, Research Division - Analyst [47]

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Okay. And then a question on the net financial income. You reiterated your guidance of 1.2 to 1.4 in the business areas, but you also say that the kind of treasury, net financial income was benefited this quarter by higher interest rates. Would you expect the treasury net financial income to be higher or above 0 now given where interest rates are at the moment?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Group CFO [48]

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Yes. It would have come down again. It touched negative territory yesterday again. Now they're positive. I mean we looked at this. The last 9 quarters, the guidance we have, 1.2 to 1.4. Last 9 quarters, that has been 1.4 on average. XVA is 0, obviously, over time. And then treasury has been averaged SEK 300 million. So I mean that maybe that could be a different sort of indication where this line will be, but I don't think -- there are so many market movements, and this goes up and down so much, so we don't feel confident in sort of changing that guidance. And last Q3, we're at lower level, now we're at higher level. So I think we just keep that guidance for now. And if you have a positive development in 2020, you can sort of rethink that and consider it. But historically, we've been within that interval. And then treasury historically has, on average, been positive. But that's the historical development.

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

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And I will just add. We are not making a prediction or I'm not guiding right now. But if you look at the last decade, if there is one area that we have -- we've been struggling with, it's the fixed income area because of the lower, lower and negative yields. If you have a quarter for the first time in a very long time when they go up, there is some movements and volatility, and they go into positive. Of course, that is what it used to be in order to have a well-functioning fixed income business. In our bank, we have a predominantly client-driven fixed income business in the division, but treasury is, of course, taking care of the balance sheet of close to SEK 3,000 billion. So there is, of course, a positive kind of context for managing those type of numbers in the fixed income market if we get into an upward sloping yield curve and positive yields. So it creates better, but it's no change in our guidance right now. It's too early.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [50]

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Thank you. And I think that concludes all the questions, and we thank you all for coming.

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

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Thank you very much.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [52]

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Thank you so much.