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Edited Transcript of SEB A.ST earnings conference call or presentation 23-Oct-19 7:15am GMT

Q3 2019 Skandinaviska Enskilda Banken AB Earnings Press Conference

Stockholm Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Skandinaviska Enskilda Banken AB earnings conference call or presentation Wednesday, October 23, 2019 at 7:15:00am 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.) - Finance Director

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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

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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, to today's results presentation. Our CEO, Johan Torgeby; and our Finance Director, Masih Yazdi, will give an update on the third quarter results. After that, we will run a Q&A session, and we will have bilateral interviews with media afterwards.

And with that, I hand over to 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 welcome, everyone, to a, well, more than fairly beautiful October morning here in Stockholm.

So we'll start with putting this quarterly result in context, and we can start with just reflecting a bit of the equity markets, which has been quite choppy during the last quarter. If you remember the start of the summer, in July, we saw a very, very strong equity market for a few weeks, only to come down over the subsequent month by about 10% and then recovering the whole thing again later in the quarter. And the other day, we noted a new high on the OMX stock exchange. So fairly choppy but in a controlled fashion.

I would say that the macroeconomic outlook has been weakened again during this quarter, particularly looking at the leading indicators. However, companies and banks seem to have a better position here and now than the macroeconomic outlook gives evidence for.

Secondly, we can look at credit spreads. Credit spreads for the bank, which is the price of the raw material in the bank, has been fairly unchanged. And also, the same goes for investment-grade credit spreads. So high-quality credit spreads moved around a bit but broadly in line with previous quarter. However, on the more riskier credit, high-yield credit spreads, that has come down a little bit. And both the strong equity market in recent month and a high-yield market performing well, that is credit spreads coming down, indicate to me at least a little bit of risk on, that there are optimists out there who wants to push these asset prices to new levels.

Last one, we saw a very dramatic drop in interest rates at the beginning of this quarter, and we noted almost minus 0.8% on the 10-year German government bond, and it has recovered a bit since then. But both Swedish and German government bonds have been significant into negative territory during this quarter. And in the last few weeks, they have come up by 20 to 30 basis point. And this has clearly been a very big topic, particularly in Pan Europe, in Continental Europe, about another headwind for the financial industry, but it has dissipated slightly here in the last weeks.

If we look at our bank, and we want to characterize this quarter, we say we have had a solid financial performance despite a seasonal slowdown as July and August is very quiet months in banking but also despite the macroeconomic weakness that has been introduced into the system. We saw broad-based demand, very high activity around advisory services, lending and capital markets financing. I will come back to that a little bit later today. And we saw the Swedish mortgage business in SEB performing now for a second quarter in a row, in line with our market share. And as you know, this has been an area where we have performed below our market share for some time, so that's encouraging.

If we look at the 3 quarters year-to-date. Income has grown by 6%, and costs have grown by 3%. Please remember that FX is an important factor in this bank as half of it is outside Sweden, and both income and costs are slightly higher than they otherwise should have been, should the Swedish kronor have been so weak. But that results in a 5% operating profit before items affecting comparability and after credit losses. So we call that a solid performance.

On credit loss level of 8 basis points is marginally higher than in the past. Our cost/income ratio is marginally lower than last quarter. Capital has deteriorated somewhat, but the capital buffer is 170 basis points. That's 20 basis points above the management -- buffer statement of 150 basis points. And return on equity is broadly in line with the past.

So with those words, I'll now introduce Masih, and he will go through the quarter in a bit more detail.

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Finance Director [3]

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Thank you, Johan, and good morning, everyone. Don't worry, Johan is going to be back in the end.

So looking a bit more into the quarter. The growth rates are pretty similar to the year-to-date development. Operating revenues are up 4%, costs are up 3%, and the profit is up 5% postcredit losses. Credit losses in the quarter is slightly higher than the average so far this year. Cost/income ratio is pretty much unchanged. And Johan mentioned the capitalization. Return on equity is pretty much unchanged as well compared to the previous quarter.

If we move into net interest income. This line is up 8% so far this year compared to last year. The positive contribution comes from the repo rate hike we've had -- we had in December last year from the low resolution fund fee and from some FX effects. In addition to that, we've had pretty good credit growth in the bank, which has been partly offset by margins coming down, especially on mortgages.

If we look at the Q-on-Q development. The NII is up 5%. That is predominantly due to lending growth in the quarter. But as we mentioned in the past, we also sometimes have some volatility in our NII in markets. And we can see that this quarter, NII in markets is about SEK 100 million above the average level in the last few quarters, and over time, we expect this to come down. As you can see, all divisions show a better NII so far this year compared to the same period last year.

Fees and commission are up 2% so far year-to-date. The strong contribution comes from lending fees, card fees and payment fees as well as advisory fees linked to M&A, DCM and ECM. We've seen slightly worse development when it comes to securities fees for asset management. And this quarter, usually, fees are down quite a bit. It's only down 1% this quarter, which shows that even though there's a seasonal decline in Q3, it's not been as strong as is usually the case as active levels mainly within LC&FI has been stronger than what's usually the case in Q3.

NFI is up 5% year-to-date, mainly due to a very strong NFI we had in Q1 this year. In Q3, you can see that the level is slightly lower than what we've been used to. It has several explanations. We have a negative XVA effect of SEK 160 million during this quarter, which is almost SEK 60 million worse than Q2. We also have a negative effect within treasury and our life business due the falling interest rates of about SEK 100 million. And also lastly, the SEK 100 million of positive contribution within markets for NII, you have the negative effect -- impact here. We've historically said that we expect this line to be between SEK 1.2 billion and SEK 1.4 billion, excluding treasury and excluding XVA, and we don't see a reason to change that guidance at this point in time.

Our favorite slide. Operating leverage continues to work. We've seen the quarterly average income come up by SEK 500 million so far this year compared to last year, with costs up SEK 100 million, leading to an operating leverage of SEK 400 million improvement in profit precredit losses so far this year. So even though we've seen a cost increase for the first time in several years, we can see that the operating leverage continues to work.

Moving to the divisions. All divisions in the bank but life shows improved return on equity and an improved cost/income ratio so far this year compared to last year. For LC&FI, it's mainly driven by the higher activity levels, partly offset by somewhat higher credit losses. For C&PC, it's the repo rate hike and the lending growth they've had, partly offset by mortgage margins coming down so far this year. Baltics, a combination of lending growth and some margin improvement. And a decline in Life, mainly due to the divestment of SEB Pension last year but also the fact that there is pretty strong margin pressure there that hasn't been fully compensated with inflows into our savings business. Investment Management is pretty much flat year-on-year, whereas there's a negative effect in treasury mainly due to add-ons for internal funds [transfer] pricing to the divisions as well as some negative impacts from the falling interest rates so far this year.

Some key ratios in the bank. As we said before, credit losses are a bit higher this year compared to last year, but asset quality remains very solid in the bank. We've seen good deposit growth this year. The LCR is up, and we expect it to be a bit higher kind of going forward as we nowadays have LCRs in significant currencies that have to be above 75% or 100%. The aggregate level for the bank will likely be higher than historically.

Johan mentioned capital. The buffer is 170 basis points. That's down 20 basis points from the previous quarter, mainly due to FX effects and the falling interest rates, which has lowered our discount rate for pension liabilities.

Leverage ratio of 4.5%, which is a bit lower than the year-end level of 2018, but that's usually the case that leverage ratio goes up a bit year-end and is a bit lower during the year.

That's it for me. I'm going to 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.

Today, we have chosen 2 themes, as we normally do. One theme is going to be a little bit of extra focus on the corporates of the Nordics and what they've been doing this quarter, and the second theme will be around our custody business, something we rarely speak about, and we thought it would be interesting to share.

If we look at the corporate portfolio, it has grown by 9% FX adjusted. And it is important to always remember FX as it has such a large impact because it's 14% if you do not adjust for it. But you can clearly see that we've had an acceleration in activity when it comes to lending and lending activities amongst the Nordic and German corporates that we cover in the bank.

On households, we've come up a bit. This is a 6% year-on-year increase, and that's around a number that signals the catch-up that we have been making on predominantly mortgages. This is the total exposure, so it's lending plus any promises you might have made. That's why the numbers could differ a bit from what has actually been lent. The smaller numbers are roughly unchanged, so limited on commercial real estate and housing co-ops, a little bit more but from a very low base on residential real estate.

So corporate, specifically. I mentioned a very healthy over normal growth rate for the corporate lending book. We also look at investment banking where both ECM and DCM and M&A has contributed quite a lot this year. If you look at the market share, measured as league tables in Sweden and in the Nordics for how many M&A advisory mandates we have gotten measured by volume, we are #1 in Sweden, and there's a very tight race in the Nordic league table, including the other Nordic countries where we are #3. But these are, of course, highly correlated to the lending growth. So as you are a very frequent adviser for larger M&A transactions, you will also be relatively well placed to take care of sorting out the capital structure, the potential financing for acquiring a business or the capital structure that needs to be put in place permanently post you've acquired a company. So all these goes, of course, together.

I also mentioned that the advisory businesses, M&A, ECM and DCM, is up 40%. It's a roughly SEK 1 billion, SEK 1.1 billion business per year, but it's up 40% the first 3 quarters this year compared to last year. So also very healthy financial result, of course, that should come out of this. And the lending fees are also up 13% compared to last year, which comes -- which is about 2 to 3x larger, so to speak, than the advisory fees. But that all fits into this picture, too.

When it comes to customer satisfaction, which is, of course, something we are extremely dependent on and focused on, this quarter, we have gotten the new customer satisfaction scores for SME corporates in Sweden. So the first one is that every year, the finance barometer, Finansbarometern, they award the Business Bank of the Year, and this is the first time in 10 or 9 years we achieved that award. So we were happy about that. And we see that the overall client satisfaction amongst all the larger banks have improved somewhat for SEB from 62 to 64, roughly in line with the average of the market and #2. So we don't put the names out, but I can say it's Handelsbanken who's the #1, who has been there for a long time.

Switching over to custody. For people who don't know what it is, it's kind of something around warehousing, safeguarding, reporting and handling financial security. So anyone who owns an equity or a fixed income security needs a depositary place for the security. In the old days, that was paper. And this is a very long tradition for this institution, SEB, to be focused on this particular service, predominantly focused on financial institutions. And I thought it would be fun to share this. This is the -- an ad that the bank took out in a newspaper from 1888. So what's that? 130-plus years ago, where we are marketing our formidable capabilities to take care of your custody services. And it is interesting to note that at the time, 100-and-something years ago, we charged SEK 1. That was the highest price for SEK 1,000. And I can say the margins are down roughly 98% or something like that since 1888.

For the Swedish people, I love the first there, we are providing them with (foreign language). In English, it's fire and bulletproof safety boxes. And that's what we did at the time. And of course, it was all paper. You took care about the interest coupons coming in going to the right place. You made sure that it was safe and secure, that you know you had your barrel bonds or your equity certificates in the right place. So long history and a very important area for us for the financial institutions.

Today, this is completely different, of course. So I'll put it in today's context. In December last year, we put out our new business plan, and we introduced the concepts of assets entrusted to us. Assets entrusted to us is -- it's a word or a sentence that is reflecting our belief in to be a financial institution where clients want to put their asset with us in any shape or form they deem appropriate is a comparative advantage in the future, and we would like to be that safeguarding for those assets. Those include asset under custody, AUC; asset under management, AUM; and deposits. And this little slide here is about custody, which is something we rarely bring out.

I would say in 2012, for the sixth time in recent history, we were at a crossroad in this bank. This is a very expensive area to invest in as it's very IT-dependent. We decided in 2012 either we had to shut it down or invest heavily, and we decided to invest heavily. This is probably the single most important investment we did during 2013, '14, '15 in order to get a completely new IT infrastructure, in order to facilitate best-in-class services for the future. It was a lot of headache, and you're always nervous when you do these larger investments that you can actually see the benefits of it. And the benefits, we kind of see now. This has been active and live since '16, kicking -- growing a little bit in '17. But now this year, we can see that the asset under custody in this quarter ended up at SEK 9,267 billion. And most of the growth over the last 4 years have come this year. So you see it was up a bit, '17 down. But also more importantly, we see the new inflow coming in. And year-to-date, we have gotten mandates in to have assets under custody that amounts to 1,300 additional billion of Swedish kronor. And now we feel that the financial institutions that are their clients, they really appreciate what we have done here, and it's going quite well.

But one should not overestimate custody because it's a very low-margin business. But you shouldn't estimate -- underestimate the value of it because it's one of the most important services a bank can provide as you get very close to your client. It's actually 1 bank who become the custodian that they have to pick for a particular close relationship, which mean that the depths, the widths and the closeness in the relationship by -- automatically becomes very close. So we estimate that we actually make 2 to 3x as much business with those financial institutions that choose us as a custody bank than otherwise would be the case. And it's a long-term customer proposition. It lasts for several years every time you're successful.

We're very proud of this, and this will -- it has just started. So financial institutions in the world who has a custody service, they probably should hear from us in the future.

With those words, we'll end this Q3 press conference, and we'll open up for questions. Christoffer?

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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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Perfect. So let's start with name and the institution you're representing. And we can start with Andreas.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [2]

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It's Andreas Hakansson from Danske Bank. Two small questions. First one on NII. You said that this short-term effect from markets was around SEK 100 million in the quarter, and that should come down. In previous quarters, as it's also been elevated, should it come down to lower level? Or is that SEK 100 million that's extra?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Finance Director [3]

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SEK 100 million is the elevated level, so SEK 100 million above a normalized level.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [4]

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Then on costs, you still have the 2021 target of SEK 23 billion, of course. But I would assume given that the FSA is investigating you on AML and all of this, could you tell us how much money you're spending on AML at the moment above what you would have done in a normal year?

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

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It is almost impossible to give a number. We've tried, but it's significant. So it's very clear that regulatory compliance is at the very top of the agenda, and researchers are being guided that way. And why I say it's difficult to say because everyone in the bank, all 15,000 employees, work with it in one shape or form, minimum spending a few hours every year on the mandatory training to get smart and be vigilant for financial crime. Then there are thousands of people in the client-facing organization, in the control functions, in compliance, in risk, in finance, who actually do the job of securing that the KYC documents are up to scratch, that the annual reviews are conducted in the right way, and then, of course, all the regulatory relationships. So we're talking thousands of people involved in the process.

But what we also said, we were one of the very few banks, I think, last year who asked the shareholders and the markets and everyone else to approve a pretty expansive plan. So we have a cost increase of close to SEK 2 billion to SEK 2.5 billion of investments over a 3-year period. And if you look through them, many of them are related to new IT system using artificial intelligence for compliance and transaction monitoring, getting your data in order, getting documentation more effective, getting new onboarding principles, all driven by new KYC and AML. So the whole investment thing, that is kind of outside investment banking in the advisory. They are all related to this in one way or another.

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Andreas Hakansson, Danske Bank Markets Equity Research - Research Analyst [6]

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So onto the SEK 2.5 billion, roughly how much would it be?

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

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I don't know. It's like asking how much minutes per day I'm thinking about it because it's spread around the bank.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [8]

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Jens Hallén from Carnegie. I guess 2 questions from me. One, coming back to credit growth. Again, it's a strong quarter. How long can that continue?

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

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I wish I knew. But it is a little bit surprisingly strong. We talked about -- I'd like to step back. There is not a perfect correlation between GDP and stock markets and a general feel and lending. That is obvious when you look at it. Over medium to long term, there is a higher correlation as investment cycles and consumption cycles are, of course, driving a need for capital. And if the propensity of the capital you spend is constant by what's lending and what's actually earnings, you kind of grow with it.

So remember, 2016 and '17, we had fantastic market in Sweden, and it was actually down. Well, actually, at '17, it was drifting down, and we were sitting here not understanding why -- how can the economy grow so much, unemployment going down, house prices went up at the time at 7%, 8% per year, and the corporate lending was falling marginally. All of a sudden now, we have a more modest growth, and it's catching up.

That said, it was an acceleration this quarter, which, of course, we have not signaled in the past and was slightly surprised. In the medium and long term, I'll just say that nominal GDP weighted from the countries that we have participated in is a good rule of thumb that we use. So these are elevated numbers that should come down.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [10]

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Okay. But when you're looking at what's happening right now, do you see...

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

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There's no signs of it changing right now.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [12]

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Okay. So it's a gradual process?

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [13]

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Yes. It's more likely the reasonable assumption rather than activity-based here and now because we see a pipeline which is unchanged. We see activity picking up this quarter. And if you talk about this elevated activity level, it seems to be in the short run here to stay, can change tomorrow. And then, of course, we have grown a market share. So this is not the market growth rates you see in any of our numbers today. We are significantly outgrowing the market in most areas.

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Jens Hallén, Carnegie Investment Bank AB, Research Division - Research Analyst [14]

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Okay. Then just 1 question on margins. Masih, you mentioned one of the pressures that you see in margins are from the mortgage lending. Why did you decide that you had to go in such an aggressive sort of fixed term product for Swedish mortgages at 1.29?

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

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Masih?

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Masih Yazdi, Skandinaviska Enskilda Banken AB (publ.) - Finance Director [16]

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Yes. I'm not sure if it's that aggressive, to be honest. I think what the market really hasn't appreciated during Q3 is how much funding costs have fallen. So in Q1 and Q2, we talked about having a spread between front book and back book mortgage margins of 10, 15 basis points. In Q3, as funding costs fell quite a bit, that spread was 0. So there's no margin pressure on mortgages during Q3.

Now you've seen after Q3 that some banks have reduced prices, and we have launched our campaign. But we've had campaigns in the past, a 5-year-old -- a 5-year fixed mortgage campaign, a 3-year fixed mortgage campaign. If you look at this campaign isolated, the margins are actually higher than the previous campaigns. So I think what the market hasn't really understood is how much funding costs have come down. Now they're actually coming back up again in Q4. So it's moving quite a bit. But during Q3, funding costs were very low, and the rates we're offering are pretty much in line with the previous campaigns that we've had.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [17]

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And if I may, this is a difficult area because you want to increase transparency, you want to have a very simple offering, you want the employees of the bank to advise on these things, to have simplicity, and you want the recipients, the households of Sweden to see something simple. And then you do a campaign like this, and maybe you have 4 to 8, maybe 12 weeks of perspective on let's do something that makes it easy to talk about and something to gather around. And all of a sudden, the interest rate goes up by 30 basis points in 1.5 weeks, and that campaign is, of course, put in a different light. But you still have some clients to take care of, and that's more important than changing around just for the bank's sake. But it's not to be viewed as a signal that we're going to use lowering our margin and not having integrity around being a sustainable, profitable bank for the future. But we will do this as well as we can to support our clients.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [18]

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Okay. Thank you so much for joining this press conference.

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Johan Torgeby, Skandinaviska Enskilda Banken AB (publ.) - President, CEO & Director [19]

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Thanks for coming.

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Christoffer Geijer, Skandinaviska Enskilda Banken AB (publ.) - Head of IR [20]

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Thank you for coming.