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Edited Transcript of SWED A.ST earnings conference call or presentation 23-Oct-19 6:00am GMT

Q3 2019 Swedbank AB Earnings Call

Stockholm Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Swedbank AB earnings conference call or presentation Wednesday, October 23, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Karlsson

Swedbank AB (publ) - CFO

* Gregori Karamouzis

Swedbank AB (publ) - Head of IR (Equity and Debt)

* Jens Henriksson

Swedbank AB (publ) - President & CEO

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Conference Call Participants

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* Adrian Cighi

RBC Capital Markets, LLC, Research Division - Analyst

* Andreas Hakansson

Danske Bank Markets Equity Research - Research Analyst

* Jacob Max Kruse

Autonomous Research LLP - Partner, Scandinavian Banks

* Magnus Andersson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Peter Kessiakoff

SEB, Research Division - Research Analyst

* Riccardo Rovere

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

* Rickard Henze

Nordea Markets, Research Division - Senior Director

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to the Swedbank AB third quarter report for 2019.

(Operator Instructions)

So today, I am pleased to present Gregori Karamouzis, Head of Investor Relations.

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Gregori Karamouzis, Swedbank AB (publ) - Head of IR (Equity and Debt) [2]

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Thank you, operator. And good morning, everyone. So thank you for joining us on this presentation of Swedbank's Q3 results.

With me in the room today, I have our CEO, Jens Henriksson; our CFO, Anders Karlsson. After their initial remarks, we will open up for questions.

Jens, please.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [3]

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Thank you, Gregori. And welcome, everybody, this early morning to the third quarter results for Swedbank 2019.

My name is Jens Henriksson. I'm the new CEO. I started the 1st of October, which is actually the day after the quarter was closed. I would summarize the quarter as a stable quarter but with some extraordinary costs. I've been into my position now for, I think, 23 days. My attitude now is to learn; to listen; and to meet relevant stakeholders as I do today with analytics, I do with owners. I met customers, media, coworkers and authorities. And out of the last 3 weeks, I spent 1/3 of that outside Sweden, in the United States, in Estonia, but let me get back to that later during the call.

As a new CEO, I have 3 priorities. The first one is to take away the cloud that hangs or the dark cloud that hangs over Swedbank that is the allegations regarding money laundering. My second focus will be on digitization. I've always, in my old position, looked with envy at Swedbank because of the playfulness. And I want to continue to sort of -- that playfulness, where we meet the customer in a playful way at the same time so we have a stable system. And the third focus area for me will be sustainability. We have an almost 200-year tradition. And it was striking in the -- during the IMF meeting how many banks and stakeholders have talked about sustainability. And we have an advantage here, but the problem is, of course, that you cannot have AML, [anti] money laundering, accusation at the same time. So my long-run goal is to have 2 focus areas: digitization and sustainability.

Now let me speak a few words on AML. So if you look on the slides now -- well, let's see here. I'm going to change the slide. Now there has been some complaints that we haven't shown a time line, so I'm going to show you a time line. And that time line, I think you should look on February 20th. So February 20th, the Swedish news program Uppdrag granskning came with a show that started a lot of processes. One of those processes was raise the internal investigation. We hired the international lawyer firm of Clifford Chance. They in turn have hired subcontractors in FTI and FRA, which are forensic experts. What they are doing is they're going through 30 billion transactions, just an example that you understand how much we're doing, from 2007 to March 2019. They're also looking at internal conduct and what has been right and what has been wrong and looking for different ways to improve it. So that's the first thing. And they will come with their conclusion to us in Q1. Roughly at the same time, we expect the Swedish FSA and Estonia FSA to deliver their final, may I call it, verdict on what has happened. They've -- we've had back-and-forth different discussions with them, and we expect them to come during Q1. Then we have the U.S. authorities. And I'm sorry. As you see, it's pretty vague. The reason for that is that it is pretty vague. We do not control that process ourselves. And during the IMF meeting, I met other banks that has been alleged to have money laundering issues, and they tell me this can last everything from 1 to 5 years, but that's not in our control. Now Gregori can you change the slide?

Today, I am taking out an action program for Swedbank. That action program consists of 132 points. Those are my 132-point program for Swedbank. And so what's happening is that we have a lot of ideas or proposals on how to improve our AML processes, and that comes from internal functions. We have audit. We have compliance. We have risk. And just to give you an example because a lot of people are talking about the so-called Grimstad report: They say -- these are things they want us to do. Then from the Estonian and the Swedish FSA, they are also coming with proposals on what to do. And then we have the internal investigation by Clifford Chance, as I told you. All together, we have 132 action points. And that concerns, as you can see, FIU reporting, that's reporting to the financial intelligence units; risk assessment; internal regulations; training; customer diligence; risk classification; and monitoring. And Gregori, please go back to the old slide. If you look on the old slide, you see that you have -- out of these 132 initiatives, 71 of them are I suppose and we hope to close by the 31 of December 2020. And the rest, 61, we then close 2021.

Well, how is it then following? Well, if you look on the third slide here. This is the status as it was yesterday. Status will probably be different tomorrow, and -- but we will keep track on this. And if you look upon it, we have 132. We have completed 20 already. We have 50 ongoing projects that are just according to plan. We have 30 projects now that are signaled in yellow. That might mean that there are some glitches. You might maybe overshoot the budget or may come in a few days later. And as it was yesterday, we're at 3 that were red. I see that as a stop signal. They need to get something before they can start going. Maybe that should be resources or personnel, things like that. Then we have 29 projects that haven't started yet, and they may be due to interdependencies on the other one.

So my -- will continue to talk about this until you are really tired of me -- listening to this. And then during the annual report, I will try to be much clear exactly what this 132-point program is about.

Now let me say a few words on the U.S. because, as I told you, me; my Chairman, Mr. Persson; and my CFO was there with me. We were there in conjunction with the annual meetings of the IMF and the World Bank. I've been to those meetings for, I think, now almost 15 years. What we did was that we met the authorities. We met other banks. And what was striking was sustainability, was anti-money laundering and was also a lot discussion about the economic outlook; and let me take a few words on the economic outlook because it has an impact on the bank. The economic outlook: A year ago, we met in Indonesia. And in Indonesia there was a discussion then that you will see inflation pikes in the U.S. That will mean that the Federal Reserve raise rates, and as a result of that, you will see flow from emerging markets into the U.S. That will give them problem. Now when we met in April, it was sort of a waiting period. And the policy message was clear: Do no harm. Now when we met this year, it was very simple policy message. Harm has been done. And I would say that it felt like we -- or the calendar said October, but it felt like November. And if you look on the growth figures, they're talking about a 3% growth in 2019 and 3.4% in 2020. And the uptick there comes mostly from Iran, Russia, Turkey because they were so depressed during 2019. That is a statistical effect of bouncing back 2020. So the message is clear, lower for longer; and that, of course, means a lot of challenges for banks looking ahead.

Well, said that, now let's say a few words about the results.

We have a return on equity that's -- right now that's just below 15%. And -- but if you look year-to-date, we are at 15.3%, which is slightly above our target of 15%. The target stands, but let's be very honest that it will be harder to reach. And the same thing applies to our cost target, not least in the short perspective, where I'll just give you an example. When we talk about the investigation, the investigation has so far cost us SEK 1 billion -- no, not so far. This year, we expect it to be SEK 1 billion, but Swedbank stands strong. Our capital position is good and our credit losses are low. When I look forward, and I say this with sort of I'm still in listening and learning mode, I see both challenges and possibilities. Swedbank has a very broad customer base. We have the innovative culture. We have competent and good people that work for the bank. And we are strong in Estonia, Latvia and Lithuania, countries that grow roughly with 1% to 1.5% more than Sweden. And we have an activity plan that I'm right now digging myself into, and we have a lot of work which I see good possibility to automize and digitamize. And we have an extreme clear customer focus, but I also see challenges. There is harder competition on most areas. We will lower for longer, and that affects us. And there are AML-related costs. Our answer to this is to continue to deliver, but it's my -- as I said, it's my 23rd day, and this is questions I will return to.

And then I give the floor to my excellent CFO, Mr. Anders Karlsson. Thank you very much.

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Anders Karlsson, Swedbank AB (publ) - CFO [4]

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Thank you, Jens.

And let me start off with net interest income, which is stable quarter-over-quarter. Swedish private mortgages continued to grow still somewhat slower than our back-book market shares. Volumes were stable. Corporate lending in Sweden declined by SEK 5 billion due to a couple of large scheduled repayments. Corporate margins also remained stable, but portfolio composition effects impacted the quarter slightly negative. Lending grew in all 3 Baltic countries by a total of SEK 6 billion, somewhat more in the private than in the corporate segments. FX contributed positively by SEK 2.5 billion, in addition to underlying growth in all countries and segments, hence the solid lending growth continues. Lending margins continued to expand both in the private and corporate segments, while deposit margins weighed on NII as Euribor rates fell. Group Treasury's NII was, as expected, lower due to less-positive contribution from covered bond buyback volumes.

As we received the final level of this year's resolution fund fees last quarter and subsequently adjusted the fee booked in NII downwards for the first 2 quarters, this quarter, we have a negative delta of around SEK 30 million. Also, the deposit guarantee fee is adjusted higher this quarter by SEK 20 million.

Over to net commission income, which was stronger this quarter. We see the usual seasonal effects in cards, as usage is typically higher in the third quarter. The asset management business benefited from the overall positive market development in the quarter. And corporate finance and brokerage activity was, as expected, slower during the summer months.

Turning to net gains and losses and other income. The overall lower market activity during the summer impacted trading income, especially the credit side. Also, valuation effects in derivatives impacted negatively, driven by lower interest rates globally. In Group Treasury, the holdings of Visa and Asiakastieto shares which are held at market value had again a positive contribution of around SEK 50 million but a considerably smaller one compared to last quarter which was SEK 220 million.

And lastly and looking at some of the other core products of the bank. We saw the insurance business continuing its positive development with improved results following increased sales and lower claims, while income from the credit card business and savings banks and associates was stable quarter-over-quarter. We also had a few one-off items, impacted positively by around SEK 60 million.

Turning to capital. The CET1 capital ratio increased to 16.3%, and the buffer to the Swedish FSA's minimum requirement stand at around 130 basis points. Net profit excluding dividends impacted the CET1 capital base positively. On the negative side, we saw the pension liability valuation increasing following further declines in long-dated interest rates. And the countercyclical buffer in Sweden increased to 2.5% in the quarter, leading to around 40 basis points of increased capital requirements for Swedbank.

At the end of September, we received the final SREP for 2019 from the Swedish FSA. Overall there were minor adjustments to the capital requirements compared to last year. The risk profile assessment remained at the similar level as before, but they also noted that the money laundering allegations have affected the bank, which should continue to be taken into consideration in the bank's capital planning. The risk exposure amount decreased by SEK 1.6 billion in the quarter. The main reason for the net decrease was positive asset valuations and somewhat faulty maturities in the corporate lending.

Let me also provide you with some guidance on expenses before I sum the quarter up. Underlying expenses are developing according to plan. That is important. We continue to invest in developing our customer offerings and digitalizing both the back and front end. We will during autumn review and develop our activity plans for next year; and let me be clear, in conjunction with the Q4 results publication, come back to you with our guidance for 2020.

As you all know, this year has been marked by extraordinary expenses. In the third quarter, we have additional one-offs of around SEK 500 million. They relate to a VAT reservation, to severance pay for management changes and higher expenses related to operational incidents in the quarter. The VAT reservation is due to that the Swedish tax authorities changed a previously approved methodology. This model change will result in around SEK 60 million of higher expenses per annum going forward. Also, the ongoing investigations into AML have cost more than initially anticipated. More specifically, the regulator's preliminary modifications led to additional work to provide them with everything they requested. And furthermore, our decision to speed up the measures we are taking to address the identified shortcomings in our AML processes have also led to higher expenses. Our best estimate at this point is that the investigations will cost around SEK 1 billion in 2019. All together, this means that a total of SEK 1.5 billion of expected expenses in 2019 are of one-off nature and will fall off in the future. We don't have any visibility at this point as to how much of the investigation expenses will fall off already next year. Hopefully, we can give you more guidance at our Q4 results at the end of January.

The headwind on expenses from FX movements have increased slightly in the quarter, adding SEK 50 million for the full year at current FX rates, reminding you that a weakening Swedish krona is net positive for the bank's results.

All in all, we expect total expenses for the full year of 2019 to be around SEK 19.8 billion.

Let me also say a few words about asset quality, which remained resilient across all business segments during the quarter. Credit impairments in the quarter were SEK 154 million, which equates to an annualized impairment ratio of 4 basis points. In the Baltics we saw a decrease of impairments compared to the previous quarters.

Now summing it all up before we take questions.

We delivered a quarter with stable income trends supported by continued loan volume growth, albeit at the lower pace; and higher activity in our cards business; and a benign stock market development. Underlying expenses are under control, with higher expenses due to the mentioned one-offs. And the ongoing investigations weighed on the bottom line. As we look ahead, as Jens mentioned, we see many opportunities and challenges. We will continue focusing on delivering customer-oriented solutions while taking out efficiency gains by digitalizing more of our processes. And finally, with the current macroeconomic outlook, we believe it's imperative to continue prioritizing origination discipline and pricing.

Thank you.

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Gregori Karamouzis, Swedbank AB (publ) - Head of IR (Equity and Debt) [5]

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Thank you, Anders. Thank you, Jens.

Operator, we are ready to take questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is over to the line of Andreas Hakansson of Danske Bank.

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

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My question is about costs. The SEK 19.8 billion, which is of course higher than what we expected, includes the SEK 500 million and, of course, the SEK 1 billion. Could you tell us, going into 2020 -- and I understand you're going to guide for that together with your Q4 numbers, but the SEK 500 million, are there any reason why any of that should spill into 2020? And if you don't want to comment on when the SEK 1 billion will fall off, do you think that a safe way for us to forecast is to keep the SEK 1 billion in and rather just take out the SEK 500 million for now? Or what's your view on that?

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Anders Karlsson, Swedbank AB (publ) - CFO [3]

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Thank you, Andreas. It's Anders here. You're right. Out of the SEK 500 million, the thing that I can see remains into the next year is the SEK 60 million that is VAT related. Other than that, it should fall off. When it comes to the investigation costs, it is extremely difficult to guide you on that one. And what we know is that there has been a massive amount of resources to go through; first of all, catch the 30 billion transactions that Jens talked about, then running them through the forensic process. And I would assume that, that work will not have to be repeated, but having said that, Andreas, at the same time, we have requests coming in from the American authorities that is very difficult to predict. And they always entail a certain amount of resources. So let me put it this way: We will come back to you if we have further information in Q4. It's extremely difficult to predict.

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

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Okay. So we keep the SEK 1 billion in, but the SEK 440 million, we'll basically take out.

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Anders Karlsson, Swedbank AB (publ) - CFO [5]

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The SEK 440 million, yes. If you want to keep the SEK 1 billion in there, it's really up to you.

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Operator [6]

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Okay. Our next question is over to the line of Magnus Andersson at ABG.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [7]

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Yes. With the cost question covered, I would like to ask you. Perhaps I missed something on capital there, but do you have any view on what kind of increased requirements you might get from the commercial real estate add-on and when we will know what that could be?

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Anders Karlsson, Swedbank AB (publ) - CFO [8]

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Thank you, Magnus. We are still in the midst of, I mean, trying to get more information from the Swedish FSA. And as far as we understand, it will be something that will be part of the SREP process next year, but we expect more clarity to come later in the year. So we will revert to you as soon as we have anything that we can talk about specifically.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [9]

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Okay, but you don't expect anything until the next SREP.

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Anders Karlsson, Swedbank AB (publ) - CFO [10]

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It will be part of the next SREP. And the process, the way it works, Magnus, is that the Swedish FSA expects you to take as much of future requirements into consideration as possible when you do the SREP, so it's a forward-looking exercise. And that will start in the beginning of next year, and it will end in September next year. So -- and it will be part of that.

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

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Okay. And then secondly, just on NII. How concerned are you about being -- still being below your back-book market share in terms of net new lending? Although it looked a bit better in the last month here. Can you say something about that and also the competitive pressure in the mortgage market?

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Anders Karlsson, Swedbank AB (publ) - CFO [12]

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I think, as we have -- to reiterate answers from before, Magnus, we -- obviously our ambition long term is to be in line with our back-book market share. As we have said, that the dynamics in the market have changed once again this year. And we have been cautious and we will continue to be cautious on price and origination standards for the short term at least.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [13]

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Well, I can say a few words on that as well. For me it's important that -- in this competitive market that we press what we are. We are a full-service bank. And that means that, when we meet the customer, it's not only about mortgages. It's about sort of -- it's about the app. It's about making people grow and their companies grow. So we see this is a full service, and I'm pretty optimistic on our possibilities in this area looking forward.

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Magnus Andersson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [14]

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Okay. And then finally, just on costs. You've had a significant ramp-up of capitalized IT investments since 2015. I think 2017 was kind of a record year, but you're still around that SEK 1 billion. When you look at AML-related costs now, it's primarily consultancy costs. And we know about SEK 1 billion. That could level off in 2020, '21, but will this also have an impact on any of your higher level of capitalized IT investments going forward and we'll see the impact obviously in terms of amortization later?

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Anders Karlsson, Swedbank AB (publ) - CFO [15]

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If you isolate the development costs for AML-related systems, it will not be of any significance because, having said that, Magnus, it's part of the overall development program that we are running. And we have, as you know, increased our development speed and our investments into developing new systems and processes. So I don't think you should isolate the AML issue. You should rather look at our increased investment spend in terms of development for the future.

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Operator [16]

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Our next question is over to the line of Sofie Peterzens at JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [17]

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Yes. Here is Sofie from JPMorgan. So my first question would be on the 30 billion of transactions that you are looking through. Can you just give us the amount or how much in Swedish krona or euros or dollars that these 30 billion of transactions amounted? So that will be my first question.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [18]

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Well, to be honest, I don't -- this is Jens here. I don't have that number, but I think it's very simple. You look at the bank's, what we've done through 2007 until 2017. Roughly they go through everything. And that means that we're looking -- we talked about 15 billion before, but that's just the Baltic business. We are also looking at the whole Swedish business during that time. And the idea is very simple: to look through and to see if we made any mistakes and to learn from those mistakes.

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Anders Karlsson, Swedbank AB (publ) - CFO [19]

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And Sofie, just to add to that. This is Anders. The first step is to ensure that we are covering all transactions that have been conducted. And as you understand, when we say that there is 30 billion transactions, the underlying number of in terms of volume is it is a ridiculous number. The next phase is to put analytics on it to see whether there are any of those that are of suspicious nature. Then it will become much less in terms -- so it's not giving you any value, as far as I can see, to talk about the underlying volume for 30 billion transactions.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay. And then in the kind of initiatives that you have done and that there is still ongoing out of these 30 billion of transactions, have you found any sanction breaches or anything that looks suspicious?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [21]

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Well, not to our knowledge, but this is an ongoing work. And if the investigators find something, they find something important, they immediately go to us, but the idea is to also now to focus on getting this internal investigation finished during Q1. But as I said, if they find something, they will call us immediately. If they find something of importance, they will immediately go to us.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [22]

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So just to clarify. So far, they haven't found anything, no sanction breaches, no suspicious activity, nothing.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [23]

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Well, I'm just -- you asked me a question on -- of know whether there was any sanction breaches. I answered that. Of course, they found some things they'd come to us, but your specific question was on sanction briefers -- breaches, sorry.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [24]

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And sanction breaches, you have not found anything.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [25]

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As I know now. I haven't been informed of any sanction breaches. Nobody has come told me. I'm not saying that it won't happen. I don't know. The internal investigation is ongoing.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [26]

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Okay. And then my last question would be on the outlook for the Baltics. One of your peers, they're saying this morning that they are seeing signs of a slowdown. How do you think about the operating environment in the Baltic region going forward, please?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [27]

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Well, I think we see signs of slower growth as well, but this is also a relative gain. And my key point in my introduction was that I would expect growth to be 1.5% to 2% higher in those 3 home markets rather on the Swedish home market. And I think there is a tendency to only talk about the problems in the Baltics. Let's not forget that these are 3 aspirational countries that we are very proud to work within and we have a strong market position and very innovative culture. So I have sort of a positive view on the Baltics looking ahead, but there is a weakness ongoing now, and that, you saw in the IMF [numbers]. Thank you, Sofie.

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Operator [28]

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Our next question is over to the line of Rickard Henze at Nordea Markets.

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Rickard Henze, Nordea Markets, Research Division - Senior Director [29]

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I'm thinking about not asking the AML question. And so firstly and in the details regarding items affecting and -- comparability, you have the line of -- I don't have it in front of me but SEK 100 million-plus of operational incidents. Can you just shed some light on what that is? That's first question.

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Anders Karlsson, Swedbank AB (publ) - CFO [30]

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Rickard, it's Anders. The operational incidents is a number of frauds...

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Rickard Henze, Nordea Markets, Research Division - Senior Director [31]

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In which geography?

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Anders Karlsson, Swedbank AB (publ) - CFO [32]

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In Sweden. We usually -- the way -- our reality is that there are attempts to fraud the bank every day in many different ways...

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Jens Henriksson, Swedbank AB (publ) - President & CEO [33]

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Every second and as we speak...

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Anders Karlsson, Swedbank AB (publ) - CFO [34]

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And we have managed most of the cases, in some cases succeed. In this case, that happened. So it's fraud related.

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Rickard Henze, Nordea Markets, Research Division - Senior Director [35]

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All right. And the second question is if you can give some more information about the Swedish mortgage margins and the market of that here. Are you seeing increased competition? What do you expect throughout the remaining part of the year and going into next year?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [36]

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Well, I can start off. Yes, we see increased competition, but I think it's important to remember that we are a full-service bank. We meet our customer and give them a full picture of that. And you also have to remember we've been there for 199 years. A few of our competitors out there, they have been there for a very short period. This goes up and down, but I think my -- sort of if I look ahead, I think we have a good possibility to keep very strong here. Anders, do you want to add anything?

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Anders Karlsson, Swedbank AB (publ) - CFO [37]

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No. It's nothing to add. What I said is the margins were stable in the quarter. Obviously, the competition is there. We continue to be prioritizing risk and price, and we will do that in the short term.

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Operator [38]

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Our next question is over to the line of Riccardo Rovere at Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [39]

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Maybe just one. I'm really curious to hear your opinion on whether the current level of rates...

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Operator [40]

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Sorry, Riccardo. I do apologize. We're finding it very difficult to hear you, as you're on a very poor line.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [41]

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Can you hear me? Can you hear me now? Is it better?

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Operator [42]

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Better. Sorry. Yes.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [43]

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Okay. Right, okay. No, I just wanted to have your opinion on whether the current level of rates, which are certainly denting the asset margins, could eventually also have at some point a positive impact on the issuance of medium, long-term funding, covered bonds, senior unsecured and so on. Do you think that at some point is going to be [visible]? Or do -- I just wanted to have some opinion from you on this topic.

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Anders Karlsson, Swedbank AB (publ) - CFO [44]

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Thank you, Riccardo. I think you've already seen the effects on our funding cost because we have been in negative territory for a fairly long time. The important question for us is the costs relative peers rather than the absolute level in the market. And there you have also seen in our latest issuance that the spread in the senior nonpreferred is about 10 basis point, which is a fairly low spread. And in all other funding sources we are in the same level as the peers.

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Operator [45]

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Okay. Our next question is over to the line of Jacob Kruse at Autonomous.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [46]

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Can I just first ask on costs, the current headwind, which I think is about SEK 900 million from FX and pensions? Just given where we stand today on the bigger pension deficit and, I guess, the weaker krona compared to the average for this year, what will that number look like if you did 12 months rolling from here on out? Or if we just say it's -- doesn't change your outward look a lot for 2020. And then my second question was just on the -- I guess, on the AML and the 132 initiatives that you have talked about. Are those -- how do they compare to the commentary that you received, so far, from the Swedish FSA? So are you well ahead of what they're asking for? Or it is broadly in line with what they want to do. And could you also comment on the Grimstad reports or the very big numbers of flows from these high-risk accounts, how we should look at that number?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [47]

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So thank you for that question, Jacob. So let me first start on the 132-point program or the 132 initiatives. They come from different sources. We have a database in the house; and that comes from, as I said, the internal investigation where Grimstad is one of those reports and also the sort of demands or questions from the FSA. I'm not going to divide the 132 projects and say who comes from who. Usually it comes from many sides, but we have a good process and I think that's something that the relevant authorities will see.

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Anders Karlsson, Swedbank AB (publ) - CFO [48]

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And thank you, Jacob. On the -- on your question on the pension and FX. It's actually at SEK 950 million with current FX rates. When it comes to the pension liability, the by far most important variables to look at is the long-term interest rates and the inflation expectations. And as you have seen during '19, the long-term interest rates have fallen quite dramatically, so we increased with SEK 300 million versus the initial situation in 2019. How the long-term interest rates will develop into 2020 is something I would not like to discuss here, but you have the sensitivity in the annual report when it comes to that. FX, as far as I'm concerned, although it's a drag on costs, it's a positive net-net for the bank. Having said that, most likely, pension costs for next year will as a consequence of this be higher.

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Jacob Max Kruse, Autonomous Research LLP - Partner, Scandinavian Banks [49]

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By how much, if you just take where we stand today?

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Anders Karlsson, Swedbank AB (publ) - CFO [50]

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I don't have that information, unfortunately. We need to close the year in order to be able to give you more information around that.

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Operator [51]

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Okay. Before going on to the next question, which is over to the line of Peter Kessiakoff at SEB, (Operator Instructions).

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Peter Kessiakoff, SEB, Research Division - Research Analyst [52]

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Yes.[My] First, one question on the question that we received -- or an update on the question that we received early on, on the mortgage market and that you're growing less than the natural market share. When I look at the developments for the savings banks, a lot of them are taking back mortgage volumes from your balance sheet onto their own, which clearly there's a drag on your growth in the mortgage market. Would you say that, that accounts for perhaps half of the market share losses that you're currently seeing? And could you say anything about whether you expect that to be a temporary effect or is that -- if you expect that to continue into 2020 as well?

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Anders Karlsson, Swedbank AB (publ) - CFO [53]

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Thanks, Peter, for your question. You're right. And if you look back in time, you can see that it has been a certain volatility in the volumes that the savings banks are putting into our balance sheet. It is to a certain extent connected to their capital and liquidity situation, so -- but you're perfectly correct that it's a drag on our sort of front book versus back book. Whether that will continue at the same pace or not is very difficult for me to say.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [54]

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But would you agree that, that probably removes roughly 1 percentage point of your mortgage -- annual mortgage growth at the moment? So roughly half of the market share losses that you're seeing.

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Anders Karlsson, Swedbank AB (publ) - CFO [55]

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You're in the right perimeter when you do that analysis.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [56]

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Okay. Then on the 132-point plan. How much -- I mean, is it possible to say roughly how much of -- how much are the costs related to various points? And given when you expect them to be fully concluded, is that a significant part of the AML costs that will be removed once these have been completed?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [57]

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Well, let me first say a few words about the 132-point action plan. As I showed in the slide, 71 of those will be closed as early as 31st of December this year. And then 60 will last in -- sorry. 61 will last into the next year, but Anders, you are the costs guy, so...

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Anders Karlsson, Swedbank AB (publ) - CFO [58]

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Yes, I'm the costs guy. (inaudible). No, but Peter, if you remember, although I was completely wrong in my forecast on Q1 on the investigation costs, I also told you that we will build up competencies, invest into processes and systems. And part of that SEK 1 billion, as I talked about at that point, was actually building run rates. So when Jens is talking about the 132-point program, it is very much about building competencies, improving processes. All of that is not entailing increased cost because some of it is actually automizing and digitalizing some of the manual processes we have today, for example, within KYC. So the blurry answer to you is no. A fair chunk of the investments that are going into the program will be part of our run rate going into next year.

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Jens Henriksson, Swedbank AB (publ) - President & CEO [59]

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And could I follow up on Anders there? Because I think this is -- sort of this answered correctly this is almost the last question. This shows you that, sort of AML, in many ways people have seen sort of KYC as -- in -- there's a Swedish expression that is -- I don't know if it's the U.S. expression as well. It's you throw in the [gist] in the dough at the very last. That's not the point. The point here is what we want to do is we take AML and KYC and put it in the customer meeting because, if you put all those questions first, I think that's a good way to start the customer discussion. So I see a lot of these things needs to be put in the genes of the banks. I also see quite a lot of possibilities to use digitization. And I will guess that one of the reasons why we've had AML issues is that we did not go automates this fully out. And I think there is starting costs, but when you get it right, I think this will be good for the business and good for the costs. So in the end, I will be a costs guy as well.

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Peter Kessiakoff, SEB, Research Division - Research Analyst [60]

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Okay. Then just a final question, I think. Anders, I think you mentioned relating to the SREP that AML impacts the capital planning of the bank or that the SREP reflects that, or your discussion with the FSA. Could you just elaborate a bit more on what you actually mean on that? What does it actually mean?

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Anders Karlsson, Swedbank AB (publ) - CFO [61]

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To give you a concrete example of what it means is that, if you remember where we were capital-wise in Q2, we were close to 100 basis points on the buffer. And we knew that we had a countercyclical buffer coming our way of 40 basis points. That is a situation where the capital is in the lower range for us under normal circumstances. Under these circumstances, it is in -- definitely in the lower range. Then you can do either of 2 things, and what we did was to change our dividend policy. That has been recognized by the Swedish FSA as a prudent action, and they will continue to follow us and ensuring that we are continuing to act prudently in the capital space. That is what I meant.

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Operator [62]

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Okay. So it looks as if we have another question over to the line of Adrian Cighi at RBC.

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Adrian Cighi, RBC Capital Markets, LLC, Research Division - Analyst [63]

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Two follow-up questions from my side, 1 on money laundering and 1 on capital planning. On the money laundering, have you mentioned which U.S. authorities are involved? Apologies if I missed it. Is the DOJ involved? And then secondly, on the capital planning, you also mentioned earlier that you might take as long as 5 years to complete the investigation of the U.S. authorities. How do you expect this to impact your dividend policy in the meantime? Do you stand by the policy outlined of plus 50%? Or do you feel the need -- that you might need to build a slightly higher buffer over these next few years?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [64]

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The first question is very simple answer: no. We have just used the word (inaudible) with -- so the U.S. authorities. And we have not talked about (inaudible). Anders, do you want to take...

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Anders Karlsson, Swedbank AB (publ) - CFO [65]

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Yes. On the second question, I think what -- if you remembered, what we also did in the second quarter was that we gave you a management buffer range, and that is for us to signal to you where we think that we need to be. And having a return on equity target of 15% remaining, I can assure you that we will not build extra capital that is not needed.

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Operator [66]

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Okay. As that was the final question for today, may I please pass the call back to you for any closing comments at this stage?

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Jens Henriksson, Swedbank AB (publ) - President & CEO [67]

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It's Jens here. I just want to say thank you for -- to everybody to -- attending.

And I'm -- let me just be very clear. I'm very proud to be the CEO of this bank. I see sort of great opportunities in the future, and I'm looking forward to working with you and being as open and transparent as we can be.

Thank you, everybody, and take good care. And have a good day.