Skandinaviska Enskilda Banken AB (publ)

Good day and thank you for standing by. Welcome to the SEB Q2 Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Johan Targeby, President and CEO. Please go ahead, sir.

Thank you very much and good morning to everyone for the second quarter results from SEB. And as always, you can follow the slides that we are referring to on our website. Starting with the highlights for the second quarter, we saw improved business momentum in several areas of the bank including positive net flows in asset management and that was also broad-based across divisions. We clearly saw a higher activity level within the investment bank and also signs of improving credit demand and I'll come back to this with some data points in a minute. Return on equity improved to 17.6%, and our capital buffer remained at a solid level at 430 basis points over the regulatory minimum requirement. And we have, together with the board, decided to increase the quarterly share buyback program now to 2.5 billion in the next period, resulting in an annual pace of 10 billion kroner per annum. Clicking to the next page just to give a few data points on the improved business momentum. So first on the net flows in asset management, after some time of muted numbers, we clearly have seen a gradual improvement with a very strong Q2. This has been predominantly driven by private wealth management and family offices, but it's also broad-based where CNPC, retail funds, etc., all experienced a positive development. Hopefully, and I say hopefully, this is a sign of the efforts that we have put in over the last couple of years in order to improve this very strategically important area for the bank. The investment bank has of course enjoyed a little bit of uptake because of expectations of falling interest rates and a fairly muted couple of years in terms of strategic and transformational transaction amongst our client base. This quarter we noted a recovery from very low volumes last year resulting in a 44% uptake in operating income for the investment bank. Pipeline remains strong. and continues to build. However, as always, very difficult to predict how this and when this will convert into real business. On the lending side, there have been some positive signs. First, on mortgages and particularly with mortgage commitments that are up 12% year-on-year in the second quarter. And of course, positively driven by recovery of economic activity and also a quite dramatic shift over the last four or five months in terms of house price expectations amongst the population. Also on the corporate side, particularly on SME and mid-corp, both in the Baltics and in Sweden, there has been a marginal shift to more positive lending volumes. However, this has not been recorded for the large corp portfolio yet. Flicking to the next page, not too much to say, but looking at the second quarter, this is all about leading indicators and early signs of a different activity level that I've been talking about. But in the second quarter, all in all, we saw a sideline movement on lending and credit portfolio exposure during this quarter. And just as a final reminder, all these signs are, of course, very early stage. It's still very fragile. Uncertainty is still around. but at least the hypothesis of NII having some headwind, and that should come from lower rates, which also means higher activity in the economy, which would benefit the fee and commission line. We talked about this in the last quarter. It seems to still be intact, albeit early days. With that, I'd like to hand over to Masi.

Thank you, Juan, and good morning, everyone. On slide six, we look at the year-to-date numbers. And as you can see on this slide, income is up by almost $2 billion year-to-date compared to the first half of last year. And with expenses up just over $1 billion, this means that the profit before expected credit losses imposed levies is up by 3%. And with continued very low expected losses and some increase in imposed levies, The operating profit is up 2% so far this year, but as the income tax expense was elevated in Q1, the net profit is marginally down. Return on equity is 17.3% so far this year, and expected credit losses at one basis point. If we move to the next slide, slide number seven, and look at the Q2 numbers, you can see that income is marginally down. But it is the fifth quarter in a row where we record income of about $20 billion. Next, just income comes down. We'll come back to that later on. Just another couple of comments here on net expected credit losses. As you can see, very low levels of $44 million. As always, we have a few sort of new reserves for some exposures, as we always do. But this quarter, that has been offset by macro updates by our economists, leading to a more positive outlook on the macro the next 12 months, which has led to some reserve releases, as well as some reduction of the portfolio overlays in the quarter. At the same time, portfolio overlays still stand as a healthy $2 billion going forward. And if the continued positive development of macro still stands, then you should see a continued gradual reduction of the portfolio overlays. However, it's difficult to say the timing and magnitude of those potential releases. On imposed levies, it did peak in Q1 and it's coming down now, and it should continue to come down in the coming quarters. and we expect imposed levies to be just below $2 billion in total the second half of 2024. On slide 8, you can see the operating leverage slide. As you can see, so far this year, income is marginally up compared to 2023 on average on a quarterly level, and with expenses marginally up as well, the profits before credit losses and imposed levies is largely flat. However, obviously, in the very long term, we've seen very good development here. Move to slide 9 and look at net interest income. So up 1% first half of this year compared to first half of last year, but it's down marginally in Q2 versus Q1. We've seen some positive FX effects, as the Swedish one on average in the quarter was weaker compared to especially the euro. and we've seen some tailwinds on the funding side. At the same time, mainly because of the rate cuts in May in Sweden, we've seen some margin pressure on deposit margins, especially within the corporate and private customers division, and continued margin pressure on the mortgage side, which quarter on quarter has led to slightly lower mortgage margins. In the other division, so LSNSI and the Baltics, the net interest income is largely flat, We see some positive effects in the Baltics coming from FX, and there is a one-off there that is offset by a negative effect in Treasury. So together, that's pretty much neutral. We've said previously that net interest income should slowly drift downwards, assuming no rate cuts, and that's been based on the fact that we've seen poor volume support and migration to savings accounts with higher yields. We now see that we do see some volume support now as we see some lending growth, especially some deposit growth, and we see no further migration to savings accounts with high yields at this point. So had we not had any rate cuts, that slow drift downwards would probably not happen going forward, but obviously with expectation of rate cuts, there will be pressure on net interest income in the coming quarters. Let's move to slide number 10 and look at the net fee and commission income, which is up 7% year-to-date. Here in the quarter, we see positive developments across the board, mainly coming from asset management. We've seen a value increase of $36 billion in the quarter when it comes to asset management, but more importantly, we've seen $63 billion increase. of inflows, and as Johan said before, most of this is coming from private wealth management and family offices, but we also see positive inflows within CNPC as well as the Baltics, and we can see that the monthly savings within CNPC are now increasing for the first time in two years. We do see a positive development within advisory fees, mainly related to investment banking, as well as lending fees. and payment and card fees continue to move in a positive direction. So all in all, a good development when it comes to fee and commission income. We move to slide number 11 and look at the net financial income development. We record an NSI number of $2.7 billion in the quarter. We've seen very healthy activity in the underlying business, especially within LC&SI and especially within fixed income. but we do see solid momentum within FX and commodities as well. We've seen a more negative valuation effect on this line this quarter compared to previous quarters, and that is mainly related to the developments in June with the elections in France leading to some spread widening, and this had a negative effect on the XDA as well as the liquidity portfolio in Treasury. As you can see now, with this quarter, the average level for the last four years is 2.4 billion per quarter, and this continues to be the best guidance we can give when it comes to this slide going forward, so the average of the last four years. If we move to slide 12 and look at the capital development, so the capital buffer is up 10 basis points this quarter compared to Q1. We've continued to see good profit generation, adding 51 basis points after reserving half of the profit for dividend. We've deducted $5 billion from the capital base because that's the level of the mandate we have from the FSA to do share buybacks for, despite the fact that we're executing on half of that during Q3. And then we have some positive effects coming from FX. So all in all, capital levels are pretty stable despite the fact that we've deducted $5 billion for share buybacks. And then this quarter we have a couple of more thematic slides on equity and capital. I'm going to start on slide number 13 looking at the pension scheme surplus we have seen improve over the last few years. This is part of the equity base of the bank. It's the development when it comes to the pension scheme Assets minus liabilities is reported under other comprehensive income. As you can see, mainly 2021, we saw very positive development here. As the values on the asset side increased and as interest rates went up, the market value of the liabilities came down significantly, leading to a large increase in the surplus we report here. Today, we have about $30 billion of the equity base that is within the surplus, within the pension scheme, which on a reported level means that return on equity is much lower compared to in a case where we wouldn't have this surplus. Most of this surplus is not included in the common equity of one capital. About two-thirds isn't included in that surplus. So at this point in time, we have a large surplus here, and assuming that equity values continue to be stable or grow up and interest rates stay where they are, this surplus will stay where it is. Over time, we are able to make compensations from the pension scheme into the parent bank. We can do that up to about $3 billion on an annual basis, and if we do that, it means that the C to 1 ratio of the bank will improve by an equal amount, so up to 3 billion. And then obviously if that is distributed to shareholders, it means that over time that will have a positive effect on the return on equity. So we just wanted to highlight that there is maybe to some extent hidden value in the bank with this big surplus we have in the pension scheme. that over time would lead to a stronger capital generation for the bank and improvement of the return on equity. And then if we move to slide 14, a bit more focus on the capital. Obviously, as you know, we report a strong C to 1 ratio of 19% in the quarter, which stood at 19.1% at year end. This CET1 ratio is calculated based on the requirements we have in Sweden when it comes to risk rate floors and other types of requirements we have been used to working with. Here we are trying to explain how this CET1 ratio would have looked had we been on the same average regulation as an average European bank. So if you remove, for example, the risk-weight floor on commercial real estate, on residential real estate, and on mortgages, then that CET1 ratio would be five percentage points higher. And then more importantly, had we had the same level of conservatism as an average European bank when it comes to calculating our probability of default ratios in our IRB models, then you would see an additional improvement of 600 basis points when it comes to RCT1 ratio. And a bit more focus on that sort of conservatism in the IRB models. On the right-hand side of the slide, you can see our probability of default ratios for different intervals and comparing that to the actual losses for those exposures over the last five years. For example, if you look at the interval until 0.15% in terms of PED, we have an average PED ratio for that interval that is six times the observed defaults we've had over the last five years. Whereas for the other Swedish banks on average and for European banks, that is actually the observed defaults are actually higher than the PED ratios they use. And if you look at this slide in totality, you can see that on average, we have been very conservative in calibrating the input variables in our IRB models. And based on that, if you move to the next slide, here we're trying to show you the total effect of the regulatory changes we can foresee for the next, let's say, 12 to 24 months. On the 1st of January, 2025, we will have the introduction of Basel IV, where we estimate a day one effect of around minus 50 basis points. This is mainly due to the fact that we will move into a non-risk-based model for operational risk compared to the risk-based model we use today, which will have a negative effect. Then, at some point in time, we will have updated IRB models that will have been approved by the FSA, And given what we calibrate in those models and given what you saw on the previous slide with the conservatism we have today in our models, we expect the net effect of these model approvals to be around zero. Today, we have a capital add-on in Pillar 2 as these models haven't been approved yet. And obviously, when they are approved, this capital add-on of around 100 basis points will be removed. And then post-2025, there will be other implementation of Basel IV, including FRTB, if that comes into force, that we think will be neutral to marginally negative. So if you take all of these changes we can foresee in totality, we expect it to be largely neutral. Obviously, there are some uncertainties here, both when it comes to updated IRB models, as well as the further implementation of Basel IV, especially related to the fundamental review of the trading book. But nevertheless, this is the best estimate we can do today in terms of the regulatory effects on capital in the next couple of years. Final slide, slide 16, or second to final slide, just a few key ratios. We've seen a good deposit development in the bank, especially in Q2. Some of that is seasonality. But it seems to be an underlying better development when it comes to deposits, especially for non-financial corporates. We have stable liquidity ratios with a stable funding ratio at 112%. We've done about two-thirds or 70% of the funding needs for the full year already in the first half of the year. And the capital ratios, as we've discussed, are pretty stable as well. Then, finally, growth financial targets. 50% dividend payout ratio of EPS, capital buffer of 100 to 300 basis points. We're still committed to reaching that interval by year-end this year, and we want to have a return on equity that's competitive with peers with a long-term aspiration of 15%. That's it, and we can open up for questions.