Skandinaviska Enskilda Banken AB (publ)

Good day and thank you for standing by. Welcome to the SEB Financial Results Q2 2025 conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star one and one 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 Torgevi. Please go ahead.

Good morning and welcome to SEB's second quarter result presentation. As customary, you can follow the slides from our website. Starting with reflecting a bit about the macro situation, I think it's sometimes helpful to make the distinction between risk and uncertainty. The typical risk definition is something that is measurable, something that is tradable or insurable or hedgeable and you can monitor and you can have risks going up or down in one's portfolio or business engagement. Here I just show two classic risk measures that is the risk premium in the credit market here measured as the credit default swaps and also the stock market and its outlook for the future and both risk measures indicate that everything is actually quite benign. That feels a bit surprising to say as uncertainty which is the definition something that is not known not hedgeable or quantifiable is actually very close to record highs and here that represents by trade policy uncertainty index which is absolutely at the same level not seen since 1920s This is a quite unique situation where the financial markets over the last quarter have behaved very, very strongly whilst we see geopolitical risks, cyber risks, trade risks and other quite elevated. For SEB this means that the client base typically has a little bit of cautious stance. Despite financial metrics such as credit swaps and stock markets very encouraging, we still see there is a little bit of cautiousness in the system and not at least when it comes to consumption and investments. Going to the next page, we classify this quarter as a very solid financial performance quarter. Volumes grew in a broad-based fashion where we saw growth in lending, both corporate and retail, growth in deposits and also net sales positive for asset under management. In particular, we do highlight the contribution from corporate and investment banking that had a very strong recovery from a fairly slow April. and then really caught up during May and June also capturing a very high share of the flows and transactions executed in the market. Airplus is on track and we have this morning also announced a continuation of the pre-approved 10 billion kronor of share buyback from the FSA for 2025 and a continuation for the next quarter with 2.5 billion. Return on equity we note at 15%, cost income of 0.41, core equity ratio of 17.7 with a capital buffer of 290 basis points. A few noticeable events during the quarter on the next page, page 4, is first we continue our efforts in terms of being progressive around deploying new technology within the bank and not at least within the area of artificial intelligence. This quarter we announced in a consortium with several other companies an investment in a supercomputer from Nvidia. This is really to secure access to very strong capabilities for the long-term future in order to be able to use whatever comes our way when it comes to AI in the future in a secure manner. Also this quarter we had a few customer satisfaction scores not at least for interest rate derivatives FX and debt capital markets investment grade issuers all coming out with very strong results. Turning to page five we have the development of the credit portfolio and the loan growth. Here we can see that lending actually grew quite strongly in the second quarter both Q1Q and year on year. This is really breaking the most recent three or four quarters of a trend where we've seen a very stable sideline movement. A bit of caution is that we had a very strong catch-up effect after a very slow April which meant that there was a lot of events and event related financings that actually helped this number to increase. Those are short term in nature and not a guarantee for the future. in the other areas of the loan portfolio also grew, albeit at a more modest pace. With that, I'll hand over to Kristoffer for Airplus update.

Thank you, Johan. So turning to the next slide and a brief update on Airplus, as Johan just mentioned. There are three important drivers of the turnaround project within Airplus, all of which are progressing according to plan. Starting with the right sizing of the organization, we have now agreed with all FTEs expected to leave during the course of this year, impacting some 350 or so staff. And secondly, we have discontinued operations in all markets that we were planning to exit, which includes 28 non-core markets. And finally, Airplus has successfully during the quarter migrated away from its old technology platform onto the new cloud-based tech stack, which will also form now the foundation for SEB Kursh corporate business going forward. So with these three achievements, we're confident that we will meet the target of breakeven before restructuring charges in 2025. And we can enter into 2026 with a positive business momentum based on a strong product offering of the two combined entities, a market leading technology platform and a period of internal restructuring now largely behind us. Our target for 2026 is to be profitable, including implementation charges. Turning to the next slide and the financials, the total operating income for the second quarter of 19.6 billion is down marginally from the previous quarter. Net interest income is down sequentially by a moderate 1%, reflecting the continuous downward development of interest rates, which was partly offset by a broad-based increase in both loan and deposit volumes that Johan was referring to. Fees and commission income is flat compared to Q1, so following the soft start to the quarter during the month of April, May and June did develop favorably, resulting in a robust performance for the period as a whole. As Johan mentioned also, it's particularly pleasing to see that within corporate investment banking, we're able to capture a lot of the business opportunities that did materialize in the period. Net financial income declined by 10% from the previous quarter despite I would say considerably more challenging market backdrop and that's particularly of course in the beginning of the second quarter. Operating expenses declined by 3% resulting in a profit before expected credit losses and imposed levies of 11.6 billion that's effectively in line with the previous quarter. Taking into account the exchange rate movements year to date we are as usual providing an FX adjusted cost target and the FX adjusted cost target for 2025 is 32.7 billion. That's a reduction from the 33 billion which is now reflecting the stronger krona. We also maintain the range of plus minus 300 million and we feel comfortable with that cost target for the full year 2025. As we have mentioned in recent quarters, following a period of investments, we are now entering into a phase of cost consolidation, and we have stated that we expect underlying cost growth this year to decline from previous years, and that is also reflected in the target for the full year. We also see the opportunity to leverage new technology, not least AI, as a driver of productivity, which we did explore in some more detail in the previous quarter. So as part of this consolidation and to ensure that we do fully leverage the investments that we've undertaken thus far, we have introduced a pause on external hiring, of course, with the exception of critical positions. So this is a pause. So by definition, it is temporary. We will evaluate the impact as we proceed. Net ECL expected credit losses amounted just under 300 million for the quarter. This is the decline from the previous quarter and corresponds to a four basis point ECL level. Within that net ECL figure we have increased our portfolio overlays by around 400 million and that is primarily to reflect the uncertainties related to the impact of the trade tariffs and what Johan mentioned in his introduction. That said, our overall asset quality remained stable in the quarter. As we mentioned in previous quarters imposed levies are expected to decline during the course of this year starting now in the second quarter and this is primarily related to the solidarity contribution in Lithuania. For the full year we estimated imposed levies of around 3.5 billion that's a small upward adjustment from the 3.4 we stated in Q1 and we should expect a total levy for next year of a similar magnitude as this year. A tax rate of 20.6, very much in line with our expected 21% tax rate, a net profit of 8.2 billion, up 5% from the previous quarter and return on equity of 15% with a common equity one ratio of 17.7. So flipping to the next slide, we look at the development of the net interest income and we can see that the negative impact from FX, which is around 100 million, was largely offset by the positive day effect, which is the same order of magnitude. Market rates during the quarter have tracked largely in line with policy rates, so there's been no sort of meaningful repricing effects that we saw previous quarters when market rates were tracking ahead of policy rates. Looking at the development across the divisions, corporate investment banking had a positive impact in the quarter from higher lending volumes, as we mentioned, but also an elevated NII from our investor services business side. This is linked to the dividend season. This positive effect from volumes and investor services was largely offset by a lower NII contribution from the markets activity. So markets NII is now back to a more normalized level. So the sequential decline of about 200 million compared to the previous quarter for the division is effectively the result of an internal funds transfer pricing, the IFTP effect that we mentioned previously and is fully balanced out by a positive effect in the Treasury and AI. Within business and retail banking the decline in the quarter is reflecting the impact from lower rates on deposit margins with here also an offsetting effect of better volumes. primarily on deposits where inflows have been higher than is normal for the second quarter season. We've also continued to experience pressure on mortgage margins in the quarter although there were some stability and signs of improvement towards the end of the quarter. The Baltic NII reflects the lower ECB rates in the quarter partly also here offset by higher volumes both loans and deposits not least in retail mortgages where we have in the quarter originated a record volume of mortgages. So broadly, long growth remains healthy and competition remains stiff. Finally, in treasury, we see the positive effect of the IFTP that I mentioned within CIB and also some benefits from lower funding costs. Looking forward, we continue to expect our NII to bottom out some three to six months after the latest rate cut, as we've previously mentioned. And based on current market rates, this is a little bit further out than what we said at the end of the previous quarter. This is, of course, always a function of where market rates stand, but also bearing in mind that the offsetting effects of volume growth, both loans and deposits that we saw in this quarter, should help mitigate the negative impact of future rate cuts. Moving to the next slide and the development of the net fee and commission income. As Johan also mentioned, corporate investment banking performed very well in the quarter supporting fee income, both related to advisory and lending fees. And the latter primarily driven by structured finance and a lot of event driven corporate loans. Investor services benefited from the higher activity as I mentioned in the dividend season also reflected in fees and commissions and overall it is just pleasing to see that we have maintained or even expanded our market shares across the CIB franchise. So now we're heading into Q3 with all the summer months that typically means somewhat lower activity across capital markets although we do feel that we are very well placed to capture opportunities when they arise. The income from asset management and custody was actually negatively affected by the asset levels in the quarter. So even if equity markets started and ended the quarter pretty much in the same place, our asset related fees are calculated on a daily basis. So therefore, the headwind in the quarter. Net new assets, as Johan also mentioned, mounted to 30 billion in the quarter, which is pleasing to see, of course, in a volatile quarter that we continue to see solid inflows. We are continuously bringing new products. to the market, and we've also continued to show good performance across our investment management products. Turning to payments, the increase in payments and card fees is, of course, impacted still by the consolation of Air+. So the underlying growth rate there is closer to 4%. And the decline sequentially from Q1 is broadly reflecting the weaker start to the quarter and the impact more broadly on spending and travel from the macroeconomic situation. If we turn to the next slide and net financial income for the quarter, the NFI declined from the previous quarter and this is reflecting a lower contribution at least from fixed income following a very strong Q1. We should also recall of course that the start of the quarter as we mentioned was characterized by this wait and see mode among a lot of our customers and then activities picked up gradually throughout the quarter. So overall a commendable performance against a challenging backdrop. We should also mention the NFI supported by some valuation gains of our strategic holdings and that's primarily our holding in Euroclear where we also received a dividend this quarter. The XVA on the other hand went the other way and we can just note that the 16 quarter average has now nudged up marginally to around 2.5 billion per quarter. Turning to the next slide we would like to provide you with a bit of an update of our expectations for future regulatory effects on our capital buffer and I would like to start with the IRB repair program. So as disclosed in our communication from this morning we have received feedback in relation to the IRB repair program in our Baltic banks. Based on this feedback, we estimate that we will have a transitory increase in REA of about 50 billion sec, translating into a capital impact of some 80 to 90 basis points of CET1 buffer on group level. This transitory increase will remain in place until our models in the Baltics are approved. It is difficult to estimate when this will happen, but it is likely to be a number of years. The dialogue with ECB is ongoing and we expect to recognize this effect gradually in our capital calculations, starting somewhere towards the end of this year or beginning of 2026. And we see this effect being absorbed by the management buffer. As you know, we already hold a Pillar 2 add-on of around 100 basis points related to ongoing IRB work since 2023. We expect this add-on to stay in place and to be removed once all our models have been approved. And as stated in the communication, the outcome of the updated IRB models in terms of impact on RIA will be subject to regulatory approval. Turning to Basel IV, an update there. The day one effect, of course, has come and gone, as you know, with an impact broadly as expected. We can also note that the EU implementation of FRTB, the fundamental review of the trading book, has been postponed once again, now until 2027. So the remaining impact of Basel IV is related to the facing in of the new standardized method and the output floors. This is sequenced into two steps. So first we have the impact of the output floors being phased in by 2030. And then secondly, we'll have the expiry of the transitional agreements and arrangements in 2033. So for us, with a high proportion of large corporate clients with investment grade characteristics, It is really the expiry of the transitional arrangements and more specifically within that the treatment of unrated corporates that is the most relevant development. We are nonetheless confident that we will be able to largely mitigate this impact by extending the rating universe of our corporate portfolio. And we believe that we can do this at a very manageable cost to the group. Now, bearing in mind this is eight years out, there can of course be changes along the way, but we are prepared and we plan for what is currently on the table. If we turn to the next slide, we look at the development of our CET1 buffer during the quarter. We started the quarter at 280 basis points and closed at 290. retained earnings contributed just over 40 basis points and here you can see the impact on rea from the pickup in loan demand that we referred to a couple of times throughout the presentation and you see the increase of our balance sheet consuming about 27 basis points of ct1 asset quality and fx effects in the quarter were only modest Turning to the next slide and we'll have a look at our asset quality and balance sheet metrics, a familiar slide. We've remained active in funding markets throughout the quarter and we ended with a robust funding and liquidity position. An LCR liquidity ratio at 130% and the net stable funding ratio at 112. CET1 buffer as mentioned ending the quarter at 290 basis points. A final slide before I hand the word back to Johan. Just going through a brief reiteration of our financial targets. We continue to target a dividend pay ratio of 50%, a CET1 buffer range of 100 to 300 basis points above the regulatory minimum and a return on equity competitive with peers and an aspiration of 15% over the cycle.