Swedbank AB (publ)

presentation. My name is Annie Ho from Investor Relations, and with me in the room today is Jens Henriksson, our CEO, and Rolf Marquardt, our CRO. Anders Karlsson, our CFO, has a bad cold today, so he is joining us online. Let's start, as per usual, with our presentation and then follow up with Q&As. With that, I hand over to you, Jens.

Thank you, Annie. In a time of war, uncertainty and green transition, Swedbank stands strong. Our business is stable and profitable. We contribute to growth and financial stability. We are a reliable partner. With uncertainty, the global economy remains resilient. According to the IMF's World Economic Outlook, the global economy is expected to recover slowly after the recent year's crisis. To restore price stability, rates will stay high for longer. In Sweden and Estonia, household consumption has decreased and growth has slowed down faster. Lithuania and Latvia have done slightly better. Inflation has slowed down but remains too high in all our four home markets. In these uncertain times, Swedbank once again delivers a stable profit of 9.1 billion kronor, with a return on equity of 19.3%. In a highly competitive market, our lending margins on mortgages continue to decrease. At the same time, our net interest margin increased. net commission income increased and expenses decreased on a seasonal basis and the cost to income ratio improved to 0.30. Our credit quality is solid and we are confident in our conservative and thorough lending process. customers seek the bank's expertise and take actions in response to the current environment. Our exposure to everything property-related is in line with the bank's strategy and risk appetite. Total credit impairments were 350 million kroner during the quarter due to a worsened macroeconomic outlook, stage migrations and recoveries. Our post-model adjustment over and above what the models show now amounts to 1.5 billion kronor. The capital buffer is 370 basis points above the requirements from the Swedish FSA. Swedbank has a strong liquidity position and we have continued to take advantage on our strong position in the funding markets. I'm proud to say that we were the first Nordic bank to issue a social bond. Our corporate business develops well. We are focusing on profitable engagements while maintaining low credit risk. In Sweden, overall lending was stable. In Baltic banking, it increased in line with our ambition of Swedbank 1525. and loans for the green transition to renewable energy are performing strongly. We want to have the best full service offering for our customers and improve our leading position on mortgages in all our home markets. The Swedish housing markets continue to be slow and prices fell slightly. In the Baltic markets, real wages have increased and the mortgage portfolio grew. Our green mortgages for sustainable housing in Estonia and Latvia are very popular. A higher cost of living is leading to lower deposits. In Sweden, we raised rates for all private customers. Monthly fund savings are stable, as is Ruber's position as the leading fund company. In Estonia, Latvia and Lithuania, we foster a culture of long-term savings with a favorable interest rate on our e-savings account EasySaver that also has unlimited withdrawals. Our customer promise is to make our customers' financial lives easier. And we are seeing high demand for support and advice on both the private and corporate sides. And we are investing to be even better. And the number of visits to our digital service Financial Health remains at a good level. Of the more than 2 million phone conversations with customers handled by the bank every quarter, over 40% are now processed through a new cloud-based communication platform, which has rolled out in Estonia, Latvia and Lithuania. And within a month or so, it will be Swedish banking's turn. At the same time, we are starting a new customer center in Unio. We are now streamlining our organization with a focus on improved availability for all our customer segments, all in line with our plan to deliver a sustainable return on equity of 15% in 2025 and onwards. To increase availability and customer satisfaction, we plan to establish a new business area for premium and private banking customers and transfer all corporate customers which have a dedicated advisor to the corporate and institutions business area. We work hard to improve availability for all customers in all channels. With that, I give the floor over to you, Anders, and I hope that you are better and can keep your voice when you go in more detail through the numbers. Anders, the floor is yours.

Thank you, Jens. And first, I do apologize for my voice. Profitability at Swedbank continues to be strong. We report a return on equity of 19% and a stable earnings per share quarter on quarter. Let's go through the financials in more detail, beginning with lending and deposits. The total loan portfolio increased by 12 billion, excluding a negative FX impact of 6 billion. Total private lending in Sweden was broadly stable, Overall trends remain the same, with limited new mortgage market volumes, net negative flows from the savings banks, and elevated levels of extra amortizations. Total corporate lending in Sweden increased by 1 billion, excluding a negative FX effect of 1 billion. In Baltic banking, both private and corporate lending increased by 3 billion and 9 billion respectively, excluding FX. Customer deposits decreased by 12 billion, excluding a negative FX impact of 8 billion. Private deposit decreased both in Swedish banking and Baltic banking, by 6 and 1 billion respectively, excluding FX. Migrations into term deposits continue, particularly in Baltic banking, albeit at a slower pace. In Sweden, the reduction in deposits was driven by continued higher household and interest expenses. Corporate deposits in Sweden decreased by 3 billion, mostly in transaction accounts. And corporate deposits in Baltic banking decreased by 2 billion, excluding FX. Turning to the revenue lines, beginning with net interest income, which increased 133 million quarter-on-quarter, mainly driven by Baltic banking in terms of increased deposit margins and lending volumes. Slightly higher lending margins in CNI, Daycount and FX. The increase was partially offset by higher funding costs from continued migrations in the deposit base, although at a slower pace. and proactive wholesale funding within treasury. Year to date, NII has increased by 69% compared to the same period 2022. In terms of outlook, our macro research team forecast that the ECB will hold rates at current levels and they forecast potentially one more rate hike from the Riksbank before stabilizing into next year. With market rates likely to be high for longer, thus NII levels are now structurally higher. We will continue with our proven pricing strategy where we strive to strike a balance between volumes and margins for lending and deposits subject to origination standards, market rates, market growth and competition. Over to net commission income, which increased by 51 million. Card commissions and payments were stable, Asset management benefited from global stock market performance as well as FX and day count. And securities and corporate finance were seasonally lower. Turning to net gains and losses, which was higher. Six income and FX sales and trading performed well on the back of high client activity. while positive revaluations from funding-related swaps offset negative valuation effects from CVA and DVA. Other income decreased by 60 million. Higher income from the savings banks was offset by lower net insurance valuations, higher claims in the Baltic Banking P&C business and slightly lower income from Entecard. Total expenses came to 5.6 billion. Underlying costs are developing according to plan. Quarter on quarter cost decreased mainly due to lower business consultancy, and marketing costs over the summer, and the cost-income ratio ended at 0.3. Regarding costs going forward, we have talked about how inflation is lingering for longer than previously expected, and that large vendor contracts are up for renegotiation. While this implies that interest rates will likely stay high for longer, it means that the cost headwind we face is prolonged. So this year we assess that it will be around 1.5 billion. Now over to you, Rolf, to talk about asset quality and credit impairments.

Thank you, Anders. When looking at asset quality, we conclude that the situation in the third quarter is very similar to what we saw in the second quarter. Most of our customers show resilience and have good margins despite the impact from inflation and interest rates. Consumption levels have been holding up well. Unemployment rates are stable, and most industries have had a sound development, although partly impacted by the economic slowdown. But we also note the implications for some customers and sectors, like retail, construction and property management. In Sweden, past-year loans increased somewhat, but were still at low levels. In the Baltic countries, levels were stable. Non-performing foreborn exposures were unchanged. The volume of Stage 3 loans increased only slightly, with 300 million. When looking at credit impairments for the third quarter, they ended at 347 million. The updated macro forecast increased provisions by 201 million. Credit migrations and state transfers in total added 831 million. This is mainly explained by a few single exposures in various unrelated sectors, where 208 million was related to property management, 166 million to information and communication, 114 million to construction, and 104 to manufacturing. The migrations were partly offset by a release of 158 million from the Post Model Adjustment, out of which 71 million in the oil and offshore sector and 50 million in property management. This is in line with the intention behind the Post Model Adjustment to cater for potential credit migrations that are not completely captured by our models. The remaining post-model adjustment is now 1.5 billion. Individual assessments ended at a recovery of 265 million. This is explained by a few single cases and a recovery in our oil and offshore exit portfolio. Other factors reduced impairments by 263 million. This is mainly explained by amortizations on lending with higher than average risk. The Swedish property management sector continues to adapt to changing conditions and have, considering the circumstances, had a stable development. The debt service tolerance ratio, the break-even interest rate, increased to 7.8% for the 20 largest customers based on reported Q2 figures. Interest coverage ratios declined to 2.9 on average for the 20 largest customers. When stressing these exposures with an interest rate of 7% on the debt that is maturing over the next 12 months, the average interest coverage ratio goes down to 2.2. No company among the 20 largest ones is below 1%. Against this background, we are comfortable with our asset quality. Now back to you, Anders, and some words on capital.

Thank you, Rolf. Turning to capital. Our capital position continues to be strong with a CETI-1 capital ratio of 18.7%. and a buffer to the requirement of around 370 basis points. The capital target range of 100 to 300 basis points remains. With regards to our capital requirements, there have been quite a few changes due to the SREP. However, the effect on our capital position was limited. In addition, there was the move of the commercial real estate risk rate floors from P2R into P1 risk exposure amounts. Going forward, we expect some REIA inflation from the IRB model approval process exceeding our current Article 3 add-ons. The SFSA's Pillar 2R add-on of 100 basis points, which mainly relates to Swedish mortgages, will be released when those models are approved. Looking through this process, our best estimate is that the excess capital of 300 basis points that we mentioned at the investor day still stands. I now hand over to you Jens to conclude.

Thank you, Anders, and your voice lasted. Our vision is a financially sound and sustainable society. At Swedbank, we are proud to be a part of the green transition and fight climate change, actions that benefit both our business and the planet. Financial literacy is one key, and in Sweden we are establishing the Institute for Financial Health, where we will bring together everyone in the bank who works with societal engagement and financial literacy. In this way, we can reach out on an even broader basis, all in line with our 200-year savings bank tradition. Now, let me summarize our quarter. We are once again delivering a result of 9.1 billion kronor. Our return on equity was 19.3%. our cost-to-income ratio improved to 0.30, our credit quality is solid, and we are confident in our diligent and conservative credit origination standard. A sustainable bank is a profitable bank that delivers dividend to our owners and contributes to a stronger society while focusing on our customers' future. Thank you all for listening. And with that, I give the floor back to you, Annie.

Thank you very much. Great. Shall we start the Q&A session? Before I hand over to the operator, I'll just remind everybody that please stick to two questions per turn. Operator, over to you. Thanks.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. First question from Jacob Helflebich, SEB. Please go ahead.

Good morning everyone. First on the decrease in retail deposits in Sweden. I was just wondering if you could comment anything on where the flows have been. Is it for consumption or have you seen increased flows to the niche banks which offer slightly higher deposit rates?

Well, let me take that question. We do not see any movements to other banks. What we see is that people have tight economic times. And what we see is the transaction accounts, they're lower because people are paying for interest rates and food. What we're seeing is, and Anders pointed that out in his introduction, is we're seeing a movement from ordinary savings account to fixed-term savings account. And that has continued during the quarter.

All right, that's very clear. And then my second question is just on your new cloud-based communication platform, which you mentioned. Will that also help to maintain cost under control in 2024, or is it pure customer experience gain?

Well, Anders, costs, that's your business.

Yes. The aim with this is that you should be able to communicate with the banks through all channels that we provide. That means that we can utilize our resources better. The first priority, however, for us is to get the waiting times down, and then we see if there are efficiencies further down the road.

All right, thank you so much.

The next question from Magnus Andersson, ABG. Please go ahead.

Yes, good morning. Just starting with NII, which was plus quarter and quarter, we do note that it's down 4% quarter and quarter in Swedish banking. So I was just wondering whether there are – how we should think about the trajectory from here and whether there are any – tailwinds or anything else we should be aware of looking into Q4 in addition to the list price hike you did late September. Related to that, I also note that when I look at your funding, you mentioned proactive wholesale funding there, Anders, and we can see that the level of senior non-preferred liabilities increased quite significantly quarter on quarter, whether there are some funding cost effects in here as well whether that's been allocated and how you think that will will progress okay thank you magnus can you hear me first of all yes good

If we start off with Swedish banking, as you rightly point out, we did a rate hike in the beginning of this quarter where you have an immediate negative effect from the deposit rates that we hiked while it's gradually rolling in on the asset side. So looking forward, I would say that... the repricing of deposits and lending should be NII neutral. Then we have seen deposit outflows, and we have seen migrations to more expensive deposit accounts. So that's sort of the reason why you see a weakness, a weak and prime reasons for seeing a weakness in Swedish banking. When it comes to your question around proactive wholesale funding, we have done that for two reasons. The first one is that we have front-loaded some of the covered bond issuance when there have been good opportunities in a very volatile market, and we foresee that that volatility will continue. Secondly, as you saw in the SREP, the changes in the capital requirements stack that the Swedish FSA decided upon increased our demand or need for senior non-preferred, which we issued at the end of August, beginning of September. And you are correct. That's more costly funding that will come into Q4 with full effect. So that's my answers to your questions, Magnus.

Okay. And my second one just on Should we read anything into the cost beat, or is it just that you are back to the old normal seasonal pattern you used to have before the last couple of years?

I would say that we are back to the old seasonal patterns.

Okay. Thank you very much.

The next question from Sophie Patterson, JP Morgan. Please go ahead.

Yeah, hi. Here is Sophie from JP Morgan. I was just wondering how we should think about net interest income going forward. You mentioned in the previous question that repricing of deposits and lending should be NII-neutral. If you have stable rates going forward, should we assume that your net interest income starts to decline partially because if you continue to see deposit declines and also deposit migration? So if you could just talk about the moving parts in the net interest income outlook going forward. And then my second question would be on the cost of risk outlook. We saw quite a large increase in underlying loan losses from negative rating migration, but you still have 1.5 billion of both model adjustments. For 2024 and 2025, should we expect these 1.5 billion of both model adjustments to be released? And how do you see the negative rating migrations going forward? So if you could just comment a bit on your thoughts here. Thank you.

Thank you, Sophie. I think you have the tools and you do know the moving parts when it comes to NII development going forward. The cost with volumes is one, obviously. Excuse me, Sophie. But again, I want to reiterate what we have been saying for some time now. The higher the rates go, the more difficult During the period of the rate hikes, we have successfully applied our pricing strategy. We have acted fast and consistent, and thus NII has increased 69% year-to-date compared to 2022. And as I also said in my introduction, we are now at a higher structural NII level. And we will continue with our proven pricing strategy, taking market environment into account. I think that is important to reiterate that. Then there are a number of tailwinds and some headwinds. You saw that lending growth in Baltics came in late in the quarter. ECB rate increases came into effect late in this quarter, so about half of the lending book in Baltic Banking is up for repricing in the coming quarter. Higher rates on our liquidity placements with ECB have kicked in, and let's see what happens if the Riksbank is increasing the rates further later in the year. So there are some tailwinds and there are some headwinds. One is that we have been proactive in wholesale funding, including the two necessary S&P issuance. We see a shift in deposit mix and deposit volumes. So there are a couple of tailwinds and headwinds, so you need to play with them. I hand over to Rob to answer your cost of risk.

Hi, Sophie. So as you know, we don't make any forecasts about future migrations. But the intention with the PMA that we have is to cater for potential future credit migrations. And if that happens, then we should use the PMA to counteract that. So that's the intention behind it. And what is also embedded in having that is, of course, to a certain extent, some huge migrations. That's what we could see.

Great. Thank you.

The next question from Richard Strand, Nordea. Please go ahead.

Hi, and good morning. Starting off with a question on MII. You write in the report that Swedish banking continues to see headwind from lower mortgage margin. Looking at the average prices versus cyber development, it looks like it's stabilizing. Do you agree with that picture and that we could expect flatter margin development ahead, or do you see continued pressure on margins?

Well, first, what you see is that the margins went down by five basis points this quarter, but we do not make any forecasts going forward.

Okay. Then another question on Baltic NII. We've heard that one of your competitors is starting to pay interest rate on transaction accounts there. What's your current status? Have you done similar moves, or are you planning to do it?

As Jens mentioned to you, we have basically three different types of accounts in Baltics. We have the transaction accounts for the daily banking. We have the e-savers account, which I don't think that the competitor have. And then we have term accounts. As of now, we have no plans of paying for transaction deposits in Baltic bankers.

Okay, thank you. I don't know what is next up.

Next question from Alex Dimitriou, Jefferies. Please go ahead.

Hi, thank you very much for taking my question. So just another one on impairment. So just on the 208 million in rating migrations from property management companies that we saw this quarter, could you provide some color on what you're seeing from these customers in terms of debt servicing as well as underlying collateral? And just secondly, On the $263 million benefit we saw from other, can you just provide some more color? I think you mentioned higher amortization and lending and higher risk segments. So any further color there would be appreciated. Thank you.

Thank you, Alex. So regarding the 208 migration in property management, that is related to just a few migrations in the property management sector. As you maybe recall, we made some revisions of internal ratings in the second quarter, so then we had large migrations. This quarter, the migrations into stage two have been two billion, so much less of that. And generally speaking, the development in the sector that we have seen so far has continued to be stable, and we see that the property management companies are adapting to the changing conditions. Regarding the amortizations on higher than average risk, to a certain extent that is from the oil and offshore sector. So that is lending with elevated risk that has been amortized. So that's the main explanation to it, but then it's also other various flows.

Thank you very much.

The next question from Ricardo Rovere, Mediobanca. Please go ahead.

Thanks for taking my question. A couple, if I may. In the first one, in your report, you mentioned the fact that in large corporations you had and implementation of new probability of default for those exposures. I was wondering whether this could eventually kind of anticipate part of the impact on RWA, which you might have from the model review by the Swedish FSA. And related to that, I just wanted to understand correctly that you expect the buffer on the requirements to be more or less unchanged whenever all this process is going to be over, so more RWA and lower capital requirements. The second question I have is on the digital euro. You have operations in Lithuania, Estonia, Latvia, ECB, Panetta and Lagarde decided to go ahead with the digital euro. We see challenges for you or maybe opportunities, and do you expect this to have an impact on your IT investments or investments in general in the next few years? Thanks.

Well, let me start with the digital euro. That is a discussion, and we're having a similar discussion in Sweden as well, even though the sort of inquiry into this said that it was a wait and hold. Of course, all technological changes mean both threat and opportunities. And I can promise you that we will try to do our very best to mitigate the threats and use the opportunities, as we've done for a little bit more than 200 years now. Okay.

Hi, Ricardo. And on the question on the probability of default models for corporates and institutions or for large corporate customers. Yes, that's correct. We are in the process of introducing a new PV model. And as a consequence of that, we have some rear migrations. That is expected. And those are being met by a reduction of the Article 3 model. Having said that, we expect some further RIA inflation from that. Not dramatic, but some increases in RIA from that. And then when it comes to the full journey of introduction of new models, then we don't know exactly how that will end because we need to go through the approval process before we have the answer to that. but we assess that the big step was taken with the introduction of the Article 3 add-on we made in Q4, but then we expect some rear headwinds as a consequence of that, but not dramatic ones.

Thanks. Thanks a lot. That was very clear. Thanks.

The next question from Nicholas McBeath, DNB. Please go ahead.

Thank you. So first a question on your financial target. So your return equity has for the past three quarters been substantially above your 15% target and also your cost of income is well below your 40% target set at the investment day almost a year ago. So some of your peers have already announced that their targets are due for review now in Q4 and I was just wondering whether you have similar thoughts as well of reviewing your financial targets given the substantial improvements in profitability and cost income over the past year.

Well, thank you. As you know, our target is to reach a sustainable return on equity of 15% or more in 2025 and forward. And we have promised that, I think it was last quarter, I said that we will get back to you and we will get back to you on an investor update. We have not really decided in what form, but we'll get back to that in the beginning of next year.

Okay, thank you. And then a follow-up question on the cost. And your comment, Anders, that you expect 1.5 billion in cost headwinds for this year. So I'm just wondering, does this encompass all cost changes you expect for 2023? Or are there also other cost increases such as investments that we should take into account as well when thinking about the cost change for 2023 versus last year?

It takes everything into account except FX that I'm aware of.

Okay. And could you comment on how much FX headwinds you're estimating currently given current FX rates?

We do not give you an estimation of FX headwinds. I think that's quite a difficult task. What I can give you is that it's approximately 400 million year-to-date on the cost side. But as you are aware of, from a profitability and profit point of view, we are benefiting from it. But from a cost side, it's 400 million year-to-date.

Okay, understood. Thank you.

As a reminder, if you wish to register for questions, please press star and one on your telephone. The next question from Jacob Cruz, Autonomous. Please go ahead.

Hi, thank you. So two questions. Firstly, if I could just follow up on cost. Just to be clear, are you essentially saying costs in 2023, you see about 1.9 billion with current FX moves above 2022 levels? And on that, you keep talking about these inflationary pressures going into next year. If you could just comment on what kind of quantum you're seeing there. And then I just want to ask on the ball picks. You saw for the first quarter some quite material outflows from the transaction accounts into term deposits. Do you see this as sort of new trends? And was there something that kind of triggered people to start making those moves in this quarter? Thank you.

On your first question, thank you for your questions. The reason for bringing up the 1.5 is that, if you remember, we informed you during the investor day that we would have a headwind of 1.2 billion. That has increased slightly, and that's why I gave you that update. I'm not giving you any cost estimate for the full year. That I leave back to you. On your second question, which is going into next year, the inflationary headwinds that we foresee are primarily salary increases and the renegotiation of large vendor contracts that we have been talking about. Those are the majority of the headwind that will come into next year. But let's get back to next year during Q4 rather than today. On your question on the migration of volumes from transaction accounts to term accounts in the Baltics, They have been slightly behind Sweden, so they started a bit later. The increase has shaded off, although not to the levels we foresee, but our best guess is that it will level off maybe not next quarter, but in the next two quarters.

So why does it level off? Is that because balances are running very low in some accounts? How do you get that visibility?

No, I don't get that visibility. The simple explanation is that excess liquidity that you could actually place on term accounts should decrease significantly. When you see the increase, there is an end to it. All customers do not have the possibility to place their transaction volumes in term accounts. It's as simple as that.

Okay. Thank you. Thank you. So far, we look on the list. We do not see any questions. I'll give you some time if you still have some questions. Okay.

For any further questions, please press star and one on your telephone.

I'll count to five in my head and see what happens. That was five. Thank you all for calling in, and thank you once again for the good question. And I will repeat myself, saying that a sustainable bank is a profitable bank that delivers dividends to our owners and contributes to a stronger society while focusing on our customers' future. With that, thank you again for calling in, and I look forward to seeing you in one or the other way. Take care. Bye-bye.

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