SWDBF - Swedbank AB (publ) (SWDBF) Q3 2023 Earnings Call Transcript
2023-10-26 18:06:06 ET
Swedbank AB (publ) (SWDBF)
Q3 2023 Results Conference Call
October 26, 2023 3:00 AM ET
Company Participants
Annie Ho - Head of Investor Relations
Jens Henriksson - President and CEO
Anders Karlsson - Chief Financial Officer
Rolf Marquardt - Chief Risk Officer
Conference Call Participants
Magnus Anderson - ABG
Sofie Peterzens - JPMorgan
Rickard Strand - Nordea
Alex Demetriou - Jefferies
Riccardo Rovere - Mediobanca
Nicolas McBeath - DNB
Jacob Kruse - Autonomous
Presentation
Annie Ho
[Call Starts Abruptly] 2023 Results 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&A.
With that, I hand over to you, Jens.
Jens Henriksson
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 focus on our customers. Despite 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 4 home markets. In these uncertain times, Swedbank once again delivers a stable profit of SEK 9.1 billion with a return on equity of 19.3% and -- 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 SEK 350 million during the quarter due to a worsened macroeconomic outlook, stage migrations and recoveries. Our post-model adjustment over and above what the model show now amounts to SEK 1.5 billion. The capital buffer is 370 basis points above the requirement 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 Robur's position as the leading fund company.
In Estonia, Latvia and Lithuania, we continue to foster a culture of long-term savings with a favorable interest rate on our e-savings account, EasySaver that also had 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 Lithuania.
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 adviser 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 sort of keep your voice when you go in more detail through the numbers. Anders, the floor is yours.
Anders Karlsson
Thank you, Jens. And first, I do apologize for my voice. Profitability at Swedbank continues to be strong. We reported 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 SEK 12 billion, excluding a negative FX impact of SEK 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 SEK 1 billion, excluding a negative FX effect of SEK 1 billion.
In Baltic Banking, both private and corporate lending increased by SEK 3 billion and SEK 9 billion, respectively, excluding FX. Customer deposits decreased by SEK 12 billion, excluding a negative FX impact of SEK 8 billion. Private deposit decreased both in Swedish Banking and Baltic Banking by SEK 6 billion and SEK 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 SEK 3 billion, mostly in transaction accounts and corporate deposits in Baltic Banking decreased by SEK 2 billion, excluding FX.
Turning to the revenue lines, beginning with net interest income, which increased SEK 133 million quarter-on-quarter, mainly driven by Baltic Banking in terms of increased deposit margins and lending volumes, slightly higher lending margins in C&I, Day Count 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 SEK 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. Fixed 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 SEK 16 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 Entercard. Total expenses came to SEK 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 lender 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 assessed that it will be around SEK 1.5 billion.
Now over to you, Rolf to talk about asset quality and credit impairments.
Rolf Marquardt
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 due loans increased somewhat, but we're still at low levels. In the Baltic countries, levels were stable. Nonperforming forborne exposures were unchanged. The volume of Stage 3 loans increased only slightly with SEK 300 million. When looking at credit impairments for the third quarter, they ended at SEK 347 million. The updated macro forecast increased provisions by SEK 201 million. Credit migrations and stage transfers in total added SEK 831 million. This is mainly explained by a few single exposures in various unrelated sectors, where SEK 208 million was related to property management, SEK 166 million to information and communication, SEK 140 million to construction and SEK 104 million to manufacturing. The migrations were partly offset by a release of SEK 158 million from the post model adjustment, out of which SEK 71 million in the oil and offshore sector and SEK 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 SEK 1.5 billion.
Individual assessments ended at a recovery of SEK 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 SEK 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 haveconsidering the circumstances had a stable development. The debt service tolerance ratio, the breakeven 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 then below 1.
Against this background, we are comfortable with our asset quality. Now back to you, Anders, and some words on capital.
Anders Karlsson
Thank you, Rolf. Turning to capital. Our capital position continues to be strong with a CET1 capital ratio of 18.7% and the 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 weight floors from P2R into Pillar 1 risk exposure amounts.
Going forward, we expect some real inflation from the IRB model approval process, exceeding our current Article 3 add-on. The SFSA's Pillar 2 are 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.
Jens Henriksson
Thank you, Anders, 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 SEK 9.1 billion. 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 contribute to a stronger society while focusing on our customers' future.
Thank you all for listening. And by that, I give the floor back to you, Annie.
Annie Ho
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 2 questions per turn. Operator, over to you. Thanks.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] First question from [Jacob Hesslevik, SEB]. Please go ahead.
Unidentified Analyst
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?
Jens Henriksson
Well, let me take that question. We do not see any movements to other banks. What we see is that people have a 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 are 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.
Unidentified Analyst
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 costs under control in 2024? Or is it pure customer experience gain?
Jens Henriksson
Well, Andres Karlsson, that's your business?
Anders Karlsson
Yes. It's -- the aim with this is that you should be able to communicate with the bank 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 rate.
Unidentified Analyst
Right.
Operator
The next question is from Magnus Anderson ABG. Please go ahead.
Magnus Andersson
Just starting with NII, which was plus quarter-on-quarter. We do note that it's down 4% quarter-on-quarter in Swedish Banking. So I was just wondering whether there are -- I mean, 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 under, we can see that your senior -- level of senior nonpreferred 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 progress quarter-on-quarter.
Anders Karlsson
Can you hear me, first of all?
Magnus Andersson
Yes.
Anders Karlsson
Good. And 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 -- weakened prime reasons for seeing a weakness in Swedish Banking. When it comes to your question around proactive wholesale funding, we have done that for 2 reasons. The first one is that we have front-loaded some of the covered bond issues from when there has 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 requirement stack that the Swedish FSA decided upon increased our demand or need for semi-nonpreferred, 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.
Magnus Andersson
Yes. Okay. And my second one, just on costs. Should we read anything into the cost bit? And -- or is it just that you are back to the old normal seasonal pattern you used to have before the last couple of years?
Anders Karlsson
I would say that we are back to the old seasonal patterns.
Magnus Andersson
Okay, thank you very much.
Operator
The next question from Sofie Peterzens, JPMorgan. Please go ahead.
Sofie Peterzens
I'm Sofie from JPMorgan. 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 a stable rates going forward, should we assume that your net interest income starts to decline for because if you continue to see deposit declines and also deposit migration? So if you could just talk about the moving forwards 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 billion of both model adjustments for '24 and '25, should we expect these $2.5 billion of both model adjustments to be released? And how do you see the kind of negative rating migrations going forward? So if you could just comment a bit on your thoughts here. Thank you.
Anders Karlsson
I think you have the tools and you do know the moving parts when it comes to NII development going forward. Deposit volumes is one, obviously see -- but again, I want to reiterate what we have been saying for some time now. The higher the rates go, the more difficult it will be to pass it on to customers. 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 it's 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 half -- 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 rate further later in the year so that there are some tailwinds and there are some headwinds. One is that we have been proactive in wholesale funding, including the 2 necessary S&P issuance. We see a shift in deposit mix and deposit volumes. And so there are a couple of tailwinds and have been self you need to play with them.
I hand over to Rolf to answer your cost of risk.
Rolf Marquardt
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 counter like 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.
Operator
The next question from Rickard Strand, Nordea. Please go ahead.
Rickard Strand
We starting off with a question on NII. You write in the report that Swedish Banking continues to see a headwind from lower mortgage margin. Looking at the average prices versus STIBOR development, it looks like it's stabilizing. Do you agree with that picture and that we could expect a flatter margin development ahead? Or do you see continued pressure on margins?
Anders Karlsson
Well, first, what you see is that the margins went down by 5 basis points this quarter, but we do not make any forecast going forward.
Rickard Strand
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?
Anders Karlsson
As Jens mentioned to you, we have basically 3 different types of accounts in Baltics. We have the transaction accounts for the daily banking. We have the Easy Savers account, which I don't think that the competitor has. And then we have term accounts. As of now, we have no plans of paying for transaction deposits in Baltic Banking.
Operator
The next question from Alex Demetriou, Jefferies. Please go ahead.
Alex Demetriou
Hi, thank you very much taking my question. Just another one on impairment. Just on the SEK 208 million on 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 SEK 263 million benefit, we saw from other. Can you just provide some more color? I think you mentioned higher amortization on lending and higher risk segments. So any further color there would be appreciated. Thank you.
Anders Karlsson
So regarding the SEK 208 million 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 2 have been SEK 2 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 that 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.
Operator
The next question from Riccardo Rovere, Mediobanca. Please go ahead.
Riccardo Rovere
Thanks for taking the questions. Couple, if I may --in this one, in your report, you mentioned the fact that in large corporate and petitions you had an implementation of new probability of default for those exposures. I was wondering whether this could eventually kind of anticipated part of the impact on RWA, which you might have from the Moodle review by the Seth. And still related to that, just wanted to understand correctly that U.S. packed the buffer on the requirement to be more or less unchanged whenever all this process is going to be over. So more of the lower capital requirement. The second question I have is on the digital euro. We have operations in Lithuania, Estonia, Latvia, [indiscernible] decided to go ahead in the digital euro, you see challenges for you or maybe opportunities and you expect this to have an impact to your IT investments or investments in general in the next few years?
Jens Henriksson
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 it that there 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.
Rolf Marquardt
Hi, Riccardo. And on the question on the probability of default models for corporates and institutions or for large corporate customers. Yes, it's correct. We have -- are in the process of introducing a new PD model. And as a consequence of that, we have some real migrations that is expected, and those are being met by a reduction of the Article 3. Having said that, we expect some further real inflation from that, not dramatic, but some increases in REA 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 REA headwinds as a consequence of that, but not dramatic ones.
Riccardo Rovere
Very clear.
Operator
The next question from Nicolas McBeath, DNB. Please go ahead.
Nicolas McBeath
So first, a question on your financial targets. So your return on equity has for the last few quarters been substantially above your 15% target and also your cost to income is well below your 40% target set at the investment they almost a year ago. So some of your peers have already announced that their targets are 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 improvement in profitability and cost income over the past year.
Jens Henriksson
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 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.
Nicolas McBeath
And then a follow-up question on the costs and your comment, Anders, that you expect SEK 1.5 billion in cost headwinds for this year. So I was 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?
Anders Karlsson
It takes everything into account, except FX that I'm aware of.
Nicolas McBeath
Okay. And could you comment on how much FX headwinds you're estimating currently given current FX rates?
Anders Karlsson
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 SEK 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 the cost side, it's SEK 400 million year-to-date. –
Nicolas McBeath
Okay, understood.
Operator
[Operator Instructions] The next question is from Jacob Kruse, Autonomous. Please go ahead.
Jacob Kruse
So two questions. Firstly, if I could just follow up on cost. Just to be clear, so are you essentially saying costs in 2023, you see about SEK 1.9 billion with current FX moves about 2022 levels? And on that, you keep talking about the 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 Baltics. 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?
Jens Henriksson
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 SEK 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 the -- 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 2 quarters.
Jacob Kruse
So why does it level off? Is that because balances are running very low in some accounts? So what -- how do you -- like how do you get that visibility?
Jens Henriksson
No, but I don't get that visibility. The simple explanation is that excess liquidity that you could actually place on term accounts should decrease when you see the increase -- there is an end to it. All customers do not have the [indiscernible] 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.
Operator
[Operator Instructions]
Jens Henriksson
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 deliver dividends to our owners and contribute 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.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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Swedbank AB (publ) (SWDBF) Q3 2023 Earnings Call Transcript