Swedbank AB (publ) (SWEDA) Earnings Call Transcript

Good morning. Thank you for dialing in this morning. I am Maria Caneman, Head of IR here at Swedbank. Welcome to our second quarter results. I'm joined today by CEO, Jens Henriksson; and CFO, Jon Lidefelt. We will first listen to the presentations, and then you will have an opportunity to ask questions. With that, over to you, Jens.

Thank you, Maria. Swedbank has once again delivered a strong result in uncertain times. The global economy continues to show resilience despite geopolitical global growth this year. Technological development and especially AI, is offsetting some of the negative effects from geopolitical tensions. The global economy is being pushed in opposite directions. Our economists estimate that the GDP of Sweden, Estonia and Latvia will grow by around 2% this year. Lithuania is expected to see stronger growth by around 3%. In these uncertain times, Swedbank has once again delivered strong results, and the quarter was characterized by a clear customer and business focus. Profit for the quarter amounted to SEK 7.2 billion. If we exclude the extraordinary cost related to the restructuring program announced last quarter, return on equity amounted to 15.5% and the cost-to-income ratio to 0.39. Earnings per share was SEK 6. 37. Credit quality is solid. Credit impairments were SEK 313 million, corresponding to 6 basis points. Swedbank has a strong capital and liquidity position and our CET1 capital buffer amounts to 2.6 percentage points. During the quarter, both Fitch and Moody's raised Swedbank's credit ratings. In their decisions, they highlight the bank's strong capitalization. Good credit quality and stable risk profile. Yesterday, Swedbank reached a settlement with the New York State Department of Financial Services, DFS to pay USD 50 million for failure to disclose information to the authority on 2 occasions, once in 2016 and 1 in 2018. With this settlement, all investigations into Swedbank's historical shortcomings have been concluded, and we can now put this behind us. Our customer promise is to make our customers' financial life easier. And we continue to deliver on our plan Swedbank 15/27. It's a plan with a clear customer focus to strengthen our customer interactions, grow our business volumes and increase our efficiency. As part of this, subsidiaries have been moved into the business areas to further increase focus on business and customers. And the bank's savings business have been moved into a unified organization. Swedbank Global and Swedbank for Cycling, our insurance company, are now part of premium and private banking. And the name of the business area has thus been changed to wealth management. During the quarter, we had a strong lending growth and the activity in advisory was high. And we have a clear business momentum across all our markets. Through high availability and stronger business focus, we can further support our customers with financing, savings and advisory. Our proactive work contributed to high activity in the mortgage business during the quarter. And during the first 2 months of the quarter, we captured around 20% of total market growth in Sweden in our own channels. And this reflects our goal to grow more than or at least in line with the market. We also saw continued strong growth in Estonia, Latvia and Lithuania, and our mortgage portfolio increased by 3% in local currency. The high level of activity is also reflected in the positive development in our savings business. Growth was driven by strong net inflows and positive market development, and the net inflow to Swedbank Global was SEK 22 billion. And among strong competition, 2 additional Swedbank Global funds were selected to the Swedish premium pension system, and this reflects the strength of our offering. The bank's corporate business continues to develop well. Our clear customer focus is producing results and corporate lending grew by SEK 18 billion. The growth was driven by several sectors and mainly by the real estate sector. We also saw high demand for bond issues. And in continued times of uncertainty, we support our customers and the activity in corporate advisory increased. The interest in sustainable products remains high. Around 40% of the bonds we arranged during the quarter were classified as sustainable. And our sustainable asset register now amounts to SEK 179 billion. We constantly work to develop the bank and our customer offering. And we see that AI solutions used within the bank are producing clear results. For example, we recently introduced an AI solution that will be rolled out to all employees during the year. Eken as it's called, will contribute to higher quality, security and efficiently and not the least cost control. And speaking about cost control, I'll hand over to our CFO, Jon Lidefelt.

Thank you, Jens. We delivered a strong quarter characterized by high business momentum and continued focus on long-term shareholder value. The return on equity was 15.5% and cost-to-income ratio of 0.39, excluding the extraordinary costs including the SEK 860 million in extraordinary costs during this quarter. Return on equity was 14.2% and cost/income ratio 0.43. We are delivering on our plan, Swedbank 15/27 and the restructuring program presented in Q1 is progressing according to plan. Lending volumes increased by 2% during the quarter, supported by strong activity across all core markets and business areas. In Sweden, Mortgage volumes originated through our own channels increased by SEK 7 billion. In total, mortgage volumes increased by SEK 8 billion. The positive trend in corporates and institutions continued with SEK 16 billion of loan growth. In Baltic Banking, growth momentum remained strong. Mortgage volumes increased by SEK 4 billion and corporate lending by SEK 2 billion, supported by demand across sectors. Deposit volumes continued to trend positively during the quarter, primarily driven by private deposits. In Sweden, private deposits grew. In general, corporate deposits also increased, but was offset by a decrease from a few larger institutions. In Baltic Banking, private deposits grew by SEK 14 billion mainly due to the Lithuanian pension reform, which also impacted corporate deposits negatively. Net interest income increased by 1% compared with the previous quarter, mainly driven by higher market rates in Baltic Banking and the generally higher business volumes. Lending margins continue to be pressured, while deposit margins increased. FX and day count effect had a positive impact of SEK 127 million. Funding costs increased during the quarter primarily driven by higher market rates early in the period. This was partly offset by higher income from Central Bank placements. As a reminder, changes in mortgage rates typically flow through to our lending portfolio with a lag of approximately 3 months in Sweden and 6 months in the Baltics. Overall, our interest rate sensitivity is as expected with the effects on funding materializing ahead of the asset repricing. Net commission income increased by 7% compared with the first quarter. Asset management commissions benefited from strong stock market performance, positive FX effects and high net inflow of SEK 22 billion. Total assets under management increased to SEK 2.9 trillion. Payment related income continued to develop well with seasonally higher cards income. Insurance income was lower, mainly though due to the annual profit sharing from insurance partners that was booked in the first quarter. Net gains and losses was high in the quarter with strong underlying customer-driven results, characterized by high business activity primarily by positive treasury revaluation effects. Other income increased by 23% in the quarter mainly driven by stronger results from the insurance business in Baltic Banking due to claims normalizing and positive revaluations. Results from associated companies improved. And as a reminder, our collaboration with the savings banks includes cost sharing for IT development and administrative services. The compensation received from the savings banks is recognized within other income, while the corresponding costs are included in our total expenses. Costs developed as expected and in line with previous communication. We incurred SEK 860 million of the announced SEK 1.3 billion extraordinary costs for 2026. Adjusting for this, underlying costs follow the usual seasonal pattern and are somewhat higher in the quarter due to the annual salary revision in the Baltic countries. Our cost guidance of SEK 27.5 billion for 2026 is unchanged. It is excluding extraordinary costs and FX.. As we said in Q1, by the end of next year, we expect our FTE level to be around 16,800. This is an effect of the restructuring program, where we are strengthening our foundation for future growth, enhancing efficiency, supporting capital generation and our ability to deliver attractive and sustainable returns to shareholders over time. In 2027, we will continue to have an elevated investment level related to this. But as the synergies will start to materialize, I expect them to offset the additional costs in 2027. By the end of 2028 the changes are expected to be fully implemented, delivering a lower cost run rate of SEK 1 billion. Asset quality remained solid. Total credit impairments amounted to SEK 313 million or 6 basis points. Macroeconomic assumptions were updated during the quarter, adding SEK 108 million. Rating and stage migration added SEK 462 million. and was primarily impacted by a few corporate customers and by the updated macro assumptions. As a consequence of the updated macro scenario, the post model adjustment is reduced by SEK 109 million and now amounts to SEK 161 million. Individual assessed provisions decreased primarily related to a limited number of corporate customers where Stage 3 exposures have been resolved. Entercard added SEK 116 million to total impairments driven by model adjustment. Overall, we continue to see a resilient credit portfolio supported by prudent underwriting standards, strong collateralization and a well-diversified lending book. Our CET1 capital ratio at quarter end was 17.4% corresponding to a buffer of 260 basis points above regulatory requirements, highlighting our strong capital and providing substantial flexibility to support customers' growth and shareholder value creation. And with that, back to you, Jens.

Let me now summarize, Swedbank has once again delivered a strong result in uncertain times. We present an adjusted return on equity of 15.5%. The quarter was characterized by high activity, and we have a clear business momentum across all our markets. We've had strong growth in our lending, the activity in advisory was high, and we are well positioned for continued growth and profitability. We continue to deliver according to our plan, Swedbank 15/27 we've strengthened customer interactions, increased business volumes and improved efficiency. Our customers future is our focus. And with that, back to you, Maria.

Thank you. We will now begin the Q&A session. [Operator Instructions] Operator, please go ahead.

[Operator Instructions] The first question comes from the line of [indiscernible] from SEB.

My first question is on capital. Now that the DFS settlement removes the last major outstanding legal uncertainty. How do you think about the appropriate CET1 buffer going forward? And does this change the calculus around capital returns to shareholders, whether through buybacks, dividends or both?

Thank you. As you know, we have a capital buffer range between 100 and 300 basis points. And in our 15/27 plan, we target the middle 60% to 70%. And and capital release above our dividend policy continues to be a judgment call. With all -- all the U.S. investigations behind us, the uncertainties have, of course, diminished, and we have no intention of holding more capital than necessary.

Perfect. But if I remember correctly, Jens, you have said before that you were open to the possibility of calling an extra AGM once all the investigations were closed and do an inter-year dividend distribution. Has this changed? Or how do you view the excess capital that you currently sit on? .

Well, I have no recollection of saying that. We have an AGM each and every year and have no plans to do something different.

The next question comes from Gulnara Saitkulova from Morgan Stanley.

So on the market shares in Sweden, previously, you mentioned that you were working to regain market share in Sweden with the objective of gradually bringing the front book performance in line with the back book. Can you elaborate how is that progressing? And could you provide an update on the initiatives that you have implemented to support this effort? .

Well, thank you. That's a question I love. But let me sort of go on top and take the overall perspective because we are the market leader in all our 4 home markets. And First, let me say a few words of the Baltics or Estonia, Latvia, Lithuania and we see continued growth, as Jon pointed out in his slide. And during the quarter, volumes increased by SEK 4 billion. Now if we go to the Swedish housing market, it has improved. And it's a combined effect of new mortgage rules and a stronger domestic economic sentiment and so have our mortgage volumes. And I don't need to remind you, but a few years back, had low volumes. And in April and May, then we have sort of comparable results from the Bureau of Statistics, we had around 20% front book market share in our own channels. Why? Well, the reason is we are available. Last time I called up -- in Sweden, we had a waiting time of 14 seconds to get in touch with sort of an adviser. I haven't called Estonia, Latvia, Lithuania. I will probably do that later on to see if beat them. We are faster and we have a strong business momentum. We can be better, but it's very cool that we are sort of seeing these advances. If we look at the market, -- it's characterized by strong competition and low margins. The margins are on a historically low level. And our focus then is on availability speed and forward-leaning attitude. And when you have these volumes, we will, of course, use this momentum to increase our customer share of wallet and everything in line with our plan, Swedbank 15/27 strengthening customer tractions, growing volumes and increasing efficiency, SG&I.

And more broadly, for Swedish market, wording positively to the net interest income. What do you see as the key factors that would allow the current margin pressure to ease?

Well, the first thing is, of course, if you look in history, we would expect that, but we don't see it. It's a tough competition, and there are a lot of providers there. Of course, we see that volumes are up. We are not really to -- we were before. But I think we're seeing that continued interest and the new amortization rules have made it a bit more easy for customers to increase while it also made it a bit more difficult for those who want to have mortgage more.

Next question comes from the line of Martin Ekstedt from Handelsbanken.

Just picking up on Jacob's question around capital repatriation. So before the AML issue broke out, I recall you had a 75% dividend payout ratio target. Would it not as be a fitting end to the story if you return to that now that you seem to have the headroom, I mean with both Entercard and PayEx earmarks of divestment that might add up 25 to 40 basis points further 41. That's my first question.

Thank you, Martin. I mean, as you know, the dividend policy, of course, ultimately up to the Board of Directors to set. But the reason for having the 60% to 70%, it is balanced so that we can capture good growth on markets without having to be limited by the dividend policy. So we think it's a balanced policy ensuring that we can focus on long-term shareholder value and have a balance between growth and giving back capital to the shareholders.

Okay. And then secondly, we saw some stage migrations impacting loan loss provisions attributed to -- I think you wrote a few rerated corporates. Can you share with us a little bit more in which sectors these are concentrated in, if any? And do you see these as isolated events or early signals of something in some markets or another.

Yes. I think, first of all, there are a couple -- if you look at the slides that I showed, there are a couple of these bars that you need to look together macro and past model, then you need to look at together. And then you also need to look at the rating and stage migration together with the individually assessed bar that is reducing because there are movements between this. But having said that, so if you add those together, you see that it's around SEK 260 million to SEK 270 million in provisions. It is related to individual customers in C&I and Baltic Banking, mainly a few customers, no particular sector, no particular trends. So it's nothing that I'm worried about or anything that concerns us. And now it's also, as I said in the speech, impacted, the macro change sort of has also an impact on the movement or the amount when you move between stages.

The next question comes from the line of Andreas Hakansson from Nordea.

Good morning, and I normally make fun of -- congratulating management. But I think stapling with all the U.S. mitigations now, I think current related issues are in order actually. Then to my questions. First of all, on the net interest income, I mean, we missed -- we were a little bit above, and I was surprised how much funding you did in the quarter. So first part of the NI question is that do you see that you're now prefunded basically the whole year given that you grew both your deposits and your cover bonds quite significantly. And relating to the NII as well. I mean is the negative impact we saw in the second quarter, very much driven by the rise in STIBOR that drove up your cover bond funding cost in the quarter. which was then offset by higher mortgage margins. And since STIBOR now come back again, was that a temporary impact in Q1, which means that when we come in -- sorry, in Q2 and which means that we're now coming to Q3 and I should start to behave more normally. That's my first question.

Thank you, Andreas. You're right that we are front loaded in our funding. We have done close to 2/3 or something of our yearly funding. It has been volatile markets, and we have taken the advantage to go out when on days where the situations have been good so that we could sit still if things get volatile on other days and weeks. So that has been approach we've had throughout the year. So yes, we are front loaded. We have taken SEK 80 million out of the SEK 130 million, basically, that was our funding plan for this year. The other part, when it comes to the NII, I would say 2 things. We have grown a lot in the quarter, but you don't see the full NII effect of the volume that comes into this quarter. I mean the they can come during the quarter. And so first, next quarter, you would see the full quarterly NII effect of the volume growth this quarter. The other is which you also touched upon I mean we have an early reaction on our funding costs than what we benefit on our asset side. So funding, wholesale funding reacts earlier. And then it takes 3 months in Sweden and 6 in the Baltics where it to fully roll through on the asset side. So you have a bit of timing effects when rates go up, opposite what you saw when rates went down, then you had the opposite that we...

But shouldn't that actually be even a bigger positive effect in Q3, given that STIBOR since come down, so your funding costs should normalize down but the margin increase as you did on your mortgages, I think you hiked by 15%, then you cut by 10%, so you keep some of the margin expansion. So shouldn't that actually be a double positive.

I don't want to go in a forecast in the NII in that sense. But -- so I'll try to give you the mechanics as you know, -- but you're right that the increased list prices or mortgage they will flow through during 3 months. So in that sense, you're right. otherwise. So you'll have to do the assumptions. I will not speculate on it.

Then my second question is, I mean, we've seen monthly data that all the strategies start to have to mortgage growth again. And then when I look at your net inflow in Swedish mutual funds, it's the highest level I've seen for, I don't know how long, and SEK 22.5 billion. So when you set with the DOJ, I remember, I was a bit disappointed that you didn't want to commit to reduce headcount, but you said that you rather wanted to steer staff over to service your clients better. Are we now actually starting to see a positive effect from that? Or is that too early to say? .

Well, I would say it's too early to say because you have to remember that the inflows of [indiscernible] consists of many things. There are institutional flows, there are premium pension flows that are sold for our own channels, we can be better within the bank to capture even more so for own channels. And the mortgage growth gives us this possibility. But of course, when people have their mortgage with us, we can do more business, we can talk with them more. And we have a strong business momentum. And even though the number of people that have been working with sort of the historical shortcoming and investigations into that, of course, it means that less management attention and more focus ahead.

The next question comes from Sofie Peterzens from Goldman Sachs.

Sofie from Goldman Sachs. So just on the fine, Danske when you got the defined from the U.S. They also had some give us -- or they had a corporate preparation period for some time. Do you have any restrictions set by the U.S. authorities, is there settlement?

No.

Okay. And then I was wondering on the Baltic IRB models, is there any update potential impact? And have you changed your thought process since the Q1 earnings?

Sofie. Well, I have no real updates. I mean, as you know, the IRB overall has taken longer for us and other than what we expected, and we don't fully know the time line. What -- we have fairly good visibility that the final outcome when we're done with everything will be somewhat positive compared to where we are now. But we don't really know the order of things to be approved. And as I've said before, even if we're positive on the final outcome, it might go a bit up and down as things get approved. We will get back when we have something tangible. We are in the approval process with both ECB and with the Swedish FSA. And I have hopes that we will during this year, be able to come back with more tangible results on a couple of the models. But let's see, the time line is not owned by us.

That's very clear. And is there any update on the Swedish IRB models?