Svenska Handelsbanken AB (publ) (SHBA) Earnings Call Transcript & Summary

Good afternoon and warmly welcome to this call. With me today on this call, I have Carl Cederschiöld, our CFO; and Lars Höglund, Head of Investor Relations. Let me start by -- start off by taking a step back a year when we announced the first major step in our journey to become a more focused bank with a clear aim to become more efficient with higher profitability. The key message was an increased focus on our core customers and the core products and services. And we made the announcement of concentrating our -- of our geographical presence outside our home markets to Luxembourg, New York and launched efforts to rationalize central units. The program is moving ahead according to plan. Today, we are delighted to present the second major step on our journey, this time by addressing the Swedish operations with the aim of becoming an even more relevant bank for our customers. In the past years, the customer behaviors have changed dramatically when it comes to the choice of interaction channel with the bank, moving quickly from preferring physical meetings to overseeing the majority of bank issues digitally. The pandemic has increased digital awareness and made this transition even further pronounced. At the same time, the demand for high quality is increasing when customers have a physical interaction at the branches. For example, asset management, private banking and corporate customers seeking advice, a speaking partner and/or relationships with the decision maker. That was also highly visible now recently during the outbreak of the pandemic and our response has been highly appreciated by the customers. We have been around for 150 years. During these years, we have constantly adopted to our client needs. We will not move ahead, but rather adjust. We believe we have reached the tipping point where the majority of everyday services is being handled over the app or web. Therefore, the bank has now decided on some actions in our Swedish operations. First, we will speed up the efforts on the digital side. Today, I would argue that we are at least on par with the peers on the digital side. However, in order to make sure that we also, in the future, have a state-of-the-art digital product offering and services, we have decided to speed up the digital development by targeting an additional SEK 1 billion of IT investments. This will be spread out until end of 2022 and comes on top of the current level of IT spending in the bank. This aims to provide a fully digitalized-mortgage product, but also to significantly improve our digital offering when it comes to the entire savings business. Second, we will strengthen our branches by adding further specialist competence locally and also a bigger mandate for credit granting and forcing the decentralized model. This should, in many cases, increase the availability of our core customers to get access to decision-makers and the demand of services. That will, for example, be 5x as many meeting places for private banking customers and specialists working with our corporate offering well to an increasing degree, move from regional and central departments to the branches, i.e., closer to the customers. The credit mandates will also be increased in the branches. So in effect, we improve the service to our clients and the degree of decentralization, even though we reduced the number of branches. Thirdly, the organization will change from the current structure with 5 regional banks into a new county-based organization, which will dissolve bureaucratic structures and increase efficiency. The consequence will be a reduction of number of branches from the current 380 to around 200 less, and around 1,000 employees are expected to become redundant. So in sum, the branch network will become smaller, but with increased quality and availability for the core customers demanding a closer physical relation, plus, of course, the bank will become more cost efficient. This will be done with the same on low risk profile, as always in Handelsbanken. This will never be jeopardized upon. Let me finish off with some comments on expected financial effects. We now provided a fixed cost target of SEK 20 billion by end of 2020 on an annualized basis. This number is excluding potential Oktogonen allocations and based on the current currency rates. And just to be clear, the target means that by the end of 2022, the run rate should be SEK 20 billion, not the expected number for the full year of 2022. This cost target includes the effects from previously announced initiatives as well as a step-up in IT investment mentioned earlier. Restructuring reserve of around SEK 1.5 billion will be booked in Q4. The income effect of the initiatives is expected to be around minus SEK 1 billion, if you compare the run rate by end of 2022 to the full year of 2019. We will give more details here later. However, the aim for us is to strengthen our ambition in core business. Mortgage lending is one area with a very low cost-to-income ratio and proven track record of low credit losses, a good mix for increased profit growth. Asset management is another one where we have a very strong track record, which we will increase our ambition in. This area has attractive cost income and very high ROE. All in all, this aims at increasing earnings growth, reduced the cost-income ratio and improve the ROE for the bank. As always, we are continuously scrutinizing our operations to make sure that we develop along with customer demands and behaviors, and I strongly believe that this second step announced today is a big step forward on our journey of becoming a more focused bank and a profitable bank in the future. I will stop here, and I -- with that, I will open up for questions.

[Operator Instructions] Our first question comes from the line of Antonio Reale from Morgan Stanley.

Antonio here from Morgan Stanley. I've got a couple of questions from my side. So the first one is on your cost targets. I mean you're targeting a fixed cost base of SEK 20 billion in 2020 with an additional revenue headwind of SEK 500 million. So SEK 1 billion cumulative. How did you come up with the revenue attrition assumptions? So what I assume, in terms of home market customer loss, market share, product mix and how much is coming from the international branch closure. And related to that, what is the phasing of the cost savings and revenue attrition, please? So how much do you expect in 2020, 2021 and 2022? I'm asking that given that some of these measures were already announced in Q3 of last year. And secondly, on the capital headwinds. So we've seen yesterday the announcement to move your U.K. business' risk-weighted assets from advanced to standard models. We've seen the RWA flow for Swedish mortgages being confirmed earlier today, and we're still awaiting the commercial real estate flow by year-end. I guess this all makes sense in the context of sort of harmonizing capital levels across Europe. But how should we think about risk-weighted asset inflation versus the large capital buffers you're still required to run with? I'm thinking of the -- sort of 3% systemic risk buffers or the Pillar 2 buffers. Do you think there is scope for the FSA to provide banks with some relief there to at least partially offset some of this Pillar 1 inflation?

Okay. Thank you for that question. Let me start with addressing the income effect. First of all, we will be transparent with the components of the income effect by Q3. So we cannot be extremely transparent on that one yet. Having said that, what we can say is that the negative effects of SEK 1 billion is including both the actions taken last fall, but also the actions taken at this time. They do -- they shouldn't be seen as a net estimate for the top line of the bank, obviously. And as Carina was alluding to, obviously, we -- this journey is an ambition to increase the emphasis on mortgage lending and asset management and also commercial real estate lending. So we believe that we should -- the bank's product mix will evolve positively out of this reorganization. And then to the capital side.

Yes. It's Lars here. Hi Antonio. So yes, I mean, you're addressing a few things on the capital side, at clearly increasing the RWA, as you say. And I think on the Swedish capital framework, in general, we simply have to wait and see what interpretation Sweden will do from the European banking package. We don't know that yet. It seems that the proposal to the government -- or to the parliament will be somewhat delayed here. So it's not even sure that it will be formally implemented at year-end as has been stated before. But having said that, regardless of timing, I think what we can expect is a new design of the Swedish capital framework once the banking package is introduced. And we don't know what that will look like. But clearly, I think it's fair to think along the line that we will have a buffer set up, which probably more resembles the European one with a higher Pillar 1, but then a Pillar 2 required and the Pillar 2 guidance. But again, we have to wait for that. I think for Handelsbanken, specifically the news around U.K. yesterday, as we wrote in the press release, we don't know, obviously, what the capital requirement on these volumes will be. We can see purely mathematically that with increased risk-weighted assets, and part of the buffer requirements being expressed in absolute billions of kroner, purely mathematically, the 14.0% requirement we had at Q2 is set to go down somewhat. But again, we have to wait and see what the final requirement will be there.

And the next question comes from the line of Rickard Henze from Nordea Markets.

Rickard Henze here from Nordea Markets. Two questions from my side. Firstly, the restructuring provision in Q4 of SEK 1.5 billion. Could you say anything about the split between the staff cost and provisions related to premises in that one? And secondly, the expected reduction of 1,000 FTEs in Sweden. Is all of those related to Swedish banking operation or is it also some share related to group functions? Those are the 2 questions.

I will have to make you disappointed that we will not be transparent with the division until Q3, the provisioning split. The...

Q4 you mean.

Sorry, in Q4. The 1,000 FTEs is related to Sweden, yes, and with -- the majority will come from the branch network, but there are some support functions as well within it. And as Carina was saying as well, cutting down the regional banks and moving to another organization, obviously, affects a lot of support functions as well.

And the next question comes from the line of Riccardo Rovere from Mediobanca.

Just a quick one. When the downsizing of the branch network is going to be completed in, let's say, a year's time or a little bit more, Handelsbanken will find itself with basically the same branches in Sweden than in the U.K. Should we -- is the distribution model in other parts of the place -- other countries so different that you should not take similar actions also in other countries at some point because you would add 200 branches in the U.K., but the size of the operations over there is a fraction of the Swedish ones. So should we expect anything similar in other countries?

I think that, first of all, as Carina was saying when -- in her speech was that we obviously try to adjust to our client needs. And in that sense, this should be seen as a reflection of us adapting to their needs and wishes for the future. And they could obviously be -- there are obviously some changes in the digital behaviors of the natives of the various home markets we have. So you shouldn't see this as a general recipe for the way we approach to various home countries. And then having said that as well, in Sweden, we've had 5 regional banks, in Norway, Denmark and Finland, we obviously -- and Netherlands, we obviously just have one head office. U.K. have a few regional banks. So we will, step-by-step, move through all of these different home markets and make the correct analysis of it and adapt to that one.

Remember, we're just talking about the Swedish operation as it is.

And the next question comes from the line of Jacob Kruse from Autonomous Research.

Could I ask first off on the U.K. business, the increase in capital or the risk weights that you're -- I suppose on a group level. If I look at the -- if I look at the subsidiary accounts, you made about 8.5% -- sorry, 12% ROE -- sorry, 8.5% ROE in the U.K. in 2019 with loan loss recoveries. So does this change your appetite to grow to that business? Does it change the strategic rationale for -- over in the U.K.? That was my first question. My second question was just on the cost savings and the branch reduction. Have you had any reaction so far from branch management or other parties in the banks that will not be involved prior to the announcement?

Perhaps I can start and then you can add to me, Carina. Well, obviously, as you're saying, we've been around for 150 years. And over that time, we've been trying to be present to our clients and improve in the way they want us to. Obviously, as you're saying, yes, U.K., this effect of the Swedish finance expects -- decision obviously affects the ROE in -- over a short time period. But we still believe that we are in a good marketplace there. We have roughly 1% of the market share, or a bit less, and we believe our potential market share there is 5%. And obviously, we will work with our U.K. operation. But this effect of the Swedish finance decision doesn't affect us that much.

Okay. And just your question about any reactions from the branches, to be honest, yes, there has been quite a few. I think it's too early to say that the general reaction is either this or that, but to be honest, it's quite positive actually because the branches has definitely been living in this environment for quite some time actually and seen the changes in the customer behavior. So I think it's -- for most of them, it's quite logical. And when we talk about increasing even more, make the branches decentralized, that is -- has been very positive and it gave them even more mandate to do business the way they want to. So, so far, positive reactions, I would say.

Okay. Can I just follow up on the first question. If you're saying you could target a five-fold increase in market share, just five-fold increase in capital. What are the levers that you're pulling to make that -- the ROE [ dilutive ]. For sure, you can't be deploying new capital assets and stop average ROE [ because of this ].

Jacob, it's Lars here. I mean, we've talked about this 5% market share not as a forecast, but more as an illustration to the huge potential we see in the U.K. market. So just to clarify that. But I mean, obviously, as Carl is saying, we work also with the U.K. Obviously, they've had some cost headwinds over the last few years for known reasons. I mean the subsidiarization, et cetera, has given them a higher cost base, a higher cost-income ratio. And of course, it's important that the U.K. operation can grow in a profitable way to add to ROE. And again, what is needed, and what we have talked about many times before, is, for example, a more modern IT infrastructure part of the business. Today, in the U.K., branches, they spend a lot of time doing manual admin, not only because of IT, it's also a U.K. phenomenon. But clearly, gradual upgrading of the IT system in the U.K. will make the branches more efficient, and thereby laying the ground for more profitable growth in the operation.

Okay. And just -- that IT investment is part of the SEK 1 billion [ you announced or separate ]?

That will -- the SEK 1 billion that we announced this morning is not covering that scope. So what we are doing gradually in the U.K. is part of our ongoing IT development spend.

And the next question comes from the line of Robin Rane from Kepler Cheuvreux.

So most of my questions have been asked. But to follow-up on the capital, so I guess since you made this subsidiarization of the U.K. business, you have been in dialogue with the different authorities, including Swedish FSA. So have you -- did this come as a surprise for you that they retracted on their -- on the -- how you treat the U.K. business? Or is this something that you have been -- seen coming, I guess? And also on the dividend, so you announced today that you won't have an extra shareholder meeting to discuss the dividend payout of 2019. Would you say that the intention of the Board is to pay out this as soon as possible or -- I mean given that I think the bank has capacity to pay out this? What are your thoughts about the dividend in next year?

Yes. So Robin, maybe if I start on your first question, and then Carl will take your second question. But -- so I mean, basically, we never comment on the discussions we have with authorities, in general. Now the Swedish FSA took this decision yesterday, and we obviously wanted to communicate that straight away. I mean, in general, the FSAs of the world take a lot of these decisions. Most of them are -- have a very, very small impact, could be some small changes in methodology, small changes in model. That is sort of part of the supervisory business, and now this decision had a different impact. So -- but other than that, I won't comment on the discussions we have with the authorities.

And regarding the dividend, yes, obviously, the decision has been taken by the Board now not to invite an extra shareholder meeting during the autumn. That means that we won't pay any dividend during 2020. And we will most likely try to pull back then the amount of -- or the value of the dividend to the capital base during Q3. Then when it comes to what the Board will decide or the shareholder meeting, actually, will decide during the springtime, it's up to them. So we don't know that, and we will have to wait to see that. But we will be in a good situation, most likely, on a capital level.

[Operator Instructions] The next question comes from the line of Chris Hartley from Redburn.

I just got a sort of slightly broader question about the kind of ongoing strategic review that we're, I guess, a year in to now. And it sort of feels like you've done the sort of broader non-core markets. You've done Sweden now. And then I think in response to Riccardo's question, you mentioned you're still working your way through some of the other geographies. Do you have a -- kind of a time line on that? I mean are we talking as sort of a major geography per year here where we like to hear on -- hear back some of those in the U.K. or Netherlands over the next few months or even weeks, say?

No, you're not likely to see anything in the coming weeks. But joking aside -- but no, obviously, we constantly review our business, and we want to become an even more further focused bank. But it's not that we have outlined that we will come with new arrangements every year or so. So we will go through step-by-step and -- but no major issues coming, as we see it.

Okay. So just to slightly rephrase that then. Have you had a deep look at your U.K. business and Netherlands business yet?

Yes. We have had a deep look at it, and we're reviewing that constantly, yes.

And the next question comes from the line of Maria Semikhatova from Citibank.

Just a couple of questions. First of all, on Oktogonen contribution. Did I understand correctly was that you won't be making contribution from now on? Maybe you can provide more details on the new compensation scheme, how many employees will be covered or what could be the key performance metrics. And second, just a clarifying question. You mentioned that the SEK 1 billion revenue loss that you're expecting, this includes the previous measures that you announced last year. And I believe that you before mentioned around SEK 500 million revenue loss. So do I understand correctly that this new Sweden restructuring implies around SEK 500 million loss of income according to your forecast?

Maria, let me start with the first one, then I hand over to Lars. Oktogonen, we -- the only change we will do is that we see that as variable salary now. Or -- so we will not -- the possible distribution, which is obviously a Board decision, will not be made to the -- to the Oktogonen. It will be made as cash payments to the employees. But apart from that one, nothing has changed. We still have the same company targets, and we measure the possible contribution to Oktogonen in the same fashion.

Yes. Maria, I'll go for the second one here on revenue. So in Q3 last year, we announced some measures and we said revenues -- the revenue impact would be some SEK 500 million, and that was very much related to geographical changes we did. And definitely, part of that has already filtered through, you can say, in our P&L. Now it's another additional, give or take, SEK 500 million, so it's building the total up to SEK 1 billion from 2019 until the end of 2022. And we will get back to, as we have said, with more details around where this comes from. But I think -- I mean much more importantly, back to Carina's initial speech, I mean, the whole idea behind this initiative we are announcing today is, of course, to lay an even stronger foundation to do even more business in our core areas with our core customers. So in that sense, the net impact should be clearly revenue-enhancing. But the SEK 500 million is on top of the old SEK 500 million, so to speak.

I appreciate your comments. Just maybe a small clarifying question. Since you've disclosed actually how much of the cost savings you addressed already since the fourth quarter of '19, I believe it's SEK 550 million. Is there a corresponding number for the revenue loss? You mentioned that the large part is filtered through, but maybe you can give us a number.

No, we haven't given that number, actually. But given the nature of the business that we started winding down all over last year, quite a bit of that was rather short-term in nature. So quite a bit of that dropped off. You saw, for example, already in Q4, we had some reduction in exposures in volumes in the bank related to that. So of course, then the revenues also dropped, aligned with that. But we haven't given that follow-up on that number.

And the last question is a follow-up question from the line of Jacob Kruse from Autonomous Research.

Just on your comments around the other side of the equation, you expected to reduce capital [ targets ]. I can see the part where you have a -- you would like to [ mature the bank, which I guess partly related to the U.K. closures ]. But what other areas do you realistically hope will change as a result of [ moving from risk-weight to standard assets ]?

Yes. Hi again, Jacob. So no, I mean, as I said, part of the buffer requirements, as they look today, still in the Swedish framework are -- part of them are expressed as a percentage of risk-weighted assets, and part of them are expressed to the bank in absolute numbers. And if we assume that those numbers will not change just because we changed the model here, purely mathematically, it means that when you increase risk-weighted assets, that part of the ratio will drop somewhat. So that's more sort of mathematically. But then, of course, when you think about it, I mean, we have now on group level, from 1st of Jan, we have the standardized way of measuring the U.K. volumes, which, by nature, gives a much higher risk weight density. So of course, the big question, which we don't know at this stage. But the big question is what kind of capital requirement will be applied on those volumes with a higher risk weight density. Will it be the Swedish capital requirements? Or will it be something else? That's the biggest question mark, and we don't know that yet.

As there are no further questions, I'll hand it back to the speakers for closing remarks.

Okay. No further questions, so thank you very much for taking your time. And I hope that we have been able to give you a bit more flavor of the questions that you've had. And again, we will get back to you in Q3 with definitely more details coming through in the future. So thank you very much.

Thank you.

Thank you.