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

Hello, everyone, and welcome back. We are now ready to start taking questions. And as always, we would prefer if you would ask one question at a time so that everyone has a chance to ask a question. So operator, we're ready to take on the first question, please.

[Operator Instructions] We will now take the first question. It comes from the line of Rickard Strand from Nordea.

A question on the profitability in Norway. If you could just sort of share some details on your current assessment there, if you think that the main problem is primarily due to the household or the corporate segment? And what do you think you could do to, as Michael commented in the press conference, grow more in Handelsbanken fashion? What do you mean with that?

Yes. Thank you, Rickard, for that question. Yes, as you know, I mean, in Handelsbanken, we work. We're trying to build profitable growth. And we build it by the branches. So the branches choose their clients and build their business with the client name by name. And obviously, as we've kept reiterating for some time now that Norway as it is right now, is unbalanced in the business model, quite a lot of lending and much less of deposits and much less of savings business. So we want to build a more balanced mix there. But it is a necessity that we try to build it from the branches name by name. So you should expect a higher emphasis on profitable growth. And of course, we want to build a better business mix, and that business mix will imply both a higher focus on savings business and deposits.

Sorry, and just a brief follow-up there. Is it primarily then on the household segment that you need this improvement, or what is your [ thought over ] there?

No, I think it's fair to say that if you look at our business mix, I mean, we have a high tilt towards corporate sector. So we want to -- of course, we want to grow in the private sector, but we want to do it with the branches in the leading role. So the branches choose their clients they bank with. And yes, a more balanced business mix will imply a higher degree of private individuals most likely and a higher degree of savings business and capital-light income.

We will now take the next question coming from the line of Magnus Andersson from ABG-SC.

I'm sorry if you touched upon this already at the press conference this morning. I didn't have time to listen into it. So I would just like you to explain how the net funding and margin effect could go from plus SEK 245 million in Q4 '23 to minus SEK 392 million in Q1 '24? And also, if you could say something about what you expect in terms of migration or any other effect we should be aware of going forward for the year? Whether this is actually the correct starting point for NII, and also whether you were surprised or not about the development in Q1?

Thanks, Magnus. Well, first of all, I mean, the way we treat our NII is obviously that the branches treat the relationships with the clients, and they both choose their level they lend on and their -- what they pay on their deposit mix. And what we've seen in this quarter is obviously quite a bit of a hit. And even though we don't normally divide it in, it comes from pressure on deposit margins, and that coordinates with a movement from transaction accounting to savings account and primarily like 3-month savings accounts. It's been quite a tough competition landscape there. As you've seen, for a long time SBAB has taken quite a bit of market share. Our branches will never ever want to lose a good client on price. So they've done what they normally do. And this quarter we see a bigger movement than usual. I don't think you should -- I don't think you can put a meaningful estimate on the future if that's consistent -- if it's going to move, because all the branches will -- each and every time they will try to stay competitive and do the best to build a long-term relationship. But margins do go up and down. But this quarter, obviously, it's a high number in margin drop there.

Yes. But I mean, if you look forward throughout the year, do you think -- is it unusually large this quarter? Or -- because it seems like it's larger than you kind of indicated during the second half of '23, this impact in terms of migration?

It is -- as you say, yes, it is larger than you would expect. And it's not from a central perspective done. So it is branches who -- the aggregate of the branches, their decision has come up to this solution this quarter. And yes, that might change. And we -- and I think the important message for us is as well, we really believe in this business model. This is what is taking us to the situation of having really, really strong client satisfaction. So we really want the branches to keep doing what they do. But margins will go up and down with their business.

We will now take the next question from the line of Andreas Hakansson from SEB.

Questions on costs. I mean, costs are rising very quickly. I mean if I take out Oktogonen, you have, what is it, almost 10% or 9% Q1-over-Q1. And when I listened to your CEO, sometimes it sounds like he wants to reduce costs. Sometimes it sounds like he wants to invest. Could you tell us a little bit where should we expect costs to go from here? Are they going to go up or down, sideways, or what's your feeling? Could you help us a little bit on that?

Yes. I think it's fair to say that we and the bank view costs in 2 different ways more or less. We really like costs where the business is generated. If branches see more business possibilities, we really want them to go out there and hire and do more business. And thereby, we expect it to come with quite decent key ratios and business outcome. On the other hand, we obviously know that cost in the banking system is a lot more than just the distribution and the branch level. And all the other costs we really try to stay really conservative around and try to be efficient. So yes, I think you understand Michael correctly. He do appreciates cost if it increases income. But we don't like cost which is just increasing cost. So what we will spend and what we do spend a very large focus on now is obviously that, first of all, trying to merge a few operations, which is support functions. [ We'll ] merge them between the group functions and the Swedish operations. And thereby, we can increase the efficiency and go down in FTEs and cost there. So that is one of the key targets. Another key target is obviously to improve the way we do IT development. We've built an agile way of developing over the last [ 5-plus ] years. And we think that can be merged and streamlined by the way we steer the rest of the bank, and we think that will create efficiency gain on that one, bringing down cost. We also think that over a few years now we've invested quite heavily both in CRM and like the toolbox for the employees. And we think we can spend a bit less there. So all else, we will do our utmost to actually bring down both consultancy levels and FTE levels. We won't guide on it, but that's our main focus. And thereby, I'm expecting to see cost basis to move in a much better direction, whilst also seeing a reallocation from central costs to allocating more of the cost base to where the income is generated as well.

Okay. Just on Oktogonen, since it's related to cost. I mean, your profitability in Sweden, Norway is below peers. And the U.K. and Holland, I would say, I'm not sure they are comparable to the local banks in those markets. So I don't quite understand why you allocate any money to Oktogonen? When you compare to the other Swedish banks, are you adjusting for something to reach a higher ROE than the peer group?

We are measuring our ROE vis-a-vis peers in the markets -- in the comparable markets. So I mean -- and we think we have really good ROE in our Swedish operation. We definitely trail our peers when it comes to Norwegian ones. But we have good ROE as well when it comes to the British and the Dutch one.

We will now take the next question from the line of Namita Samtani from Barclays.

I don't really understand the comment that net [Technical Difficulty] was negatively impacted from heightened competition, specifically on customer accounts, because if I compare your personal [Technical Difficulty] deposit rates [Technical Difficulty] on your Swedish [Technical Difficulty] present similar to last year, the 6 months like interest rates have come down by 50 bps of average savings, account rates of 2% haven't gained [Technical Difficulty] and only the 3-month rate increased by that. So [Technical Difficulty] I mean much of this impact is [Technical Difficulty] interest income as deposit mix shift with mortgage margin pressure?

I'm sorry, Namita, but we couldn't really hear your question there. Could you repeat it, please?

Sure. I just wanted to understand that comment on net interest income where you're talking about heightened competition on pricing, particularly on customer deposit accounts? Because if I look at your personal customer deposit rates posted on your Swedish website at present, 1st of July last year, the 6 months to 5-year deposit rates have come down by 50 bps on average. The savings account rate of 2% hasn't changed. It's below SEK 50,000 and only a 3-month rate by 35 bps. So please, can you explain to me [Technical Difficulty] really impacting it and it's the make shift for Swedish mortgage margin pressure?

I'm sorry, Namita. Your line is occasionally breaking up. But we'll try to answer what we think is your question, at least. If I answer correctly, you're wondering about the quantification of the impact of deposit-related NII, if I understand correctly.

Yes.

No, what you saw in this quarter was that an increasing share of the customer deposits were put on short-term savings deposits. And we have one product, for example, or it's called [indiscernible]. It would be like a savings investments account. It's a 3-month fixing. It's currently paying 4% interest. So what we saw during the quarter that -- was that an increase in share of customers moved from transaction accounts into this short-term savings accounts, so moving from 0.25% interest rate to 4% interest rate. And that, I would say, would be the main impact for the squeeze in overall NIMs.

We will now take the next question from the line of Sofie Peterzens from JPMorgan.

I know you didn't guide on net interest income and [ kind of ] rates and the [ EBITDA ], but maybe if you could just talk us through the moving parts. Going forward, how should we think about net interest income growth? What will be the main driver? Is it loan growth? I assume margins that are not really going to move much from current levels, unless we have rate cuts. But if you could just kind of talk about the different building blocks to help us kind of model the net interest income going forward?

Yes. Thanks, Sofie. Well, yes, obviously, we've seen slow growth. We've seen slow volume development. That holds for most of our home markets. And it's both slow gross growth, but it's also high amortizations happening in the system still. One could expect, obviously, amortizations to drop off once rates starting leveling out. And it should also drop off with -- as -- when we've gone through a rate cycle more or less and the whole loan book has matured into a new rate level, you could expect as well amortizations to drop off, but they're still at elevated levels. So -- and we don't as of yet foresee -- We don't see growth picking up. But I mean, as you know, quite a bit of the other liquidity factors or growth factors point to that we're closing in towards it. But so far, slow growth. Then, the exemption there is obviously Norway where we see strong growth both in households -- or especially in households, I should say. On the deposit side, we've seen -- On the household side, the deposit growth has obviously mirrored the household lending and that's what we expect to keep on seeing. On the corporate side, we've seen obviously quite a lot of deleveraging. So paying off both lending and taking deposits and using it to pay off their borrowing. That could obviously slow down when rates are now perhaps moving downwards again. When you go to the margin situation, yes, I think it's likely to see if rates start dropping down, there should be a pressure on deposit margins as we've seen, obviously. But with some volatility over the quarters, obviously, based on the branches decisions, we haven't -- we're likely to see a movement from -- if rates move down, obviously, we can't guide on the outcome, because that's a factor of competition. But on the upside, at least, is, deposit margins has increased and lending margins has decreased. So the opposite wouldn't surprise us. So that I think is -- and then, a few things to mention. We have the notice periods in Norway. They should be a positive benefit going forward. We see some signs of positive margin development on the corporate side. And obviously, yes, we start seeing some spring signs or some positive signs on the mortgage business in Sweden and Norway.

Could I just ask a follow-up question? In terms of rate cuts, what's your expectation? When do you expect Sweden to cut rates?

I think our economist view is that Sweden will cut 3 times this year and that they start in the summer time. But obviously, that's our economist view and we don't base our business model on these decisions.

So the branches are not basing their pricing on the future rate cuts?

No. What we do is, as we've kept saying, is that the central treasury, they price their marginal funding cost. And obviously, the marginal funding cost will be -- have an implication on the future rate expectations. But that's what they give to the branches and then they decide their margins.

We will now take the next question from the line of Nicolas McBeath from DNB.

I wanted to ask about your comments that you made that the branches are recruiting more FTEs, that indicates rising demand at the branch office level. But looking at the volumes for you in a quarter, they're actually mostly declining, nor does it seem that you're actually taking market shares on lending and/or deposits. So I was just wondering by what metric you look at when you say that you see customer demand, that the customer interaction levels are increasing? And whether you also could say anything if we should expect FTEs to continue go up during the year?

Yes. Thanks, Nicolas. First of all, obviously, the branches do have their own decisions if they're going to hire or not. And they're quite -- how should I put it -- They're quite sensitive to the business climate. And they are obviously cost conscious as well, because they are benchmarked vis-a-vis all the other branches when it comes to cost-to-income development. So that's quite a neat system which has proven to work for many, many years. If they decide now to hire, I mean, you won't see that in historic figures. That's future looking. So if the FTE levels right now is moving upwards, that implies that they see a better situation going forward. What we can say is that we've seen, obviously, the number of advisers done in the bank has grown quite materially in the start of the year and the number of private banking advising, which is happening at the branch levels and also the occupational pension advising. These ones has moved in really the correct direction. So therefore, that could imply that they keep on hiring. But we -- and we don't have any guidance on that one going forward. But I mean, we as a bank will be cost conscious definitely moving forward as well.

[Operator Instructions] We will now take the next question from the line of Gulnara Saitkulova from Morgan Stanley.

I have a follow-up question on the competition, please. You mentioned the intensified competition on the pricing and in particular on the deposit accounts. I wanted to ask what are you seeing in terms of the competitive behavior on the lending side? And would you potentially expect the competition to ease once the rates start to decrease? And also, can you talk about what in your view is the main underlying driver behind these competitive pressures? Is it driven mainly by the smaller competitive peers like SBAB? Or do you think the core reason is overall the muted demand and the volumes? And yes, can you please talk about the underlying reasons? And what is your outlook for the competitive environment going forward?

Yes. Thanks, Gulnara. I think it's fair to say that the way we run our bank is obviously that we run a long-term business model. We try to build long-term relationships with our clients, and that's really been proven over the years that, that one works. But then in each and every time we will face different competition. And some of our peers, which is more top-down driven, will run with various initiatives. Right now, obviously, we see some campaigns when it comes to the mortgage business that some of the peers might offer a few months for free or so. Other times we might face other kind of campaigns. It's fair to say that on the deposit side we've obviously seen that the SBAB has obviously been really competitive for the last year. On the lending business, it's been other peers, more niche banks. I can't say that -- so we don't foresee this structurally to be one of the competitors, which will be the main competitor going forward. Rather we expect to see a competitive landscape. And that's for our branches to compete in and we're used to do that. So that's -- it's going to be a moving competitive landscape going forward. But having said that, I mean, if we have low margins on lending and we have -- the banking system has higher margins on deposits, obviously. So that should probably point to -- the competitive toughness will be tougher on deposits vis-a-vis mortgages.

We will now take the next question from the line of Riccardo Rovere from Mediobanca.

Just a quick one. In your report, you say that credit risk migrations had an impact of 0.1 percentage points on the capital. But you are -- so there was negative risk migration, I understand. But on the other hand, your credit losses continued to be positive -- zero or positive. How can this be possible that you have a negative impact on credit migrations and positive credit losses when both technically should be more or less based on the same parameters, probability of default and loss given defaults? I mean if risk-weighted assets go up, [ why ] we see nothing on credit losses? And sorry, just a quick follow-up. There is no guidance on cost, right? Correct me if I'm wrong.

Well, no, there is no guidance on cost. You are correct in that one. And we hear you loud and clear. Well, first of all, obviously, we've seen obviously negative credit migration for quite a few quarters now. That is obviously very intuitively understandable. When rates are increased, clients' cash flow outlook will become a bit more troublesome and that implies in many times a negative credit migration. We've also said that since we have good clients, with good owners, with good financials, even though we see a negative credit migration, that might not imply a higher credit risk, and especially if we have collateral in place which -- with low LTVs. And this has been obviously something which has happened during the last years that we've seen Stage 2 volumes going up without Stage 3 reservations going up. So that's exactly what is happening in this quarter as well. We don't see credit losses happening. We see very little actually -- actual credit losses. There is like single-digit ones with low [ nominals ] on them. So a really good credit situation. Having said that, if we obviously increase the Stage 2 volumes and we see a negative credit migration, that will have an impact when you calculate the credit losses in the capital. And we have an opposite side of that one, which is the risk-weight source. So I don't see any -- there isn't anything strange in this. You can definitely keep on seeing negative migrations, whilst not see any problem with the asset quality or credit losses. And that will have an implication on the capital calculation.

And just to add to Riccardo also, if you look in the slide deck on Slide 21, we have a breakdown of the credit losses recognized in the quarter. And you can see there in that table or that picture that rating migrations accounted for SEK 49 million of additional credit losses. But those are offset by the reversal of the expert base to add on, better quality of new loans coming in compared to the old ones and also macro assumptions and so on and so on. But you have the breakdown on Slide 21, which clarifies the issue.

We will now take the next question from the line of Hugh Moorhead from Berenberg.

Just a quick follow-up on Norway, please. You've obviously spoken about how you'd like to increase deposit volumes there. What's your strategy going to be for doing that in what's a very competitive market and perhaps what's worked or what appears to work in Q1 in terms of increasing household deposit volumes there? And adjacent to that, are you still guiding for investment -- IT investment spend in Norway to drop down this year, which I think you previously guided for?

Yes. Thank you. Well, I mean, Norway as a country is obviously a country with quite wealthy people. And we think our banking offering should suit that market quite well. So I mean we're used to working with the branches close to our clients, working with all of their balance sheet more or less. We both lend to them and we take on their deposits and we take on their asset management business. So nothing extreme in a strategy apart from being very close to the clients by the branches and doing a lot of advisory. So fairly similar to what we do in Sweden. Yes, the IT investment in Norway will obviously drop down over this year. Having said that, obviously, we will have the amortization effect of the investments we've done. So the cost side of it will obviously not drop down as of yet.

We will now take the last question from the line of Jens Hallen from Carnegie Investment Bank.

I guess the final follow-up then on cost and trying to establish for the future. So my question is, in the quarter, is there any double counting of costs given they're moving away from consultants to employees, the merging of group functions? Or maybe if we can use Slide 9, what do you consider to be recurring on that side, particularly given all the comments you have on focusing IT centric function on the important things? At least it sounds like you think it's on the high side.

Yes. Thanks, Jens. And if you look at Slide 9, obviously, first on the left-hand side, obviously, we'll [ starting ] then on the pink boxes here. First of all, obviously, we had the yearly salary. So -- and we've also increased the number of FTEs this quarter. So we will work quite a lot on bringing down the FTEs. That is not the guidance, but still we will work quite a lot on moving them down. When it comes to Oktogonen, that would obviously be decided by the performance as this year. So we can't say anything on that one going forward. The pension expenses -- the lower rate will be here for this year. So the pension expenses, if we have the same number of employees, that will more or less stay flat for the coming quarters. When it comes to the boxes with the dotted lines on it, what they more or less say between the staff cost and also the other expenses is that, yes, we have made some -- we've let consultants go and some of these more sticky businesses we've hired people for. But we're expecting going forward both to let consultants go and replacing some of them, but not all of them. And the other part of the dotted boxes is that the IT development we've done, they imply a higher level of bringing over the cost line and less of it over the balance sheet. So I don't know if that was answer to your question, Jens.

Yes. Well, I think it was at least partly, but it sounds like from those boxes, there's nothing major like big cancellations on consultants contract that should be coming out in the short term. That should be a gradual process of consultants and FTEs coming down. Is that correct?

Yes, correct. Agree. All right, everyone. Thank you very much for participating. And with those words, we wish you all a good day. Thank you very much.

Thank you.