Swedbank AB (publ) (SWEDA) Earnings Call Transcript & Summary

Welcome to Swedbank Fourth Quarter Report 2020. [Operator Instructions] And just to remind you, this conference is being recorded. Today, I'm pleased to present Annie Ho, Head of Investor Relations. Please begin your meeting.

Thank you, Naz. Good morning, everyone, and a very warm welcome to the presentation of Swedbank's 2020 year-end result. In the room with me today is Jens Henriksson, our CEO; Anders Karlsson, our CFO; and also Rolf Marquardt, our CRO. We will, as usual, begin with a presentation and opening comments followed by a Q&A. [Operator Instructions] So without further ado, I'll hand over to Jens.

Well, thank you, Annie, and good morning, everyone, and welcome. I am proud to today present a stable quarter in difficult times. It was a quarter once again dominated by COVID-19. Overall, income was stable. The housing market and private mortgage demand is strong, companies, though, had held back on new loans. We see a continued inflow of deposits while central banks are adding liquidity in the capital markets, pushing credit spreads down. The economic uncertainty remains and is still bleak in society and the economy due to the pandemic. Life is still held back by restrictions. But thanks to the vaccine, there is a light at the end of the tunnel. A few days ago, IMF forecasted world economic growth this year at 5.5%. If that would materialize, it would be the highest world growth rate since 1973. Continued government support through fiscal and monetary policy is critical. Our economist at Swedbank also sees a recovery. This year, GDP in Sweden is expected to rise 3%. And we are closely monitoring developments are -- and are prepared for the possibility of setbacks. The rollout of the vaccine is the biggest risk provided that fiscal support is sustained. Well, you all know that 2020 was a year filled with challenges, a tough year. During spring, the Swedish FSA gave us a hefty fine, and we received a precept from the Estonian FSA. A few days later, Clifford Chance presented their report on our historical shortcomings combating financial crime, and then the pandemic hit the world. And the bank once again adapted in a way, at least I had not thought was possible. Within a few days and weeks, we were working from home, taking care of our customers from customer centers while taking precautions to make our local branches safe. Our most important accomplishment in 2020 are tied to the challenges we faced. Let me start by AML. During 2020, we addressed our history and strengthened our efforts to prevent financial crime while being transparent about it. At the end of 2020, we closed our 244-point action plan to remedy the historical deficiencies, which we are reporting on since I came in. Further actions are now a part of the bank's continuing development work. And last quarter, we responded to the Estonian FSA precept and last week, they informed us that we have met their requirements. We have introduced new enterprise risk management, reworking our whole risk appetite framework. And today, we are presenting a new corporate structure for a clearer governance of our Baltic subsidiary banks in Estonia, Latvia and Lithuania. And we have hired people. During 2021, we will be nearly 1,500 people working full-time against financial crime or almost every tenth person in the bank. On top of that, all employees in the bank have a personal responsibility to combat financial crime in their daily work. Let's then move to sustainability. In 2020, we saw, once again, green financing grow. And Swedbank was in the top 3 of arrangers of green, social and sustainability bonds in the Nordic region. We've also developed a framework for green equity. And during the fourth quarter, we, as the only Nordic bank, qualified for the Dow Jones Sustainability Index. It's a mark of quality. We want to be a part in the transition from oil and coal to renewables. Our fund company, Robur, is showing the way with their decision that all these assets under management will align with the Paris Agreement by 2025 and be carbon neutral by 2040. In this context, and in line with our revised strategic direction, the bank has taken a strategic decision to stop financing unconventional fossil fuel production such as shale oil and gas, arctic oil and gas or oil sand, nor will we finance exploration of new oil or gas fields with the exception of clients whose business strategy is aligned with the Paris Agreement. And then move to the, I think, the most important part, mainly meeting customer needs in COVID-19 times. During the pandemic, Swedbank has continued to adapt. We are a digital bank with physical presence. Our digital tools, including a calculator for government support, have been visited millions of times. Events held through our digital channels have had hundred of thousand of views. And we now have virtual solutions where customers can receive advice face-to-face. And we have a way for young people to get the bank idea without having to visit a branch to schedule COVID tests, for example. And we will continue to invest in stability and resilience so that we are available 24 hours, 7 days a week, 365 and sometimes 366 days a year without interruptions. Our customers need to be able to trust Swedbank. I am proud that Swedbank now is the most popular brand in the Baltic region, and our efforts to strengthen trust in Sweden are moving forward. In the end of 2020, we decided on a new strategic direction. It's not a revolution but an evolution based on our 200-year history. It is fully anchored with all our 16,000 employees through our culture and work. Our purpose, Swedbank's purpose, is to empower the many people and businesses to create a better future, and our vision of the better future is a financially sound and sustainable society. And based on our long-lasting and strong commitment to sustainability, we have defined our customer promise. Together, we make your financial life easier. And this will guide how we develop our customer offer. Our values -- open, simple, caring -- are still valid. And we have also defined the foundation we base our business upon. First, Swedbank should be an attractive workplace with a culture based on inclusion and accountability. We will continue our work with employee engagement and have launched a program to strengthen leadership within the bank. Our infrastructure should be standardized, scalable and stable. Customers should be able to trust that they can access Swedbank when they need through the channels they differ. And we shall be an efficient, profitable, and compliant bank and financial services platform. We maintain our target of return on equity of 15%, and we should have the leading cost income ratio. We continue to invest in compliance and our capability to effectively and efficiently fight financial crime. With this strategic direction, all employees in Swedbank will work to create long-term value for our shareholders, customers and society. And during the year, I will come back in a structural way on how this strategy will be realized. Now let me say a few words on our results for the fourth quarter. Swedbank's fourth quarter delivered a stable result in difficult times. Total income increased, primarily due to strong development of net commissions and net gains and losses. Net interest income was slightly down due to higher deposit guarantee fees for the full year. Expenses are higher due to seasonal effects and the hiring of more people in the anti-financial crime area. Credit impairments for the quarter ends at SEK 0.5 billion, and is mainly explained by provisions related to our exit portfolio in the oil and offshore sector. And due to continued uncertainty on the economic outlook, we have the management overlay on SEK 600 million to neutralize a release due to the projected upswing. Return on equity was thus negatively impacted by seasonally higher expenses, credit impairments and further accumulation of net profit and ended at 11.8%. The capital situation improved, and we ended the quarter with a buffer around 500 basis points above the requirement. So where does this lead us on 2020? Well, first, 2020 was a year like no other, for the global economy, for our customers in their daily life and for the bank's business. Over the course of the year, earnings were stable even under these extreme circumstances, but profit as a whole was weaker than usual, weighed down by the fine from the FSA and provisions for credit impairments in accordance with IFRS 9. Expenses have increased due to AML-related work and continued IT investments. Our liquidity and capital position remains strong. And the Board has suggested a dividend of 25% for 2019, corresponding to SEK 4.35 per share that will be discussed at an extra general meeting February 15. For 2020, the Board of Directors is proposing a further dividend of SEK 2.90 per share, and this will be discussed at the Annual General Meeting. And with that, I give the floor to our CFO, Anders Karlsson, who will in more detail, present the result. Now it's your turn, Anders.

Thank you, Jens, and let us turn to the quarterly result in more detail. I will first talk you through the volume development and the P&L in more detail, and then ask Rolf to speak about asset quality and credit provisioning before I sum up with a few remarks on capital and some forward-looking comments, then handing back to Jens to conclude. Compared to last quarter, we had underlying lending growth. But due to a significantly strengthened Swedish krona, the total loan portfolio decreased by SEK 6 billion. Mortgage lending in both Sweden and the Baltics continued to grow steadily in local currencies, but corporate lending continued to be muted. Corporates remained prudent on refinancing risk, which is reflected in the growth that we see in committed facilities, although the propensity to utilize these facilities has continued to gradually decrease since the second quarter. Instead, corporates have been turning to the debt and equity capital markets for funding and capital at attractive levels. Customer deposit inflows continued this quarter, increasing by SEK 55 billion, mostly from corporates. Now let us look at the quarter-over-quarter results, starting off with net interest income, where the underlying NII is stable, but FX and a higher deposit guarantee fee for the full year impacted negatively. The trend that we saw over the third quarter continued into the fourth quarter where deposit volumes increased and average lending volumes decreased slightly. Market rates continue to fall, impacting lending margins positively but deposit margins negatively, reminding you that assets reprice gradually whilst deposits are impacted immediately. Over to net commission income, which was strong. Card commissions were lower as a result of the second wave of the pandemic impacting card activity, but the Asset Management business continues to perform and are well reflecting the development in the equity markets. Income was also positively impacted by annual performance and market making fees in Sweden, and we had a positive development within ECM. Turning to net gains and losses that were higher in the fourth quarter. There were good levels of client activity in LC&I, particularly in FX trading, and the CVA, DVA and bond valuations also impacted NGL positively. Other income was stable. While the income from insurance and the partly owned savings banks was stable, the share of profit from Entercard was lower. Let us look at expenses before I hand over to Rolf. Full year 2020 underlying expenses ended spot on our SEK 19.7 billion guidance. Total cost ended on SEK 24.56 billion, of which SEK 4 billion were related to the fine from the Swedish FSA and SEK 850 million to costs related to the AML investigations. As previously discussed, the number of FTEs has increased markedly over the year as a consequence of us hiring new competencies and a low attrition rate due to COVID-19. Out of the increase of almost 1,000 FTEs during 2020, around 500 was in AML and compliance and around 350 were in IT. In the fourth quarter, higher headcount and the usual seasonal increase of costs led to higher expenses. I will now hand over to Rolf to talk about asset quality and the credit provisions that were made in the quarter. Please, Rolf.

Thank you, Anders. Now when we summarize 2020, we can conclude that the credit quality remains solid and a very large part of our portfolio has not been impacted by the pandemic. When we look at the internal late payment statistics, development of customer credit quality and different early warning signals, we see that credit quality in general has been stable during 2020 and remain at the same level as a year ago. The exception to this is the oil sector and also, to some extent, some other sectors that have been more directly impacted by COVID-19. This is also the explanation behind the credit impairment ratio of 12 basis points in the quarter. Out of total credit impairments in 2020 of SEK 4.3 billion, oil-related losses accounts for SEK 2.9 billion within our large corporate institutions division. The remainder of the impairments are related to other sectors and mainly explained by stage 2 migrations in COVID impacted sectors, where expected credit losses have increased but with a limited number of actual defaults and bankruptcies so far. The total credit impairment for the fourth quarter was SEK 523 million. The IFRS 9 calculation of expected credit losses based on updated macro scenarios pointed to a release of impairments of SEK 639 million. At the same time, an additional post model expert portfolio adjustment of SEK 672 million was made in the fourth quarter, which was allocated to the sectors significantly impacted by COVID-19. The reason for this is twofold. First, the deterioration in economic activity in some sectors have not yet resulted in an increase in actual defaults, which may have been postponed by the governmental support. The second reason is the significant continued uncertainty related to COVID-19. The individual assessment resulted in a further provisioning of SEK 394 million, which was explained by the single individual oil-related exposure. Rating migrations during the quarter were limited. The final note on our oil-related exposure within shipping and offshore. Our oil-related offshore exposures remain limited and are, to a significant degree, in runoff. The exposure was SEK 12.6 billion as per Q4. We have SEK 6.2 billion in stage 3 and 63% of that has been provisioned for. So with that, I hand over to you again, Anders.

Thank you, Rolf. Let me now turn to capital. The risk exposure amount was stable quarter-over-quarter. Credit risk exposure amount decreased slightly due to a stronger Swedish krona. The CET1 capital ratio increased to 17.5%, with the profit in the quarter and the pension liability valuation having impacted positively. The accrued dividend from profits generated in 2019 and 2020 is still deducted in accordance with our dividend policy of 50% from CET1 capital. The buffer to the Swedish FSA's minimum requirements stand at around 510 basis points. Over the coming quarters, changes to our requirements will occur as new regulations are implemented. In this context, we are confident that we will remain well capitalized and are reiterating our capital target range of 100 to 300 basis points. Let me now move to some forward-looking comments before I hand back to Jens to conclude. Considering the current situation, income is expected to be stable year-over-year. NII will be supported by growing Swedish mortgage loan volumes while continued muted corporate loan demand and higher price competition in retail mortgages will weigh negatively. We expect deposit volumes to remain at high levels and foresee continued deposit inflow while market rates will likely remain low or negative, which will put pressure on deposit margins, also considering fees paid to central banks replacing excess liquidity with them. Replacing maturing bonds with primarily retail deposits and issuing cheaper covered bonds will help to largely mitigate the mentioned headwinds. We expect the resolution fund fee and deposit guarantee fee to each be around SEK 50 million more for 2021 than 2020. Underlying expenses of SEK 19.7 billion in 2020 will reach SEK 20.5 billion in 2021, mainly due to the higher number of FTEs reflecting an increased ambition to improve AML compliance and IT resilience as well as to strengthen governance in the Baltics. We intend to maintain underlying expenses at SEK 20.5 billion for 2021 and 2022. Regarding AML investigation costs, we can only make a best estimate at this time, which is around SEK 500 million for 2021 and 2022, respectively. Let me end on a positive note. Swedbank, with its large customer base, broad and deep offering and strong financial position, is well equipped to capture the opportunities when the situation normalize and the economies are recovering. Now over to you, Jens.

Well, thank you, Anders, and thank you, Rolf. 2020 has been a challenging year, but our core business is strong and stable. We've made major investments and added significant resources in the fight against financial crime. As a result, we have a lower operational risk profile but with increased cost. We expect underlying costs during 2021 to level off and we do not expect further increases in costs in coming years. We have delivered on governance, AML, enterprise risk management, cultural assessment, customer solutions and a new strategic direction, all while in the midst of the pandemic. Our capital position and capital generation capacity are strong, and we are proud to distribute dividends to our shareholders. During this spring, we will pay out SEK 7.25 per share if the General Meetings so decide. We want to give out more dividends in accordance with our dividend policy and on monitoring the economic development and communication from supervisory authorities. Our revised strategic review gives Swedbank a clear direction, a direction with focus on sustainability. I am confident about the future. We are a bank that empowers the many people and businesses to create a better future for another 200 years. Thank you. With that, I give the floor back to Annie.

Thank you very much. I think we'll open for questions. I'll hand back to the moderator.

[Operator Instructions] Our first question comes from the line of Magnus Andersson from ABG.

Yes. My first question would be on capital and dividends. Just to try to make this clear, should I read your comments in the report around dividends that you would like to suggest even more dividends? That -- if we assume that the restriction is lifted on the 30th of September, we could very well get the second installment in the second half of the year? And if that is the case, would you consider share buybacks as a tool to repatriate capital to shareholders in addition to dividends? That's the first one.

Thank you, Magnus. What we have expressed is our ambition to keep to the dividend policy of 50%. So yes, if we will be able to distribute dividends after September 30, we will do that in accordance with the dividend policy. I think it is too early to talk about share buybacks. We have that in our toolbox, and we ask for that mandate on every AGM. But as I said, I think it's too early to talk about that. But we stick to the dividend policy and we take -- with the sort of obvious comment that we are following the authorities closely in their language.

Okay. That's clear. And my second one is on NII, you mentioned a couple of factors there in your outlook statement, primarily mortgages, then deposits and the lower funding costs as well as fees. I was just wondering if you could say something about the corporate lending trajectory which has been quite weak also relative to the market now for a while? And related to that, if I add up the factors you mentioned, is it fair to assume a flattish NII year-on-year in 2021?

If I start with the question on corporate volumes, I'm not sure that we, Magnus, are sticking out immensely but if -- compared to competitors. I mean what we have seen during the year is, if you take Swedish banking, for example, we have lost volumes on tenant owner associations, which is a price and margin issue for us. And when it comes to the larger corporates, primarily, I would say, within the real estate sector, they have had the possibility to issue in the corporate bond space at much lower rates, and that's why you see that committed facilities are increasing rather than lending. So I'm not sure if we stand out more than anyone else. I think it is a similar pattern. And the remaining part of the corporate sectors are a bit hesitant to take on new aggressive investment loans. To answer your second question on NII, that is the best estimate that I can give you at this point, that it is a flattish development.

And the next question comes from the line of Andreas Hakansson from Danske Bank. [Operator Instructions]

Andreas?

Hello?

Now we can hear you.

Hello? Can you hear me you?

Hello. Yes, now we can.

Yes. Sorry for that. So on the revenue guidance you just gave, Anders, we hear that you talked about the flattish NII, but did you say that you expect a flattish total revenues for 2021 or did I misunderstand that?

No, that is our best estimate as we speak. But as you know, if -- I mean, we are well positioned, especially when it comes to the commission income, but we have seen a muted card activity, which is very dependable on development of the pandemic situation. And the asset management is, as you're are aware of exogenously determined very much by the stock exchanges. So that is the best estimate as we speak.

But if -- I mean, sure, we don't know where the equity market is going to go, but we know where it is today. And of course, it is significantly higher today than the average over 2020, so you must have very significant tailwind on that line. And also in card payments, wouldn't you say that -- it's hard to imagine that we're going to have, for example, a Q3 equally bad as in 2020, so shouldn't card also be a tailwind into 2021?

As I sort of finished my speech, Andreas, we are well positioned for an economic recovery and a normalization. That is for sure. But at this point, I think it is a bit aggressive to take that into consideration. That is why I said flattish. But you are perfectly correct that we are well positioned, especially on the commission role.

And the next question comes from the line of Adrian Cighi from Crédit Suisse.

Adrian Cighi from Crédit Suisse. Two follow-up questions, please, on capital and actually one on impairments. So on capital, how do you expect credit risk migration to impact you in 2021? And do you have any estimates for the potential impact of the model review that you could impact capital again this year? And then on impairments, would you be able to offer us any insights, how do you expect the impairments to develop in 2021 given the vast range of uncertainties still remaining?

Thank you. I think we will divide the answer between myself and Rolf. On the rating migrations, we have seen rating migrations negatively rating migrations during 2020. I can't sort of give you an estimate of a continuation. But if I put it this way, if the economies are recovering, you will see rating migrations, but to the other direction. But I leave the floor to Rolf.

Yes. And if you look at the credit migrations we've seen during the last quarter, they have been more or less neutral. So the migrations we saw, we saw in the second quarter, in particular. And then going into 2021, we don't make any forecasts about that. But what you should also keep in mind is that we will gradually move into using new models as a part of IRB overhaul. And that means that the impact from credit migrations will be much less severe than it had been in the past when it comes to capital adequacy. And then when it comes to the question of impairments and the potential impact on IFRS 9 calculations and so on, we don't make any forecasts about that. We can conclude that uncertainty is still big when it comes to development of COVID-19, and then we have provisioned what we think is the right thing to do at this point. So the best assessment is the one you have at the table at the point -- at this point.

Rolf, can I follow-up with a question, just a clarification? You mentioned the new models. Can you give us an estimate on the impact of those new models to the capital ratio?

No, we haven't communicated the impact, and that is an ongoing exercise where the Swedish FSA will go through those models and approve them during the year. So it's a bit too early also to make a very precise estimate of that, but we haven't communicated potential impact from that. But it will increase capital requirements to a certain degree.

And the next question comes from the line of Johan Ekblom from UBS.

Can I just follow up on your cost guidance, please? So I guess I'm trying to understand where your SEK 800 million increase in underlying costs is coming from, right? So you say that there's an increased headcount component to that. But I guess that's been a gradual increase through the year. So it still looks like quite a chunky year-on-year rise in underlying expenses. So if you can give some more color on what's driving that, that will be very helpful. And I guess, related to that, you say expenses will peak in 2021 and 2022. So does this mean that some of these AML investments, and not the investigation expense, are expected to kind of remain for the next 2 years and then taper off? Or how should we think about the longer-term cost trajectory?

Well, thank you. It's Jens here. Let me first say, when you look on the quarterly results, you will see that the costs for wages have gone up a little bit more than I think was expected from the market. So there has been a buildup of the number of people, and that will then come into 2021. But we've also been very clear that we want to continue to invest in stability, resilience and a different customer solution. So actually, this is a year where I think we have the highest development budget ever. So we're not giving up on our business ambitions. On the contrary, we're taking strong measures to strengthen that. When it comes to the year -- the coming years, we have not given any guidance. We now give guidance on 2021 and 2022, as we promised during the year. But of course, I hope that in order for us to sort of reach our long-term goal, that is to strive for an industry-leading practice, i.e. in sort of the fight against financial crime, I believe we can do a lot more when it comes to digitization. But right now, we're handling 3 different things at the same time: dealing with the backlog, working with the present and investing for the future.

I guess, in another way, just on the same topic. I mean, the AML investments that you outlined, I think it was a year ago, were expected to come down gradually. What's replacing that? What are the new areas of investments as those AML investment expenses come down?

Well, I think it's -- we need to do more investments in a lot of areas. And AML investment, we have not sort of said that this much would be AML investments and this will be other investments. But of course, in sort of -- in the steady state looking forward, we think that you could see sort of lower cost on this area, but we need to work with sort of investments in order to get there.

I think what I have said also, Johan, Anders here, is that, I mean, we have been building FTEs gradually over 2020. They are now giving us the full year run rate. So that is sort of the first one. Secondly, even though we have been putting a lot of effort in the so-called 244-point program, there is a continuation. We need to use flesh and blood going forward. We have not been able yet to automate or use machine learning or artificial intelligence or whatever to sort of increase efficiency. So that is -- we are still working with AML and financial crime related issues and IT-related issues. And then we also will have a certain degree of cost increase due to the change of the Baltic banking governance where we are clarifying the legal structure. And with that comes, as far as we understand, an increase in VAT expenses. So there is a combination of different things. But I think you need to have in the back of your head that we have had 1,000 more new people coming in that will have a full year run rate effect in this year.