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

Welcome back to the 15/25 Studio. When we met there over a year ago, we presented a plan on how we want to reach a sustainable return on equity of at least 15% in 2025. And that was a plan how we will grow income, control cost, maintaining a good asset quality, and not hold more capital than necessary. Today, we will present you an update on that plan. And with me, I have Kerstin Winlof, who is the Head of Group Products and Advice; and Anders Karlsson, our CFO. So what we will do is talk about the business priorities, how we deliver on that. And then we'll talk about the financial results. So all, a warm welcome. Last year was tough. Russia's aggression in Ukraine continued. There is an ongoing conflict in the Middle East, and the climate change crisis has worsened. The macroeconomic development has been characterized by the measures to tackle inflation with the tightening of monetary policy. In times like this, we need sustainable and thus profitable banks. By being profitable, we contribute to financial stability. And by being profitable, we can support our customers, distribute dividends to our owners, and continue to develop the bank. So a little while ago, we just presented a strong result for the full year of 2023, with a return on equity of 18.3% and a cost-to-income ratio of 0.33. Does that mean that the case is closed 2-year ahead of schedule? No, because what we set was a target of a sustainable return on equity of at least 15% in times of high interest rates and in times of low interest rates, in times of low economic growth and in times of high economic growth. And delivering a consistent return on equity of at least 15% with the cost-to-income ratio of 0.40 is difficult. But with Swedbank's business model and strategy, we can do it because of our strengths. We have more than 7.5 million customers across our 4 home markets, which means scale and support profitability. And that scale is further enhanced by our partnership with the savings banks, adding 2 million private customers and numerous corporates to our customer base, as well as operating leverage in form of shared IT costs. We are a low-risk bank with a solid credit quality and conservative liquidity and capital position. And we have a high capital generation capacity contributing to strong and stable returns over time. In Swedbank 15/25, we formulated 4 business priorities. First, to leverage on our proven business model and pricing strategy. Second, to grow our share of wallet for existing customers. Third, to grow our business in prioritized segments. And finally, to continue to invest, to improve our availability and operational excellence. Now, what I'm going to do is I'm going to through the first 3 and then Kerstin, you can follow up on the fourth. During 2023, we leveraged on our proven business model and pricing strategy and grew NII by 54%. We have acted decisively in the repricing of mortgages in Sweden and protected our back-book when new market volumes have been low. In the Baltic countries, volume growth has been higher than in Sweden with a total lending growth of 8% in local currency during 2023. And our green mortgage offering for sustainable housing has been a success, contributing to 1/3 of new volumes in Estonia and Latvia since the launch in March, 2023. And we have maintained our market leading position for mortgages, savings and mutual funds in Estonia, Latvia, Lithuania and Sweden. Having more than 7.5 million customers means that we have an opportunity to grow our share of wallet. To do that, we need to be more proactive and especially in the digital channels. By providing automated offers and advice based on our customer's life event, we can empower them to save more or to sign up for suitable insurance policy, strengthening their financial health. In 2023, we manage to increase the number of sales from these automated offers by 25% in Sweden, driven by savings, insurance and service concepts, just to name a few. Scaling our advisory capabilities and increasing proactivity are important drivers of both volumes and fee incomes. In the Baltic countries, we continue to be the most loved brand for the fifth year in a row. And during 2023, we increased the number of customers with long-term savings by around 40,000. This is in line with the aim to double the total number by 2030. Our efforts to grow within e-commerce and insurance in the Baltics are also progressing well. For example, for the first time ever with the #1 P&C insurer in Estonia. The third business priority is about growing our business in prioritized segments. In Investor Day, we talked about the youth, the homeowners, and the affluent customers. We also said that we aim to grow in the small and mid-sized corporate segments in Sweden and to improve our market share for corporate lendings in Latvia and Lithuania. To grow business in these prioritized segments, we need to spend more time with our customers. And in 2025, we aim to conduct 300,000 assisted advisory meetings. And last year, we made good progress as our advisors conducted around 265,000 meetings. The youth segment is especially satisfied with our digital services. But surveys show that they do worry about their financial situation. By educating them on how to improve their financial health, we contribute to society and support the bank's futures business. We are the leader in mortgages, but we can also see that many of our customers have their mortgage somewhere else. And during a time of low market activity, we have spent time on limiting churn and attractive new customers, resulting in higher inflows from and lower outflows to other banks. And then we have the affluence. All over Sweden, there are people who have created their own wealth or inherited money and want a banking offer suitable to them. Those are or should be our customers. For that reason, we are the 1st of February creating a new business area in Sweden called Premium & Private Banking. One of the most important strategic changes is the creation of one corporate business in Sweden. It is a major step for Swedbank as our corporate capabilities are now concentrated in one business area. During a time of lower demand, we have focused on risk and profitability management. But as loan demand picks up in Sweden, we will focus on establishing a leading position for small and medium sized companies where we want to be the main bank while we continue to optimize our large corporate business. In Latvia and Lithuania, we have an ambition to increase our market shares for corporate lending to 25% to 30% by 2030. This is developing according to plan while we continue to apply strict origination standards. Now I have just talked about how we will continue to leverage our proven business model and pricing strategy, how we will grow our share of wallets, and how we will grow in our prioritized segments. Now Kerstin, it is your time for the fourth business priority and that is to improve availability and operational excellence.

Yes, thank you so much. Jens, you just described Swedbank's progress in 3 out of 4 priorities. The fourth priority is about enabling growth through investments in improved availability and operational excellence. And those investments are a new omni-channel communication platform, end-to-end processes, as well as a new omni-channel advisory platform. So let me now share the progress of those and our plans ahead. During 2023, the first phase of the omni-channel communication platform was successfully launched in all our 4 home markets. And out of more than 2 million conversations that Swedbank has each quarter, we are now able to carry out more than 90% of those in the new platform. This was the first step in connecting our contact branches together with the branches into one common platform. And this year, more capabilities and media types will be connected to form a seamless customer experience across all our channels. It will allow customers to switch between remote meetings such as telephone, video, live chat or messaging, or choose self-service through our virtual assistant. And by 2025, the aim is that customers will be automatically routed to the right channel, depending on their service errand. The overall goal is to shorten our lead times, improve our stability, as well as to optimize our internal capacity planning. And at the same time, we create opportunities to do more business with customers that are in contact with us. When it comes to the end-to-end processes, we are also delivered according to plan. This area of investments relates primarily to standardizing our credit origination process. And for example, in 2023, we implemented a new valuation tool for tenant-owned apartments, making this step of the process more efficient for our customers as well as for our employees. And this year, we are introducing the same tool for property management. In addition, we have enhanced our online self-service loan application for new as well as for existing private customers. And in March, a totally new credit origination flow will be introduced, which will allow us to meet our customers in a quicker way. Often during the first contact, customers will be able to have a decision. And this new process and flow improves and automates several steps of the credit process, freeing up time for our advisors to support them even more. And going forward, we are speeding up the digitalization of credit documentation, which will enable customers to sign their mortgage documents digitally. And by 2025, we expect the end-to-end processes to increase our availability and shorten the lead times within the credit origination. Lastly, when it comes to our new advisory platform, which is planned to be fully launched in Sweden later this year, we have already started to use the capabilities and the results. Those looks promising. Based on the 20% of the advisory sessions that are currently being conducted on the platform, we see that advisors save up until on average 18 minutes per interaction. And this has also translated into increased customer satisfaction. On a monthly basis, 80,000 to 100,000 of customers seek advice and guidance in our platform, primarily in our app. And with the new platform, we strive to convert this activity into advisory interactions, getting us closer to our goal of 1 million in 2025. Scaling our guidance and advisory capability also means that people get access to the financial health concept. This concept empower our customers to improve their financial health, ensuring that they can plan for their life as retirees, that they are properly insured and that they can save for different purposes. So to sum up, we are happy and pleased with the results we see so far. And besides improving our availability and our operational excellence, we are confident that we deliver long-term value for our customers through guidance and advice, enabling the growth we heard Jens mentioned about.

Thank you, Kerstin. So you now listen to me and Kerstin talk about the business priorities. But in the end, it is all about delivering financial results, of course. So Anders, the floor is yours.

Thank you, Jens. I will start with quoting myself. On the Investor Day a little over a year ago, I said, being the CFO, this is the day of the year. And that quote deserves to be repeated, "Being the CFO, this is the day of the year." The result has been fantastic, and better than we initially thought. So let me say a few words on the macroeconomic assumptions that we based our 15/25 plan on. For example, we expected the Riksbank's policy rate and ECB's deposit facility rate to peak during 2023 at 3% and 2.25% respectively. Instead, they both reached 4%. During this period, Swedbank has captured the benefits of rising rates by leveraging our balance sheet structure and by being disciplined on pricing. Which is in line with our first business priority. As a result, we have improved NII and consequently return on equity beyond what was envisaged in the 15/25 plan. With that backdrop, let me now go through the key metrics and see how we have performed since our baseline year 2021. During 2022 and 2023, we have grown total income by on average 24% per year. Mainly driven by net interest income. Expenses, excluding fines, have increased by on average 6% per year. This has resulted in an exceptional annual average operational jaw of around 18 percentage points between 2021 and 2023. The cost-to-income ratio amounted to 0.33 in 2023, clearly outperforming the plan. In addition to strong income growth, we have maintained our strict cost control during a period of high inflation. The credit impairment ratio amounted to 9 basis points in 2023 compared to our long-term historical average of 7 basis points. Our capital position is strong, with a CET1 buffer of around 390 basis points above the Swedish FSA's requirements. In 2025, we aim to reach a buffer of around 200 basis points. And based on this level, we assess that we will generate roughly 300 basis points in excess capital over the course of the plan. All in all, we have delivered a return on equity of 18.3% in 2023. Since the start of the plan, we have grown income, controlled cost, and maintained solid credit quality. Based on this strong progress, we are in a favorable position to continue to deliver consistent returns. We are committed to distributing excess capital to our shareholders. The timing and quantum of extraordinary capital distributions, as well as the reassessment of our dividend policy, will be subject to the conclusion of the ongoing U.S. investigations. With that, I hand over to you, Jens, to conclude.

Thank you, Anders. So we have now presented the progress of our business plan, Swedbank 15/25. To summarize, last year was about the transition to higher rates. In this environment, we have supported our customers, continued to enhance our offering and demonstrated the strength of our business model. We have made strategic changes to the way we organize in Sweden with a customer focus. We have attracted new long-term saving customers in the Baltics and grown both private and corporate lending. And we have continued to invest to improve availability and operational excellence. And today, we published our climate transition plan, explaining how we will support our customers in the green transition. Going forward, we will focus on growing the business by supporting households and companies in our 4 home markets. We will continue to invest to drive business growth and we stay committed to delivering sustainable long-term value to our shareholders, because a sustainable bank is a profitable bank. In a year's time, I will invite you to a new Investor Day, where we and other representatives from the business areas will look a few years ahead and present how we will continue to deliver a sustainable return on equity of at least 15%. Now, it is time to kick off the Q&A, and Annie Ho, our Head of Investor Relations, you will guide us throughout the session.

Yes, thank you. It looks like we have quite a few questions already. [Operator Instructions] The first question comes from Rickard Strand from Nordea.

A question to Anders on the rate sensitivity. In the previous call this morning, you mentioned that the theoretical rate sensitivity for Swedbank, and also that it's similar when rates increase and decline. But you've also talked in the past about it's getting harder to forward rates to customers, the higher rates get. So I was wondering if you see the same dynamics here, now that rates are about to roll over that the rate sensitivity might actually be a little bit less in the beginning for the first rate cuts.

It seems like it was a question directed towards you, so.

Yes, thank you, Rickard. We gave you the numbers, as you know, with the simplified underlying assumption. And then what exactly is going to happen with the pass through when rates are coming down is very much up to the competitive environment. What I said in our Q4 presentation is that we will actively work with the administratively set rates on both the assets and liability side, particularly in Sweden.

Okay, then a quick, or the second question here on the, you talked about your ambition here to increase your footprint in the Swedish mid-sized corporate segment. Given the impaired macro-outlook, has that changed your progress here or is it becoming more or less favorable compared to your original plan given the change in macro-outlook?

Well, you put it directly like it is, Rickard. So what we've seen is that we have not grown as much as we expected in this market. And the reason is that we are taking a firm stance on sort of what's ongoing with the economy. And maybe that's not the time to increase. I mean, the overall target for us is to reach the 15% return equity. But as I said, I am very optimistic about the economy looking forward. Sweden has sound public finances with great companies and we have strong and profitable banks, good education among the people. And that means that I expect things to brighten up quite a lot during summer and autumn, and there we have good opportunities. And the good thing we do now is we're putting all together in what we call one corporate business, meaning that we have a powerhouse of good advisors, knowledge, expertise that can be phased out and used in different parts of the country. Because we are a bank that's all-around Sweden, so we see potential there. But you're right, this year we have not reached the sort of market share that we initially thought we could do, but due to the macroeconomics.

The next question comes from Johan Ekblom from UBS.

Just maybe to continue a little bit on the net interest income and the kind of active pricing mechanism in Sweden. When we think about deposits, Sweden has one of the more generous deposit remunerations in Europe today. How do you think about that? I mean, we're in a situation where deposits are flat to declining in Sweden. Is there anything different today in terms of the competitive dynamics compared to what we've seen historically? Or do you think you can reduce the effective deposit betas as rates fall?

Well, if I start with that, so the key point is you're absolutely right. We have a very competitive offering when it comes to sort of deposit rates. If you have on your transaction accounts where you get your money, we pay 0.30 from SEK 1 up till all the way up. And it's the most competitive among the large banks. When it comes to e-savings, we have 2.1 and if you come to us and lock it in for 3 months, we have 3.80. So what will happen when rates start to fall is the first thing to keep in mind is that we will not go back to negative interest rates. I don't think that will happen, and I think the central banks have learned a lot from that. And that means that our -- the structural or the interest rate, nominal interest rate for longer will be high. Not as high as now, but it will be high. And that means that we have a structural increase of our NII, which Anders has talked about. Then in that movement from higher interest rates to lower interest rates, we will act in the same way as we've acted during the uptake. We will act strategically and really follow the market.

Okay. And then maybe a second follow-up just on asset quality. I think I saw in your plan you assumed something like 7, 8 basis points in 2025. But I guess, we've all been surprised by how benign the credit cycle has been to date, but I guess there are some signs of a weaker consumer. You mentioned that EnterCard turned a loss in the fourth quarter on the back of higher impairments. We saw a niche consumer lender report sharply increasing Q4 provision. And your mortgage book has, I think, the biggest increase in stage 3 that I've seen, admittedly still at a very, very low level. But is there a risk that there is a big time lag and actually we'll see, even though the economy might be doing better in 2025, we see a worse credit quality development, in particular on the consumer side?

Well, first, you're right that it is a tough economic environment, both for household and companies. And if you look at credit losses, we've been consistent in the last 2 years around 8, 9 basis points. Then what we did was made an assumption for 2025, not the forecast and not the guidance, but looking at the average. And when we look so specifically at the mortgages, sometimes I think a lot of people who follow Swedish banks and other banks do not understand how our system works, because we talked about the credit losses we made in mortgages. During the last 40, 45 years, we've made credit losses in this area of SEK 2 billion, meaning SEK 50 million a year, that's GBP 4 million a year. And this has been sort of the Swedish banking crisis in -- sort of in the 90s. It's very good in that sense. We have a good credit origination standards, and we are confident in our credit quality. And the good thing, if something would happen, and I am going to talk a lot about that today, and that is that we are a profitable bank and we can withstand sort of a worsening, but I'm optimistic and our credit quality is good.

We have a question from Magnus Andersson.

Just to follow up on the financials in the plan. Under [ CET1 ] presentation 1 year ago, you were quite firm about the cost-to-income ratio being at 40%. That was the supporting target and we had a discussion whether it could be below. And you said you stuck to 40%. Now obviously we have a completely different income level. Is it still 40% we should look at, which given consensus income in 2025 would imply a cost base of some SEK 27.3 billion? Or do you think you can be below 40% now?

Thank you, Magnus. I think let me be crystal clear on the 40% cost-to-income. That is a supporting KPI that we think long term is where you have to be if you want to have a return on equity of at least 15%. We are not steering on cost-to-income and we will not steer on cost-to-income. Sometimes we will be below, as we have been for the past year, and sometimes we will be slightly higher. So you should see this as an ambition in order to enable the overarching goal of at least 15% return on equity.

And that's also, we talked about that. That is what I would say is sort of, how you look at a good retail bank in Europe. Sort of what are the best? And the best, delivering a consistent return on equity of 15% with a cost-to-income ratio of 0.40.

Okay. If I just may follow-up then also on capital. I mean, you stick to your capital target of being 200 basis points above the minimum requirement from the Swedish FSA. My question is, have you got any pushback at all on that either from authorities, rating institutions, etc., because I mean, we are seeing your competitors, Swedish competitors being at around 450 almost the same level as you are going forward without having a looming U.S. fine hanging over them. So is it realistic or is there something else here we should be aware of potentially?

No, we have not heard that.

There is no pushback at all on the 200 from anywhere?

No, I have not heard that.

Neither have I.