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

Ladies and gentlemen, welcome to the Swedbank Interim Report Q4 2024 Conference Call. I'm Sandra, I'm the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Annie Ho, Head of IR. You will now be joined into the conference room.

Good morning, and thank you for dialing into Swedbank's Q4 and Year-end 2024 Results Presentation. My name is Annie Ho, Head of Investor Relations, and we have our C-suite here in the room with me: Jens Henriksson, our CEO; and for the first time, Jon Lidefelt, our CFO; and Rolf Marquardt, our CRO. Let's start with our usual presentation and then follow up with Q&A. Jens, I hand over to you.

Thank you, Annie. Swedbank has once again delivered a strong result supported by timing effects. We are creating value for our customers and shareholders in both good and bad times. The global economy remains weak. Falling interest rates are cautiously starting to have a positive effect on the economic development, but regional differences are growing while the geopolitical situation has deteriorated. During the quarter, the Federal Reserve, the ECB and the Riksbank continued to cut their policy rates and they are expected to be cut further in 2025, but uncertainty about when and how much has increased. Economic activity is strong in Lithuania while the development in Estonia, Latvia and Sweden is more cautious. Significant public investments in defense as well as infrastructure will support economic growth and give us business opportunities. Strong public finances, rising real wages, innovative companies and lower interest rates imply that our home markets are expected to be among the fastest growing in Europe in 2025. In this environment, Swedbank stands strong. The profit for the full year 2024 increased by 2% compared to the previous year. The result for the fourth quarter amounted to SEK 8.5 billion. Net interest income declined during 2024 and was stable during the quarter due to positive timing effects. During the year, lower customer interest rates on lending have been offset by lower funding costs. Net commission income increased during 2024 and was stable during the quarter. Costs developed according to plan and ended up in line what we have communicated. We maintain strict cost control, and our hiring freeze implies that we are fewer employees today than we were a year ago. Our cost-to-income ratio was 0.34 for the full year and 0.36 for the quarter. For the full year 2024, we thus delivered return on equity of 17.1%; and for the quarter, a return of 15.8%. A strong result. Swedbank has a conservative and thorough lending process. We had a credit impairment provision recoveries in the fourth quarter as well as for the full year. Our credit quality is solid, our liquidity and capital position is strong and we have a strong ability to generate capital. Swedbank's Board of Directors yesterday decided to change the dividend policy to between 60% and 70% of the profit. We have accumulated capital for a long time and we have no desire to hold more than necessary. This policy gives us the possibility to both develop the bank and increase lending as the business environment changes while securing a continued strong capital position. The Board of Directors therefore intends to propose a dividend for 2024 of SEK 21.70 per share, corresponding to 70% of the profit at the Annual General Meeting. The dividend goes to our owners in savings banks, insurance companies, pension funds, funds, retail investors and foundations that, in turn, give back to society. At Swedbank's Investor Day 2022, the road to a sustainable return on equity of at least 15% was formulated. It is a plan that we have delivered on. By leveraging our proven business model, we have increased business volume, grown in prioritized segments and improved our operational efficiency. We look forward to presenting an updated strategic plan for the coming years at the new Investor Day before the summer. Swedbank is the leader in mortgages in all our home markets, and we maintain that position in tough competition. We have seen increased customer mobility on the Swedish market during the year, which has affected us to a larger extent as we have the largest number of mortgage customers. During the year, our mortgages through owned channels have increased by about SEK 2.5 billion, which is below our market share. During the third and fourth quarter, our mortgage volumes have declined slightly. This is mainly because we have had too low availability at the time when many wanted to talk to the bank. In Estonia, Latvia and Lithuania, lending increased during 2024 as well as during the fourth quarter and it is the green mortgage loans that continued to drive the mortgage development. The development in savings remained strong with significant inflows to our Robur funds in 2024. In Estonia, Latvia, Lithuania, the development in savings has been very good, which continues to be a growth opportunity going forward. We are proud to contribute to savings culture in all our home market. In addition, inflows to the pension and insurance business also developed strongly in 2024. Premium and Private Banking has reached a new milestone. In 2024, 10,000 customers have signed up for our concepts. In Sweden, the demand for corporate loans remains muted, and Swedbank has maintained its market share in a declining bank lending market. Looking forward, the underlying view on the Swedish corporate market is positive. The combination of the local presence and national expertise remains at the center of our corporate business. Corporate lending increased in Estonia, Latvia and Lithuania for the full year and the quarter and the development since the summer has been strong. We are the leading corporate bank in Estonia and Lithuania, and our ambition to establish the same position in Latvia remains. But we will be more selective going forward as the new bank tax will make new lending per se unprofitable in the coming years. We invest for a better and stronger Swedbank to sustainably deliver on our customer promise of an easier financial life. In 2024, we have had an accelerated investment pace, and let me give you some examples. Our advisory platform, we have now migrated half of our customers to the platform. Our omnichannel communication platform to increase our availability and an improved end-to-end lending process to increase our speed. In Sweden, we adapt our ways of working to meet customers where they want to meet us. And we see that more and more customers want to meet us digitally and by phone. Therefore, we are reallocating resources to advisory meetings in those channels, all to increase our availability and speed. Sustainability is at the core of Swedbank's business strategy and at the heart of our vision a financially sound and sustainable society. In 2024, we reached several milestones. Swedbank's Sustainable Asset Register exceeded SEK 120 billion at the end of the year after increasing by more than 70% during 2024. And 36% of Swedbank's arranged bonds were sustainable bonds. Also in our annual report, we will report under the EU Sustainability Directive, CSRD, 1 year before it comes into effect in Sweden. Directing financing towards sustainable assets is both profitable and our responsibility. It is our way of contributing to accelerating the necessary transition of society. Looking at financial health, which is an area close to our hearts. We continue to contribute to increasing general knowledge of economic concepts and promoting better financial decision-making in our home markets. In Sweden, we have educated more than 100,000 children and young adults in personal finances in 2024. Now let me give the floor to Jon Lidefelt, who will deep dive into the financials in his first quarterly report as CFO. Jon have been with the bank for nearly 2 decades in total, and he knows the bank very well and his leadership is well suited for the next step in the bank's journey. Jon?

Thank you, Jens. I'm pleased to present the financials for yet another strong quarter. Some of you I've met in my previous role as Head of Baltic Banking, and I look forward to further discussions with you in our upcoming meetings. But as a starter, I'm very proud of what we have achieved in the Baltics over the past years where we have managed to combine substantially growing the business and at the same time expanding into new income streams. We have done so with a diligent focus on profitability, cost and capital efficiency. In my new role, the overarching objective for me is, of course, to ensure focus on shareholder value. To deliver on that, I know that we must have a diligent focus on return on equity and thus cost efficiency, capital efficiency, asset quality, and of course, income growth. Further, that we steer the bank with a long-term focus while being agile and adjust as we go. With that as a start, let me move over to lending and deposits. The overall loan portfolio was stable excluding a positive FX impact during the quarter. In Sweden, the lending environment continues to be muted. However, household confidence is improving and the cautiousness to borrow is slowly subsiding. For mortgages in Sweden, we continue with our pricing strategy and maintain focus on the balance between volumes and long-term profitability. Mortgage volumes decreased with SEK 2 billion while mortgage margins increased during the quarter. Corporate lending volumes in Sweden decreased with SEK 8 billion during the quarter, mainly related to a couple of individual customers' repayments. Underlying, we however see some positive signs in terms of customer activity stemming from our focus on one corporate business in Sweden. In Baltic Banking, lending continues to grow. The interest rate reduction since June have improved household affordability and consumer confidence, contributing to an increase in activity. Private lending increased with SEK 2 billion and corporate with SEK 6 billion, excluding FX. Customer deposits increased by SEK 4 billion, excluding an SEK 8 billion positive FX impact. In Sweden, private deposits decreased by SEK 1 billion, and corporate, by SEK 16 billion, mainly due to seasonal outflows from money market accounts. In Baltic Banking, we received some temporary inflows of public funds and payment of a 13th monthly salary in Lithuania, following the same pattern in December this year as previous years. Private deposits increased by SEK 17 billion and corporate deposits by SEK 4 billion. Year-on-year, we have increased our market share in private deposits in Baltics and volumes have grown by 13%. If we turn to the P&L. Net interest income was stable with a quarter-over-quarter increase of SEK 45 million, mainly driven by timing effects. Lending income decreased due to lower customer rates, largely offset by lower customer deposit rates as well as lower funding costs. Let me take the opportunity to deep dive on our NII sensitivity. We provide you with an update of our balance sheet composition and how we come to the full NII impact that is also disclosed in the fact book. We have around SEK 640 billion of non-remunerated deposits and equity. That imply ceteris paribus that a rate reduction of 50 basis points leads to a SEK 3.2 billion lower NII fully phased in. In reality, of course, volume, margin and FX changes will have an impact and you have to make your own assumptions of that. However, the journey to the fully phased-in impact is hard to estimate, as was discussed during the Q3 call. Let me elaborate a bit on the dynamics here. The trends we saw in Q4 have been similar to what we saw in Q3, and therefore, the NII development continues to be impacted by timing effects. This occurs as our liabilities reprice faster than our assets. All on-demand savings deposits where we pay interest reprice immediately when the pricing changes. Further, as we have seen recently, IBOR rates have declined ahead of and even more than central bank rates, which means that our wholesale funding costs have declined earlier and faster than assets that are dependent on central bank rate changes. On the asset side, our Swedish mortgage book on 3-month fixings reprices over a 3-month period after we have lowered rates, which we have typically done around the central bank rate decision. Therefore, when rates decline, our total funding cost will reduce earlier than our income. This is why in a period where rates fall fast, we have experienced a better NII development short term and why the NII development quarter-over-quarter in the current environment is hard to forecast. Over to net commission income, which is stable, mainly driven by stock market performance within asset management and market maker fees of SEK 50 million. Our emphasis on cross-selling pension and investment products have resulted in higher business activity. For example, our new business area, Premium and Private Banking, has seen a positive effect in attracting new inflows from private occupational pensions. Card commissions were seasonally lower, hence, following the same pattern as previous years. Net gains and losses were strong but down in Q4 ending at SEK 923 million. Client trading continues to be solid and we benefited from revaluations of equity instruments. Reminding you that Q3 was impacted by large positive revaluations of funding-related interest rate swaps. Other income decreased by SEK 309 million. Net insurance income decreased by SEK 142 million, of which SEK 121 million stemmed from less positive revaluation effects quarter-over-quarter. Underlying net insurance income was stable. Profit from partly owned companies decreased by SEK 244 million, of which SEK 120 million was a one-off adjustment in Entercard during Q3. The businesses in other income are meaningful, steady sources of income. One of our key business initiatives lies with the net insurance where the P&C business in Baltic Banking has seen an impressive 50% increase in revenue over the past 2 years. Total expenses for the year developed according to plan including FX, ending at SEK 25.4 billion. Looking ahead, we continue to be in an investment mode, and I will ensure continued strong cost discipline and aim to increase our focus on efficiency. We strive for long-term positive jaws in order to achieve profitable growth with shareholder value and focus where, long term, I mean, that we need to see through rate changes and plan based on a longer horizon with stable rates. For 2025, we set a cost guidance of SEK 26.5 billion based on 2024 year-end FX rates. Of that, we have temporary investments of around SEK 1 billion to accelerate certain initiatives such as the omnichannel advisory platform, payments infrastructure, data transformation and IRB overall. It is also important to mention Swedbank's strategic partnership with the savings banks. Through our close cooperation, both on business origination, operations and IT development, our joint operational efficiency and customer offerings improved. Costs for services provided are compensated by the savings banks and thus do not negatively impact our net profit. A word on other impairments before I hand over to Rolf to talk about credit impairments. Following the front-loading of IT investments since 2024, which replaced older systems, our regular accounting review of intangibles have resulted in a write-down of SEK 757 million. With that, I hand over to you, Rolf.

Thank you, Jon. Credit quality is solid. For the full year of 2024, we made recoveries of SEK 268 million. The economic recovery in most of our home markets has been delayed and the impact still lingers from this, but we see positive signs on the back of lower interest rates. Past due loans increased somewhat in Sweden, but improved in the Baltics. In the fourth quarter, credit impairments ended at a recovery of SEK 394 million. The impact from macro factors reduced provisions by SEK 212 million, explained by updated interest rate projections. Rating and stage migrations increased provisions by SEK 353 million due to downgrades of a few individual customers. At the same time, SEK 146 million of the post model adjustment was released, mainly related to property management in Sweden and agriculture in the Baltics. The remaining post model adjustment is now SEK 720 million to cater for geopolitical and related uncertainties. For individual assessments, we recovered SEK 56 million. Net repayments and balances reduced provisions by SEK 333 million. Out of this, SEK 83 million was related to net recoveries on written-off exposures. In the property management sector, we have in 2024 seen a stable development with open wholesale funding markets, strengthened balance sheets and stabilized interest coverage ratios. Our assessment is that the credit quality is solid. So with that, I leave the word back to you, Jon.

Turning to capital. REA increased by SEK 14 billion net and ended the quarter at SEK 872 billion. The annual recalculation of operational risk added SEK 16 billion. Reminding you that next quarter, we will see the impact of the implementation of Basel IV, which we expect to have a limited negative impact. The effect is primarily stemming from revised coefficients for operational risk REA. With the new dividend policy and the 2024 dividend proposal, our CET1 capital ratio is 19.8% meaning we have a buffer of around 460 basis points above the requirements. In addition, at the 15/25 presentation where we targeted 200 basis points, i.e., the mid of the management buffer, we talked about 300 basis points in excess capital. This has gradually grown. Given the new dividend policy and the proposed dividend for 2024, we now expect around 250 basis points in excess capital once we are through the work with IRB. Hence, our capital position continues to be strong. With that, I hand it back to you, Jens.

Let me now sum up the full year. We delivered a strong result for 2024. The profit increased by 2% compared to the previous year. Return on equity was 17.1%. Our cost-to-income ratio was 0.34. The credit quality is solid. With the changed dividend policy, the Board of Directors intend to propose a dividend of SEK 21.70 per share at the Annual General Meeting. Our capital buffer is strong at 4.6 percentage points. We have delivered on our plan, Swedbank 15/25, and we look forward to presenting an updated strategic plan for the coming years at the new Investor Day before the summer. We create value for our customers and our shareholders in both good and bad times. Our customers' future is our focus.

Thank you very much. Let's begin the Q&A session. [Operator Instructions]

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

Can you hear me?

Yes, we can.

Yes. Okay. Good. Excellent. Just on NII, as your NII sensitivity analysis you have in your fact book hasn't changed for a long time, I guess what you're saying is that we should continue to expect this positive timing effects for as long as short-term rates decline in average terms quarter-on-quarter and that it will reverse or normalize once rates flatten out, which according to the current expectations, could be during the second half of '25 which means that from that point, we should come down to whatever we thought was the underlying level excluding these timing effects. Whether that's correctly understood or not. And my question number two, Jon, since -- with your background in the Baltics, if you could comment on the windfall tax in Latvia from 2025 and '26 and whether you think that this windfall taxes we will have now in Latvia and Lithuania will be temporary or whether they will be replaced by something else, i.e., so that we should really expect bank taxes in the Baltics to be recurring. Those are my questions.

Well, thank you. I'll steal the word from Jon here because he's the CFO right now, so I'll talk about the Baltics. When it comes to bank taxes, let me first, as always, remind you that banks are an important part of our society. And what we do is that we channel our customers' hard-earned deposits to lending thus empowering people and businesses to create a sustainable future. And to do that, we need to be profitable. And a sustainable bank is a profitable bank. And we are proud taxpayers that contribute to the financing of welfare and security in our home markets. What we do not like are sector-specific taxes, retroactive measures and an unpredictable regulatory environment. What we do like is equal treatment, rule-based system and an investment climate that fosters growth, financial stability and green transformation. And let me not just talk about Latvia. Let me do a quick tour across our four home markets. In Estonia, corporate tax increased with 2% this year according to plan. In Lithuania, the investor tax on NII will last the year out and then the government has declared that it will disappear. The general corporate income tax increased by 1 percentage point from the 1st of January while reminding you that, since 2020, there is already a 5% extra tax on banks. In Latvia, we will now, for 3 years, have an investor tax with a similar definition of that to Lithuania, namely, 60% on NII exceeding 150% on our average NII between 2018 and 2022. But the main difference is that unlike Lithuania, income from new lending will not be excluded. That will hurt the Latvian economy in the short, medium and long term. Our ambition to become the leading corporate bank in Latvia remains, but the tax will have impact on our business strategy. In Sweden, we have a bank tax that the government is reviewing with the aim to introduce a base deduction while delivering the same tax revenues, thus, leading to an increased tax for the larger Swedish banks. Now Jon, NII.

Thank you, Jens. And if I just may add two things on the tax. Reminding you, Magnus, that the bare construction in Lithuania makes this tax at least temporary. At the same time, we also have an extra 5% corporate income tax for banks that is permanent. The Latvian has a different construction, as Jens said. But -- so I'll leave it with that. On the NII, I mean, yes is the short answer. I mean, I did this deep dive to give you the components and explain why we have these timing effects. At the same time, it will be very, very hard to do a correct forecast quarter-over-quarter due to all the moving parts and when rates are changing as they are now. So that's why I also reiterated the long-term sensitivity and sort of the components that in the end will impact that: volumes, margins, FX and so on. And there, you will have to make your own assumptions.

Yes. But nothing of this is really recovering assuming that the assets side will also reprice, although it reprices a bit later. So when rates flatten out, we should be at the correct underlying level regardless of these effects short term.

Yes. The long-term sensitivity is exactly what I have explained.

The next question comes from Martin Ekstedt from Handelsbanken.

Jon, welcome to the team. My first one, could you talk a bit about the derivatives effect that you see in the NII accounts, both from the interest income and expense side? They contributed a material positive portion in the quarter. And then secondly, if I may, the fall in card commission income in Swedish Banking, could you just speak a little bit more about the underlying factors there that you saw in the quarter?

Thank you, Martin. If I start with the derivatives, I think, first of all, when you look here, you have our trading-related NII is in this. And you can see also how much of the trading-related NII that is then moved out, so you need to keep that in mind when you look at this. The trading-related NII has moved to NGL in the end. But you also, on the expense side, you can see how our lowering funding cost is coming through. And here, you need to look at the derivative line in combination with the debt security issue. And so you will see our lowering funding costs coming through, but you will also have to take into account the trading-related NII here which is, in the end, not included in the NII line. On cards, I mean, we have a move between different -- within the net commission income since we have -- where we have concepts where we price. So things are moving from one part of the NCI to another part, moving out from cards to concepts partly. So that is the traffic you need to keep in mind there.

The next question comes from Gulnara Saitkulova from Morgan Stanley.

When it comes to the volume, to what extent do you think the potential recovery of those maybe throughout 2025 can support the NII dynamics? If you can you talk about the outlook for the loan growth momentum for both mortgages and corporate customers in Sweden and the Baltics. And what are the key observations when it comes to the customer behavior on the mortgages? And maybe can you also touch on the competition? How does it evolve throughout the Q4? Do you see some easing of the competitive behavior lately? Or do you think it still remains intense? And may I also ask the second question on the capital. Your capital buffer looks very solid. You're 460 basis points above the regulatory requirement. And you have increased the dividend payout. But still you are well above the management target buffer of 200 basis points. Assuming that after the AML investigation is closed, what would be your priorities when it comes to this excess capital? Would you consider potential buybacks, special dividends, M&A? Or would you focus mostly on the organic growth?

Thank you. Let me see what I can answer and then, Jon, you will have to see what is sort of left behind there. The first thing, if you look on the loan demand, it is, as we said, muted in Sweden when it comes to the corporate side. We see that the mortgages have increased during '24 compared to '23 while still at a low level. And in the three Baltic countries, we still see continued good demand. But let me say a few words, a deep dive into the mortgage market. And as you know, we are the market leader in all our four home markets when it comes to mortgages. In the Baltics, our mortgage volumes increased with SEK 6 billion during 2024 and we have a market share of around 40%. In Sweden, mortgages sold for our own channels increased with around SEK 2.5 billion during the year, translating to a meager front book market share of around 5% compared to our back book of 18%. The year started well, but the last 2 quarters our Swedish mortgage book has been slightly, slightly negative. The competition is tough, and we strive to strike the right balance between margins and volumes. And the market has been characterized by tough competition, increased customer churn due to high activity in our large customer base and thus many customer interactions which has caused, as I said in my introduction, availability issues and long waiting times. Our investments in the cloud-based omni-communication platform means that we can start serving customer calls both from service centers and local branch offices. And thereby, we can start using the national potential of our professional local employee mortgage and client adviser. This is a transformation that will take some time, but lead to results without increasing FTE levels. Now let me say a few words on capital and let's take the overall perspective here as well. We're very proud that the Board yesterday decided on a new dividend policy. And that policy is that 60% to 70% of our profit should be returned to our shareholders through ordinary dividends. And as you rightfully said, since 2019, we had a dividend policy of 50% and we have continuously built capital. And that cannot continue forever, and we have no intention to hold more capital than necessary. From now on, we have a sustainable dividend policy of 60% to 70%. That will give us a possibility to develop the bank for our customers and increase lending in line with the changing business environment while making sure that we have strong capital buffers. And you know that, for 2024, the Board will propose a dividend of SEK 21.70, which amounts to 70% of our profit. After this, as Jon pointed out, our capital buffer is 460 basis points. We still have the management buffer range between 100 and 300 basis points. And in 15/25, we targeted the mid of it, i.e., 200 basis points in 2025. That stands. So when can you then expect capital release so that we can reach our target? Well, there are always uncertainties related to what the regulators might do. But the biggest uncertainty is, of course, the U.S. investigations. And as I've said many times, we have no information on when they will be concluded. The U.S. authorities fully own the time line, and we cannot assess whether we will get any fine. And if we do get any fine, we cannot make an assessment of the size of such a potential fine. Sorry for being so long.

The next question comes from Tarik El Mejjad from Bank of America.

Just a couple of questions from my side. First, I'll start on costs. Just to be clear, what do you factor in your guidance? Do you include -- still include the SEK 1 billion extra investments you had for '25? And also, I guess you factor in the higher regulatory costs or windfall taxes in Baltics. And then another question, I mean, on the CMD. You answered part to Gulnara, I guess. But I mean, I understand that you reached a certain level of capital that's very comfortable and you don't want to go above, that's very sensible. So how then you're comfortable with the plan and your plans tend to be quite a longer time frame without knowing exactly what the size of the fine could be? Are you -- do you have any idea or evidence that it will be within the buffer you set? Just my experience of a lot of banks having been through this litigation settlement is that it's hard to set longer-term targets for growth and so on if you don't know exactly what capital you have on hand. And just sorry to come back on the NII. I just want to make sure I understand this derivatives point as well. So basically, on NII, you have the benefit from the derivatives, which is basically you're swapping your fixed rate liabilities into floating, which is actually what we refer as a timing difference because these reprice faster and quicker than the loans. But then you have part of it offset through trading, which will be a negative effect. We have the same actually affecting other banks in Europe, and I think it would be useful to show actually what's the kind of aesthetic elements outside NII. And then I guess this is where you say when rates will stabilize, that effect will basically diminish.

Well, let me start by the U.S. authorities. And to zoom out, as you know, we are in discussion with 3 U.S. authorities: the Department of Justice, the Securities and Exchange Commission and Department of Financial Services New York. And as I've said many times, when I was new as CEO, I called around and met with colleagues that have been in similar circumstances and they told me that the process like this usually takes 3 to 5 years. In spring, 6 years have passed, but the time line is fully owned by the U.S. authorities, and we do not know how it looks like. And as I do not know whether we will get any fines, and if we do get fines, we cannot estimate the size of those. And we have been as transparent as possible during this process. And when something material happens, we will continue to adhere to that principle. Jon?