Swedish retail customers use equity instruments to a larger extent than customers in most other European countries, resulting in a deposit funding gap. SEB, like its Swedish peers, depends on a large portion of wholesale funding which we believe does not allow for a funding costs' moat. SEB did lower its efficiency ratio to below 50% in the last few years, but we don't think this alone allows for a moat. We also did not find any competitive advantages in credit or funding costs. Second, the high capital intensity of the business paired with low differentiation of product offerings result in only modest returns. First, banks typically are unable to generate any switching costs for their customers in this segment. We don't think this is a particularly moaty segment. SEB distinguishes itself from its Nordic peers through its focus on large corporates, with this segment contributing about 38% to its operating profits. SEB's operations do not warrant a moat, in our view. We therefore believe the 15% return on equity is likely to be the exception rather than the norm. Owing to its high dependency on wholesale funding, a lower-for-longer outlook on interest rates, and the first signs of slowing economies in Europe, we also do not expect macroeconomic tailwinds to lift earnings in the medium term. While the move toward a bancassurance model and further investments in private banking services should be positive, we believe management’s target to regain share in the Swedish mortgage market is ambitious and is likely to come at the cost of lower margins. As a result, we expect costs to trend upwards from here, forcing it to turn toward its top line to drive earnings growth. As a result, the group now has one of the smallest branch networks in the Nordics, and management already acknowledged that any further closures may chip away at its small and medium enterprise business, which relies on close customer relationships through branches. SEB has exploited its largest efficiency levers such as noncore divestments and branch closures. Now guidance excludes investments in the business, and additional costs for anti-money-laundering staff could also be on the horizon. The first step, to soften the cap, was taken in the last business plan update, and we believe further risks of cost inflation exist. Additionally, we are more cautious on management’s ability to maintain the cost cap. Profitability in the bank's largest segment, large corporates and financial institutions, just about covers our cost of equity assumption, while we believe the strong performance in the small corporates and private customer segment as well as the Baltics is partially supported by a currently benign credit environment. We find it difficult to close the gap between SEB’s ambition for a 15% return on equity and its current outlook, however. Also, we like the group’s achievements in its efficiency programmes, keeping costs virtually flat for almost a decade. Skandinaviska Enskilda Banken's, or SEB’s, focus on corporate lending and advisory banking services results in a healthy diversification between spread and fee-based income streams. Guidance of SEK 6 billion in loan losses for this year were maintained.īusiness Strategy and Outlook | Oct 27, 2020 In total, SEB set aside another SEK 1.1 billion for loan losses bringing the year-to-date amount to SEK 5.3 billion. SEB’s oil portfolio continues to generate the lion’s share of provisions. Another chunk of provisions for credit losses were booked, primarily stemming from its large corporate and financial institutions segment. Operating expenses were kept in check, declining by 1%. All three segments have been under pressure this year, although activity is beginning to normalize. SEB’s fee and commission income stems primarily from lending fees, issuing securities and cards, and payments. Net interest income, up 6% year over year on better lending margins, more than offset deposit margin pressure, neutralizing continued weakness in the net fee and commission income line, which was down 8%. If we exclude the beneficial impact from net financial income, which is driven by volatile asset prices and credit spreads, performance was still resilient. In the third quarter, operating income grew 5% compared with the same period a year prior.
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