SEB - well positioned in the new economy
Since 1997 SEB has focused strongly on savings and asset management. In 1998 we established a number of "stretch targets" for the Group: five domestic markets, five times the amount of assets under management, and five million Internet customers by the end of 2004.
The results for 1999 were favourable and clearly show that our efforts have borne fruit. As a result of our distinct mobilisation of resources in Asset Management, assets under management has increased from SEK 499 billion to SEK 702 billion and net commission income has risen by 26 per cent.
SEB strengthens transformation to e-banking
Nineteen ninety-nine was the year in which a number of critical steps were taken to transform SEB from Nordic to European, from a "universal" bank to a Group centred around the Internet, from being product oriented to being guided by customer needs within two main customer groups - business-intensive private customers and Nordic customers.
Approximately 50 branches to be closed in Sweden
With 380,000 of our most attractive customers on the Internet - 25 per cent of the total number of customers, the highest percentage in the world -- we have now reached a critical point in Sweden. The number of branch visits has declined to such an extent that we can begin to measure the consequences of the changed behaviour of customers. We will therefore close around fifty branches, a fifth of the total number, during the first half of the current year. The branches will continue to play an important role in the future, particularly with regard to advisory services.
Our Internet lead offers an opportunity for a major step into Europe
SEB was among the pioneers with regard to the Internet and has experience from three years of continuous development in this field. In the first phase, the Internet was a technology that was used to make such simple services as payments available via a new channel. Gradually, we provided more and more services such as funds and stock trading. We are now in transition to a completely new phase, in which we are utilising a new business logic that is made possible through the Internet.
SEB is among the elite in the world with regard to the number of its customers who use the Internet bank - 25 per cent. Where the Internet is concerned in our established markets -- Sweden, with 380,000 customers in February, and Estonia with 35,000 -- we see that cost-savings are now beginning to develop in "the old ways of working." However, Internet is much more than a way to save money in the "old channels." Our customers on the Internet conduct more transactions that those who do not use the Internet and provide for higher profitability. With the pan-European model, which is a fantastic instrument for the customers' financial planning, we also believe that we will acquire new customers in the markets in which we are already operating.
The greatest and most attractive opportunity naturally lies in our expansion in Europe, where we are participating in a growing investment market with a tool that offers superior service for customers. The new pan-European model is being launched in Denmark at the end of March, and in Germany under the auspices of BfG in the third quarter. We are now analysing the opportunities to also start up in Great Britain at the end of the year, under our own auspices or with a partner.
SEB -- In the middle of Europe's "wireless valley"
The private segment is not the only one in which the Internet has become substantial. SEB today has the largest percentage of corporate customers on the Internet. During the year an additional substantial investment will be made in this area to tie together our various corporate services. Growth in Sweden generally, and in "new economy" companies in particular, is naturally something that we are focusing on in the corporate sector, where we are already strong.
Costs continue to be a priority concern
At the same time we are seeing clearly how our costs are increasing. The largest increase is in Asset Management and Life, as well as other growing operations such as Enskilda Securities, where revenues are growing even more strongly. We will continue to invest in these areas, even though the focus for Asset Management during 2000 will be to streamline and to prioritise profitability ahead of growth. It is within the Nordic Banking operations, which mainly conduct business in a mature market with shrinking margins, that the costs savings must primarily be realised.
Cost reduction measures in intensified form are continuing in many areas, however. In addition, the increase in information-technology (IT) costs has now ended following a period of major projects. But a period following the initial investments in new system is often required before the savings become visible.
SEB is in the middle of the bridge between old and new business logic. It is clear to us that a paradigm shift is taking place. As a purely practical matter, we can achieve the necessary change in expertise without major costs, due to the large surplus values that we have in our pension funds. In the spring of 2000, as part of its cost-savings, SEB is continuing the program of early retirement of employees. The costs of this program are being met through compensation from SEB's pension funds, in which surplus values increased from SEK 13 billion to SEK 18 billion in 1999.
Continued increasingly efficient use of capital and reduction of risk
More efficient use of capital in Merchant Banking has been a priority area during the year and the amount of capital allocated was reduced from SEK 10,400 M to SEK 9,500 M. The risks in proprietary trading and in emerging markets have been reduced to lower, currently comfortable levels.
The restructuring of BfG has begun
A comprehensive program to restructure BfG and increase its profitability is currently under way. The core business in the savings and private-customer segments is attractive and it recently became known that BfG is the German bank with the highest percentage of satisfied customers. The results of our surveys since we took over the bank on 3 January have also been highly favourable. Goals and plans for cost savings and revenue increases have been raised from EUR 60 M to EUR 80 - 100 M annually through a restructuring program to boost profitability. This means that at least 500 positions will be eliminated and that nonstrategic units are being examined for the purpose of restructuring, selling or closing them down. As we reported in October last year, BfG is to become our portal to the market for savings programs in Europe. The pan-European Internet model is being launched in the third quarter. Currently, BfG has 65,000 Internet and on-line customers.
"Changing old companies in traditional industries presents a challenge," says Lars H Thunell, President and Chief Executive Officer. "But it is not a matter of disassembling; it is a matter of changing and creating something new; that is the only way to achieve growth."
Results for main groups and business areas
Effective as of 2000, several of SEB's business areas were organised to form four main groups - Nordic Banking, Asset Management and Life, BfG and "Other Group" operations. The latter comprises a number of companies/ business areas - Enskilda Securities, SEB Kort, SEB Internet, SEB Baltic Holding and SEB IT - that operate more independently under their own brands.
Nordic Banking comprises the Retail Distribution, Merchant Banking and Financial Services business areas, excluding SEB Kort, which forms a separate business unit as of 2000. The new main groups reported a combined total result of SEK 4,644 M in 1999. Revenues rose 1 per cent. The increase in costs was 5 per cent, of which staff costs, net, amounted to 12 per cent. The average number of employees was approximately 6,500 in 1999.
Income remained essentially unchanged, SEK 5,360 M. Net interest earnings declined mainly due to reduction in margins. The decline in net interest earnings was offset by a rise in commission income, primarily from securities, funds, payments and insurance. Despite a reduction of 243 in the number of employees, costs rose by 4 per cent due to higher staff costs and the continued investment in the Internet. Total result declined by 3 per cent to SEK 1,481 M. Return on allocated capital, SEK 7,100 M, was 15.0 per cent (15.50 per cent).*
Concurrently with the increasing use of primarily the Internet, but also of telephone and automated services, far fewer customers visit branch offices for simple transactions. During 1999, the trends reached a point where the office as a physical meeting place is no longer required to the same extent as previously. At the same time, the Banks' focus on more business-intensive customers and their need for qualified advice resulted in an aim to concentrate resources to the areas in which these customers exist. Accordingly, some 50 offices will be closed in 2000. About 280 persons are affected by the reduction, which will result in a net savings of about 150 positions.
Financial Services - continued high return
In Financial Services, SEB Finans displayed a particularly strong result, + 22 per cent. Overall, the business area increased its total result by 7 per cent to SEK 1,078 M. Return on allocated capital, SEK 1,300 M, amounted to 59.7 per cent (55.8 per cent).
At year-end 1999, SEB Finans' lending volume totalled SEK 18,762 M (SEK 16,634 M). SEB Securities Services held Swedish and international securities worth the equivalent of SEK 2,211 billion (SEK 1,575 billion) in custody. SEB Kort's turnover in 1999 amounted to SEK 112,889 M (SEK 103,030 M).
Merchant Banking - higher customer-related income and successful capital rationalisation
Merchant Banking in 1999 reported a total result of SEK 2,470 M (SEK 291 M). The goal to increase customer-related income and reduce dependence on more volatile market-risk-related income was achieved. Customer-related income rose 4.5 per cent, as a result of a highly positive trend in currency trading and the growing European, corporate debt capital market. As a result of lower market risk levels, income from own position-taking declined to SEK 840 M (SEK 1,089 M). Customer-related income accounted for 83 per cent of total revenues.
Extensive efforts have been made since 1998 to increase capital efficiency, Since June 1998, when SEB began to measure risk level in accordance with the Capital at Risk method, Merchant Banking has reduced its risk level by 19 per cent. This has been achieved primarily through a sharp reduction of exposure in emerging markets and through lower and better-controlled market risks. Return on allocated capital, which was reduced from SEK 10,400 M to SEK 9,500 M, amounted to 18.7 per cent (2.0 per cent). Capital rationalisation programs will continue during the current year. The focus on growth areas such as the European debt capital market has been financed by enhancing the efficiency of the international network. For example, the number of employees outside the Nordic region was reduced by nearly 20 per cent since 1998. The fact that costs nonetheless rose 8 per cent was due firstly to bonus-related remuneration and secondly to higher IT costs in conjunction with the introduction of the euro and preparations ahead of the millennium shift. Recoveries exceeded credit losses, resulting in a net SEK+441 M (-2,010 in provisions in 1998).
ASSET MANAGEMENT AND LIFE
This main group comprises the Asset Management and SEB Trygg Liv (life) business areas, which attained a combined total result of SEK 2,597 M in 1999. Revenues, including changes in surplus values, rose 39 per cent. The cost increase, net, was 27 percent, of which staff costs rose 45 per cent. The average number of employees was 1,800 during the year.
Asset Management - 40 per cent increase in managed assets
Income advanced 29 per cent to SEK 3,035 M, chiefly as a result of rising stock prices, but also because of a higher level of activity and acquisitions. Costs rose by 40 per cent, primarily as a result of the acquisition of ABB Investment Management in autumn 1998 and ventures in Denmark and Great Britain. Rising bonus-related remuneration as a result of higher activity and improved investment performance also contributed to the cost increase. The total result rose by 19 per cent to SEK 1,211 M (SEK 1,019 M). Return on allocated capital, including goodwill attributable to the group, SEK 3,750 M, was 23.3 per cent (19.6 per cent)
At 31 December 1999, Asset Management had SEK 702 billion (SEK 499 billion) under management. Of this total, portfolio management accounted for SEK 274 billion, traditional life insurance for SEK 228 billion and funds and unit-linked insurance for SEK 200 billion. SEK 72 billion of the volume in portfolio management and life insurance resulted from the agreement with Codan, a Danish company. Net deposits amounted to some SEK 14 billion, of which about SEK 8 billion was in the Group's mutual funds and SEK 6 billion in portfolio management for customers in Sweden and the rest of the Nordic region, and in Britain, Luxembourg, Switzerland and the U.S.
SEB Enskilda Banken experienced a strong capital inflow, of which 75 per cent derived from new customers. Assets under management increased from SEK 150 billion to SEK 230 billion in 1999.
SEB Trygg Liv - doubled result
Total result more than doubled to SEK 1,386 M (SEK 575 M). Sales, that is, new policies and extra payments on existing insurance policies, rose 22 per cent to SEK 8.8 billion (SEK 7.3 billion). Premium income (paid-in premiums) increased 20 per cent to SEK 15.1 billion (SEK12.6 billion). The change in surplus values in life insurance operations was twice as large compared with 1998,
SEK 1,502 M (SEK 752 M).
Return on allocated capital, including attributable goodwill, SEK 3,250 M, amounted to 30.7 per cent (12.7 per cent).
Funds under management at year-end amounted to SEK 230 billion (SEK 190 billion). (See Appendix on page xx.)
"OTHER GROUP" OPERATIONS
The combined total result for these units amounted to SEK 1,147 M (SEK 583 M). Revenues rose 60 per cent and costs increased 48 per cent. This included staff cost increases, net, of 79 per cent.
Enskilda Securities - best result ever
Enskilda Securities reported its best result ever, SEK 592 M (SEK 217 M). The earnings improvement is based on a very high volume of share trading and a large number of successful corporate finance transactions. Revenues rose by 70 per cent to SEK 2,279 M, while costs were up 55 per cent due to new recruitment and increased bonus-related compensation.
Return on allocated capital, SEK 650 M, was 65.6 per cent (24.0 per cent). Enskilda Securities' share of equities trading in Sweden in 1999 was slightly more than 10 per cent, representing an unchanged position as the largest player on the Swedish stock exchange. Enskilda is also the clear leader in Nordic M&A transactions.
Effective 1 January 1999, the operations within Enskilda Securities are incorporated.
After the close of the fiscal year, Enskilda Securities has signed an agreement to acquire Norwegian Orkla Finans (Fondsmegling) from Orkla Finans ASA, with payment in own newly issued shares. After the acquisition, SEB will hold 77.5 per cent and Orkla Finans ASA 22.5 per cent of the shares in Enskilda Securities.
The Baltic States - increased ownership
During 1999, SEB has gradually increased its ownership in the Baltic States, which since the autumn of 1999 forms a separate business area in the Group. At year-end 1999, SEB held 50.2 per cent in Eesti Ühispank, Estonia, 50.5 per cent in Latvijas Unibanka, Latvia, and 40.8 per cent in Vilniaus Bankas, Lithuania. Accordingly, the first two banks were consolidated in SEB since October and July 1999, respectively, while Vilniaus Bankas is reported on a profit participation basis. Earnings development in the three banks was positive. Total result including amortisation of goodwill amounted to SEK 170 M. Return on allocated capital, SEK 980 M, was 12.5 per cent.
During the current year, the number of branches in Eesti Ühispank will be reduced from the current 82 to about 50-60. The reduction is a result of the rapidly growing use of the bank's electronic services, mainly Internet. The number of employees will be reduced this year. Personnel reductions are also expected in Latvijas Unibanka and Vilniaus Bankas as a result of technical development.
SEB Internet - now the hub
Since summer 1999, SEB Internet is a separate unit in the Group. Costs for the Swedish Internet operations, which in 1999 amounted to nearly SEK 300 M, are carried by the business areas, whose customers use the services. Income from the operations accrues in the relevant business area, that is, mainly Retail Distribution and Asset Management. Investment in the pan-European Internet model amounted to about SEK 100 M in 1999.
During 1999, the number of business transactions on the Internet rose by 70 per cent. Twenty per cent of stock trading transactions by private customers and 30 per cent of private bill payments are made via the Internet bank.
During the current year, SEB's new e-bank will be launched in Denmark in March and in Germany during the third quarter, with Codan Bank's and BfG Bank's existing services on the net as a base.
Non-life insurance operations
The result from the Group's non-life insurance operations amounted to SEK 57 M (SEK 2,497 M). The result includes a capital gain of SEK 500 M from the divestment of Trygg-Hansa Försäkrings AB to Danish Codan on 14 October 1999 (with settlement as of 31 August 1999). The result also includes the run-off operations remaining in the SEB Group.
The BfG Bank was consolidated in the SEB Group on 3 January 2000 and, accordingly, is not included in SEB's 1999 results. BfG's own reporting is still in accordance with German accounting rules and are not yet adapted to the Swedish and international principles applied in the SEB Group. Adjusted by SEB, comparable profit before tax for BfG's amount to EUR 60 M in accordance with the same model applied in the issue prospectus.
Including non-recurring gains that are part of BfG's own results, earnings amount to EUR 117 M. Prior to the forthcoming acquisition, this result is charged with restructuring costs of EUR 85 M and estimated general reserve allocations, etc. in accordance with German accounting rules totalling EUR 197 M. After these closing measures, BfG reports, in accordance with its own accounting principles, a loss before taxes of EUR 164 M. The reported result is treated in the acquisition analysis in such a manner that a portion of the difference between the purchase price and shareholders' equity is appropriated already before the acquisition.
At 31 December 1999, BfG managed SEK 110 billion, of which about 80 per cent in mutual funds. BfG, which has been highly successful in its focus on savings, is the bank in Germany with the highest proportion of satisfied customers, according to a comprehensive survey conducted at the end of 1999.
In the current year, cost levels will be reduced through co-ordination with SEB in a number of areas, divestments and rationalisation of central functions. These measures will result in a staff reduction of at least 500 positions. Moreover, the operations of Deutsche Handelsbank are being terminated, resulting in reduction of an additional 75 positions.
Income - strong rise in commission income
Net interest earnings rose 3 per cent, to SEK 6,913 M (SEK 6,707 M), mainly due to the growing differences during the year between long- and short-term interest rates. Net interest earnings from deposits and lending increased marginally as a result of added volumes from the Baltic States that, combined, accounted for approximately SEK 200 M of net interest in 1999. The cost for the deposit guarantee amounted to SEK 263 M (SEK 268 M).
Net commission income increased by 26 per cent, to SEK 8,317 M (SEK 6,619 M), mainly due to increased securities commissions from equity trading and asset management, but also due to improved commission on payment services.
Net result of financial transactions, excluding changes in Trygg-Hansa's market portfolio, rose 29 per cent, to SEK 2,269 M (SEK 1,757 M). This was mainly attributable to the favourable result in equity and currency trading. The result from proprietary trading was affected adversely by rising long-term interest rates. Risks in these operations were reduced by 40 per cent during the year.
A one percentage unit change in the Swedish market rates as at 31 December 1999 would have resulted in an increase/decrease of approximately SEK 0.8 billion (SEK 1.9 billion) in the market value of the Group's total positions in Swedish kronor and foreign currency. The decline is attributable to reduced trading in own portfolios.
Other income declined 8 per cent, to SEK 2,040 M (SEK 2,218 M), Capital gains amounted to SEK 948 M (SEK 1,181 M). Comparable figures in the preceding year included a capital gain on the sale of bank properties of about SEK 1 billion. The 1999 result includes return on and a gain on the sale of investment portfolios of SEK 541 M and dividends from venture-capital funds of SEK 300 M.
Combined, the Group operating result, excluding divestment of the non-life insurance operations, amounted to SEK 19,758 M (SEK 17,528 M).
A significant portion of the result from the life insurance operations is attributable to the change in the surplus value in these operations, primarily unit-linked insurance. In accordance with the prevailing principles, this value change is reported as a separate line within total result. In an analytical perspective, however, the value change should be made the equivalent of income. Measured in this fashion, the adjusted result amounts to SEK 21,260 M (SEK 18,280 M), an increase of 16 per cent.
Costs - increasing percentage variable
Group costs amounted to SEK 15,098 M (SEK 12,973 M), an increase of 16 per cent. The higher costs are attributable mainly to investment in expansion of the Internet and continued rapid growth within Asset Management, SEB Trygg Liv and Enskilda Securities, which also reported favourable result increases. In addition, investments were made in Nordic Banking and Baltic States and Codan Bank was added in the autumn.
In general, there are considerable differences in the cost structure and costs development between the different new main groups within SEB, mainly between the growth-oriented segments and the more management oriented.
Part of the cost increase is due to pension costs, for which compensation is received from SEB's pension funds. Pension provisions are reported under a separate item in the profit and loss account and amounted in 1999 to SEK 873 M (SEK 531 M). If costs are reduced by this compensation/ contribution, net costs amount to SEK 14,225 M (SEK 12,442 M), an increase of 14 per cent.
The income/cost ratio amounted to 1.50 (1.47). The positive development during the fourth quarter resulted in an income/cost ratio of 1.65. The corresponding cost/income figure (relation of costs to income) was 0.67 (0.68). This resulted in an improvement to 0.61 in the fourth quarter.
A significant portion of the increase in staff costs is due - in addition to new recruitment in growth areas - to an increase in bonus-related remunerations as a result of positive earnings trend, mainly within Enskilda Securities, Asset Management and Merchant Banking. Staff costs amounted to SEK 8,419 M (SEK 6,816 M), up 20 per cent, after reduction by the aforementioned pension provisions. In other respects, the increase in costs was limited to 8 per cent.
IT costs - including personnel within SEB IT - amounted to SEK 2,806 M (SEK 2,857 M), down 2 per cent. Taking into account the personnel in the business area, the total IT costs can be calculated at slightly more than SEK 3 billion, which is the same level as a year earlier. This means that the previously expressed ambition to maintain IT costs at an unchanged level in 1999 could be realised. A further improvement of efficiency in the IT area is planned in 2000, by linking control more closely to business development and incorporating the actual IT organisation and establishing a central Chief Information Officer (CIO) function.
The number of staff, measured as an average for the year, increased by 528 to 13,875. The increase is attributable to Eesti Ühispank and Latvijas Unibanka being consolidated in the SEB Group during the second half of 1999. Excluding the addition from the Baltic banks, the average number of staff declined by 459.
At the end of 1999, SEB's management and the trade unions agreed that the profit-sharing system should be replaced with a pension insurance for the years 1999 and 2000. The past year's costs for this amounted to SEK 376 M (compared with an allocation to profit sharing in 1998 of SEK 292 M). As a result of the agreement, a large portion of costs can be financed through payments from SEB's pension funds.
At year-end 1999, SEK 1,699 M of the restructuring reserve of SEK 2,255 M was utilised.
Lending losses and doubtful claims - recoveries and reduced exposure
During 1999, the Group's recoveries and withdrawals were greater than lending losses, including value changes in assets taken over and write-downs of financial fixed assets. Accordingly, a net of SEK 289 M (loss: SEK 2,251 M) was reported. Incurred losses and provisions for possible lending losses amounted to SEK 1,089 M (SEK 2,801 M), while recoveries and withdrawals, including reserve for political risks abroad, SEK440 M, amounted to SEK 1,295 M (SEK 564 M).
The provision for the Group's undertakings in emerging markets at year-end 1999 amounted to SEK 1,797 M (SEK 2,525 M), of which SEK 790 M (SEK 1,318 M) pertained to Russia.
Doubtful claims, net, declined by 21 per cent, to SEK 2,824 M (SEK 3,577 M) and the volume of assets taken over declined by 39 per cent, to SEK 626 M (SEK 1,031 M). The level of doubtful claims decreased to 0.82 per cent (1.08 per cent), while the provision ratio for doubtful claims increased to 59.6 per cent (52.0 per cent).
Pension provision - major surplus in pension foundation
Operating costs are continuously charged with both general pension fund contributions actually paid and with standard pension costs in accordance with the supplementary pension plan of the Bank. These pension costs are restored in the total result of the Group, because the Bank has the right to compensate itself for this type of costs from the Bank's pension funds, which are independent from the Bank. This right applies as long as the assets of the pension funds exceed estimated pension commitments.
For 1999, this pension provision amounted to SEK 873 M (SEK 531 M). In addition, a nonrecurring cost for early retirements is being charged directly against the pension foundations in the amount of SEK 716 M (SEK 461 M). The total assets of the pension funds were slightly more than SEK 25 billion (SEK 19 billion), while their commitments totalled SEK 7 billion (SEK 6 billion). Accordingly, the surplus value rose from SEK 13 billion to SEK 18 billion during 1999.
Taxes relating to the total result amounted to SEK 1,776 M (SEK 1,211 M), which equals a weighted tax rate of 24 per cent. Tax costs of SEK 1,355 M (SEK 1,000 M) consist of SEK 1,288 M (SEK 527 M) in taxes paid, SEK 276 M (SEK -450 M) in taxes for prior years, SEK -209 M (SEK 923 M) in deferred taxes. Combined, this corresponds to a tax rate of 23 per cent.
Rising total result
Operating profit, excluding the non-life operations, amounted to SEK 5,065 M (SEK 2,304 M) The change in the surplus value of the life insurance operations was SEK 1,502 M (SEK 752 M). With the addition of changes in the surplus value and a pension provision of SEK 873 M (SEK 531 M), total result - excluding non-life operations - amounted to SEK 7,440 M (SEK 3,587 M).
Including non-life operations, the total result was SEK 7,497 M (SEK 6,084 M) before taxes and SEK 5,665 M (SEK 4,867 M) after taxes.
Investments in Nordic region, Baltic States and Germany
During the year, SEB Trygg-Hansa Försäkrings AB (non-life insurance) was divested for slightly more than SEK 4.3 billion to Danish Codan. At the same time, SEB acquired Codan Bank, 49 per cent of Codan Link and Codan's 15.8 per cent interest in Amagerbanken for a approximately SEK 1 billion. The agreement with Codan also included an agreement on asset management.
During the year, SEB successively increased its holdings in the three partly owned Baltic banks, Eesti Ühispank in Estonia (from 34 per cent to 50.2 per cent), Latvijas Unibanka in Latvia (from 44.3 per cent to 50.5 per cent) and Vilniaus Bankas in Lithuania (from 35.8 per cent to 40.8 per cent). Accordingly, the first two banks are consolidated in the SEB Group.
In October, SEB reached an agreement to acquire 100 per cent of the shares in BfG Bank for EUR 1.6 billion, (DEM 3.1 billion) or SEK 13.9 billion from Crédit Lyonnais. The acquisition was financed partly through a rights issue of SEK 4.1 billion. BfG was consolidated in the SEB Group as of 3 January 2000.
The full report including tables is available to download from the enclosed link.