The change programme continues to yield strong results
Improvements in many areas
Our 3 C Change programme continues to generate strong results, as seen within many areas of the Group. Our services have met with increased customer satisfaction, costs continued to decline and employee motivation was enhanced. The result has kept improving, quarter by quarter.
It is gratifying to see that so many different parts of the Group have contributed to our improved result. In a broader perspective, not only our shareholders but also our customers and staff have seen improvements during 2003.
Our customers and their relationship with us are of fundamental importance. Two years ago, we decided to focus more strongly on both our private and corporate customers. Over the last couple of years we have taken a number of measures as regards product offerings, service, accessibility and prices. Furthermore, we have changed our way of working and decision-making. This is why it is particularly pleasing for all of us within SEB to see that our efforts have proved successful. Today, we are pleased to note that our customers have become more satisfied, step by step, and that we are increasing our market shares within many areas. This is true for all categories of customers. It is of utmost importance for our profitability to have satisfied customers, choosing us as a partner for their financial needs.
However, a high degree of customer satisfaction can hardly be achieved without a committed and competent staff. It is their competence that is key to customer confidence. It is a matter of providing good service, efficient transactions and sound advice.
It is therefore promising for the future that the motivation of our employees is deepening. During the past year, all SEB employees and managers have devoted a great deal of time to our Group-wide common values: Commitment, Professionalism, Continuity and Mutual respect. This forms an important part of our ambition to create a common culture across organisational and geographical borders. It is our ambition, by acting as "one SEB", to become both more efficient and to offer our customers improved service. In addition, many employees have devoted time and commitment to various charity and social projects.
For our shareholders it is a high and sustainable profitability that counts in the end. We have managed to improve our result, quarter by quarter, due to increased customer satisfaction, higher market shares, a committed staff and lower costs despite weak markets within many areas.
In terms of contribution from various parts of the Group we note that large corporations - mainly Nordic and German large companies as well as international financial institutions - have become increasingly important for SEB from a profitability point of view. We are pleased with our high and stable earnings within this area as well as with our strong market position.
The Nordic retail business has also reported strong improvements in terms of result, volumes and customer satisfaction after the changes implemented. In the Asset Management division, portfolio and fund performance improved significantly as well as new sales. Furthermore, in spite of a difficult market, the Swedish life insurance business managed to increase both its market share and result.
The German economy remained weak during 2003. Even though our result was strong compared with our German competitors, many of which reported red figures, profitability did not meet our requirements. Our German retail operations are therefore implementing a further restructuring programme in order to adjust costs to low demand. Due to a certain recovery of the economy in combination with our on-going restructuring, our outlook for our German operations has brightened.
Once again, the Baltic & Poland division reported an excellent outcome. We foresee continued strong growth in the Baltic economies and, consequently, in our subsidiary banks there. Our Estonian, Latvian and Lithuanian banks have contributed with increasing and strong results after being successively acquired in the period between 1998 and 2000.
To sum up, SEB's position is strong. We have implemented sweeping changes throughout the Group that continue to generate results. We have a solid capital base and more stability and breadth in our result. Our strategy continues to build on our 3 C programme, i.e. concentration on customers, costs and improved co-operation. Our strengthened platform provides us with new growth opportunities, particularly in the Nordic area. We are confident that our efforts will continue to benefit our shareholders, customers and employees - especially since we now start to see a brightening of the economy!
Fourth quarter isolated
Operating result for the fourth quarter amounted to SEK 2,194m, including pension compensation, or 9 per cent better than in the previous quarter and 17 per cent up compared with the corresponding period of 2002. The improvement was an effect of increased capital market-related revenues.
Total income amounted to SEK 7,113m, an increase of 6 per cent compared with the third quarter and 3 per cent compared with the corresponding quarter of last year.
Net interest income was virtually unchanged compared with both the previous quarter and the last quarter of 2002.
Net commission income rose by 6 per cent compared with the third quarter and by 11 per cent compared with the fourth quarter of 2002.
Net financial transactions were significantly higher than in the third quarter and in line with the previous year.
Mainly due to increased performance-related compensation total costs, SEK 4,647m, rose by 4 per cent compared to the third quarter. However, they were 1 per cent lower than last year.
Net credit losses amounted to SEK 330m, an increase of 57m compared with the third quarter and 52m compared with the corresponding quarter last year.
The full year 2003
Operating result: SEK 8bn
Operating resultfor 2003 increased by 7 per cent, to SEK 7,963m (7,412) in spite of reduced pension compensation. The result excluding pension compensation rose by 13 per cent, to SEK 7,305m (6,464).
Net profit rose by 7 per cent, to SEK 5,704m (5,318).
Stable operating income
Total income decreased by 1 per cent, to SEK 27,071m (27,378).
Net interest incomeamounted to SEK 13,782m (13,719). Increased volumes, particularly mortgage loans, offset negative effects from lower short-term interest rates.
Net commission incomeincreased by 2 per cent, to SEK 10,218m (9,975). Higher customer activity levels and under-lying values of assets under management had a positive impact on equity-related commission income, which constituted approximately 40 per cent of the Group's net commission income in 2003. Income from corporate finance activities was negatively affected by the fact that there were no IPO's on the Swedish market in 2003.
Net result of financial transactionsamounted to SEK 2,084m (2,409). The lower activity levels during the summer months and uncertainty prior to the euro referendum had a negative impact, whereas the last quarter of the year showed strong recovery.
Other incomedecreased to SEK 987m (1,275), mainly due to lower capital gains compared to 2002.
Total costs including pension compensation decreased by 4 per cent, to SEK 18,135m (18,949). Excluding pension compensation, costs were reduced by 6 per cent, to SEK 18,793m (19,897).
Staffcosts, gross, decreased by 1 per cent to SEK 11,157m (11,297) due to staff reductions. The average number of full time equivalents in December 2003 was 17,832, a decrease of approximately 2,160 since June 2001, which was the basis for SEB's cost reduction programme.
Compensation from pension funds was reduced by almost one third, to SEK 658m (948).
Other operating costswere reduced by 11 per cent, to SEK 6,191m (6,923). External IT-costs amounted to SEK 1,508m (1,784). Total IT-costs (defined as a calculated cost for all IT-related activities including costs for own personnel) were SEK 3.5bn (3.5).
Further restructuring in Germany
In spite of significant improvements during the past years and even though SEB performed better than its German competitors, the result of the German Retail & Mortgage Banking division is still unsatisfactory. The division has therefore launched a profitability improvement programme, which includes a staff reduction of 400 employees. This will lead to further restructuring costs of about SEK 300m, mainly during 2004.
New accounting principles for pension-related costs
On 31 December 2003, total assets of SEB's pension funds amounted to SEK 13.2bn (12.9) while commitments were SEK 10.6bn (10.3). Accordingly, the excess value was SEK 2.6bn (2.6).
As stated in the interim report for the third quarter of 2003, the introduction of new accounting principles, SFASC 29 (IAS 19), as of 2004 will have an impact on pension costs in the Group accounts. The Group's excess value according to the new rules will be around SEK 1.7bn as of January 2004. The change is expected to affect profit before tax for 2004 negatively by approximately SEK 250m, compared to current accounting principles. The new principles will initially increase equity by about SEK 1.3bn.
Stable credit loss level
The Group's credit loss level, including changes in the value of assets taken over, remained stable at 0.15 per cent (0.13). Lower recoveries than last year and the build-up of reserves in Germany were the main reasons for the increase in net credit losses to SEK 1,006m (828). Asset quality remained stable.
Improved result from life insurance operations
SEB Trygg Liv's operating result increased to SEK 149m (40). This is the division's best result up to now and has been included in the Group's result.
SEB Trygg Liv's result from on-going business, (including change in surplus values but excluding financial effects of short-term market fluctuations), was SEK 1,888m (1,343).
Results including surplus value changes are not consolidated with the SEB Group's result. Therefore, in order to provide a complete description of the Group's operations SEB Trygg Liv, including changes in surplus values, is reported separately on page 21 and in "Additional information" on www.sebgroup.com.
The result of the SEB Group's total insurance operations, non-life (run-off only) and life including goodwill amortisation of SEK 147m (147), amounted to SEK 78m (-56).
Net profit and tax
SEB's profit after tax increased by 7 per cent, to SEK 5,704m (5,318). Return on equity improved to 12.3 (12.0). Earnings per share increased to SEK 8.22 from 7.60 (weighted average number of shares).
Total tax amounted to SEK 2,247m (2,057). Of this, SEK 1,402m (1,133) represented taxes paid, SEK 761m (842) deferred tax and SEK 84m (82) taxes for previous years. The total tax rate was 28.2 per cent (27.8).
Increased assets under management
During 2003, assets under management increased by 11 per cent, to SEK 822bn (742). Net inflow during the year was SEK 36bn (20) while the change in value was SEK 44bn. SEK 11bn of the net inflow emanated from Sweden, SEK 16bn from Germany, SEK 5bn from the rest of the Nordic countries, and SEK 4bn from the Baltic States and Poland.
Net sales of mutual funds increased in all home markets leading to higher market shares.
Total credit exposure, including contingent liabilities and derivatives contracts, amounted to SEK 1,012bn (1,000), of which loans and leasing excluding repos amounted to SEK 776bn (731).
Swedish household mortgage lending, the German public sector and the Baltic subsidiary banks continued their volume growth. Lending to the corporate sector increased in local currency terms but remained stable in SEK due to the strengthening of the Swedish krona, particularly against the U.S. dollar.
Since year-end 2002, risk-weighted assets for credit risk increased by 6 per cent, to SEK 490bn (462).
The geographical distribution of the credit portfolio remained stable, with credit volumes concentrated in SEB's home markets: the Nordic area (45 per cent), Germany (34 per cent) and the Baltic countries (4 per cent).
On 31 December, doubtful loans, gross, amounted to SEK 10,877m (11,002), of which SEK 8,632m (8,862) were non-performing loans (loans where interest and amortisation are not paid) and SEK 2,245m (2,140) performing loans. The reserve ratio was 66 per cent (71). The lower reserve ratio reflects a reduced need for collective reserves as volumes related to these risk classes declined, particularly in the Nordic area. In addition there has been a shift from collective to specific reserves.
The volume of assets taken over amounted to SEK 117m (130).
Risk and capital management
By year-end 2003, the Group's total diversified Capital at Risk had increased to SEK 39.6bn (37.0). The increase was mainly volume-based.
The Group's risk-taking in trading operations (measured by so called Value at Risk, VaR) averaged SEK 106m (93) during 2003. This means that the Group, with a 99 per cent probability, cannot be expected to lose more than a maximum of SEK 106m during a ten-day period. The slightly higher VaR compared to 2002 was due to higher market volatility.
During 2003, the Group has intensified its preparations concerning the new capital adequacy rules, which are being developed by the Basel Committee and the EU Commission. Realisation of the potential benefit to the SEB Group creates a strong incentive for the Group-wide implementation project.
Capital base and capital adequacy
As of 31 December 2003, the capital base of the financial group of undertakings (i.e. excluding insurance companies) amounted to SEK 54.7bn (52.7). Core capital was SEK 42.6bn (39.7), of which SEK 1.8bn constituted so-called core capital contribution. Total risk-weighted assets amounted to SEK 535bn (503). The increase of SEK 32bn was mainly due to increased credit volumes in the Swedish mortgage business and the Baltic operations.
The core capital ratio was 8.0 per cent (7.9) and the total capital ratio 10.2 per cent (10.5).
In January 2003, Moody's upgraded its long-term rating for SEB to A1 from A2. In November the institute raised its outlook to a further "Possible upgrade".
In December, Standard & Poor's changed its long-term rating for SEB to A from A-. The improved ratings are important, since a higher rating over time leads to lower funding costs and more business opportunities in the international capital markets.
Proposed employee stock option programme
In order to attract and retain competent key staff, SEB has since 1999 had a broad employee staff option programme.
At the Board Meeting of 12 February 2004, the Board decided to propose that the Annual General Meeting resolve the launch of a new employee stock option programme for approximately 700 senior officers and specialists. An evaluation of earlier years' programmes has shown that they have helped keep costs down.
The new programme will have conditions and principles similar to those applicable to the 1999-2003 programmes. The Board proposes, however, to cap the potential gain for the option holders.
It will also be proposed that the potential cost of the employee stock option programme should be hedged as in previous years.
If the existing option programmes had been closed on 31 December 2003 at the share price of 106 kronor, the pay-out to the option holders would have been SEK 234m before income tax. The full value would have been more than offset by the hedge arrangements through equity swaps and repurchased own shares. It should be noted that the option holders agreed to freeze or reduce compensation in order to qualify for the programmes. If the existing programmes had been closed, 13.2m shares with an acquisition value of SEK 1,155m would have been restored to shareholders' equity.
Detailed information will be published in connection with the summons to the Annual General Meeting and in the Annual Report.
Proposal to repurchase shares
The Board of Directors has decided to propose to the Annual General Meeting to authorise SEB to repurchase own shares in the stock market for the following purposes:
- SEB's own securities business (must not exceed 3 per cent of the total number of shares in the Bank)
- Hedge against potential costs of the proposed employee stock option programme (maximum 6.2 million)
- General repurchase - effective management of the capital position of the Group (maximum 20 million shares)
According to Swedish regulations no more than 10 per cent of outstanding shares can be repurchased at any time.
The size of the dividend of SEB is determined by the financial position and growth possibilities of the Group. SEB strives to achieve long-term growth based on a capital base for the financial group of undertakings that must not be inferior to a core capital ratio of 7 per cent. The dividend per share shall, over a business cycle, correspond to around 40 per cent of earnings per share calculated on the basis of operating result after tax.
The Board of Directors proposes a dividend of SEK 4.00 (SEK 4.00) per Series A and Series C shares. The total dividend amounts to SEK 2,818m (2,818), calculated on the total number of issued shares as per 31 December, including 13,2 million repurchased shares. This proposal corresponds to 49 per cent (53) of earnings per share, which exceeds the policy target. The high dividend ratio should be viewed in light of SEB's strong capitalisation with a Tier one ratio of 8.0 per cent. The SEB share will be traded ex dividend as from 2 April 2004.
Changes within SEB's Group Executive Committee
As from January 2004 Nils-Fredrik Nyblaeus, formerly Deputy President and Chief Financial Officer of Förenings-Sparbanken, is Executive Vice President with responsibility for Group Staff and IT. He has succeeded Lars Gustafsson, who has retired.
Stockholm, 13 February 2004
Lars H Thunell
President and Group Chief Executive
More detailed information is presented onwww.sebgroup.com "Additional information" includes:
Appendix 1 SEB Trygg Liv
Appendix 2 Credit exposure
Appendix 3 Capital base
Appendix 4 Market risk
Profit & Loss Account quarterly performance, eight quarters
- The SEB Group
- The divisions and business areas
- Revenue split
Financial information in 2004:
13 February Annual Accounts for 2003
1 April Annual General Meeting
6 May Interim Report January-March
27 July Interim Report January-June
20 October Interim Report January-September
Further information is available from:
Lars Lundquist, CFO,
+46 8 763 95 68
Gunilla Wikman, Head of Group Communications,
+ 46 8 763 81 25; +46 70 763 81 25
Per Anders Fasth, Head of Group Investor Relations,
+ 46 8 763 95 66; +46 70 573 45 50
Annika Halldin, Responsible for financial information,
+46 8 763 85 60; +46 70 379 00 60
The full report including tables can be downloaded from the link below.