RNS No 1175f
SKANDINAVISKA ENSKILDA BANKEN
17 August 1999
PART 1
Interim Report January-June, 1999
Investment in growth areas continues
- The total result* of the SEB Group, excluding non-life insurance operations,
increased by 10 per cent during the first six months of 1999, to SEK 3,705 M
(SEK 3,380 M).
- Including non-life insurance operations, which are in the process of being
sold, the total result amounted to SEK 3,473 M (SEK 5,617 M) and the operating
result to SEK 2,757 M (SEK 4,991 M). This deterioration was primarily due to
the negative development of the investment portfolios of the non-life
insurance business.
- In June, an agreement was signed with the Danish company Codan regarding the
sale of Trygg-Hansa Non-Life. SEB is thereby making inroads into the Danish
market.
- Return on equity * was 16 per cent (26 per cent).
- The total result per share after tax was SEK 4.44 (SEK 6.72).
- Assets under management increased, to SEK 549 billion (SEK 472 billion), to
which assets of approximately SEK 70 billion were added according to the
agreement with Codan.
- Investments within Asset Management, IT and the Nordic branches continued
while other operations are subject to continued rationalisation.
- The Internet unit has been made a separate unit in order to accelerate SEB's
Internet drive.
*) Operating result including changes in surplus values in life insurance
operations plus pension provision.
Market conditions and business trends
Long-term interest rates rose by close to one percentage unit during the first
six months of 1999, while short-term rates remained largely unchanged. At the
same time, the period was characterised by a continued stock market boom both in
Sweden and in the majority of the most important international markets. The SEB
Group consolidated its position as the biggest player on the Stockholm Stock
Exchange, with a share of 10.6 per cent during the first half of the year,
compared with 9.4 per cent during the same period last year.
Interest in asset management and savings remained at a high level. Since
co-operation with Codan started on 1 August 1999, SEB's total assets under
management for account of customers, or SEK 549 billion, had increased to
approximately SEK 610 billion by the middle of August 1999. Of this amount,
portfolio management accounted for 45 per cent, traditional life insurance for
close to 30 per cent and mutual funds, including unit-linked insurance, for
25-27 per cent. On 30 June, SEB's total assets in mutual funds were SEK 156
billion, of which SEK 148 billion (SEK 129 billion) was in the domestic market.
This corresponded to a market share of 22.2 per cent (22.9 per cent).
SEB's household deposits were largely unchanged at SEK 59 billion, which means
that the market share dropped to 13.6 per cent (14.4 per cent).
On 30 June, the Group's lending to the general public (i.e. households,
companies, etc.) amounted to SEK 349 billion (SEK 350 billion). Adjusted for
repos, lending increased by SEK 8 billion, to SEK 313 billion (SEK 306 billion),
mainly due to an increase in private housing loans. The SEB Group's share of
household lending increased to 11.7 per cent (11.2 per cent).
Mixed development for SEB's business areas
The best contributions to the result during the first six months of 1999 were
delivered by Merchant Banking, Retail Distribution and Financial Services.
Compared with the first half-year of 1998, Enskilda Securities and Merchant
Banking showed the greatest improvements, while Financial Services and Enskilda
Securities reported the highest profitability.
Retail Distribution - continued rationalisation
Income dropped by 4 per cent, primarily due to pressure on deposit margins.
Despite volume increases on the lending side, net interest earnings decreased
slightly as a result. Commission income also dropped, due to lower custodial
fees and eliminated withdrawal fees on National Savings Accounts.
Costs decreased by 1 per cent. Despite a decrease of an average of 350
positions, staff costs increased a little, mainly due to contractual pay
increases. Lending losses remained largely unchanged.
The total result amounted to SEK 462 M (SEK 563 M) and return on allocated
capital was 10.4 per cent, calculated on a twelve-month moving average basis.
On the whole, Retail Distribution's market shares remained unchanged. A
decreased share of the private lending market was offset by continued strong
development of SEB BoLan's housing loans.
Financial Services - high earning capacity
Financial Services comprises the following business units: SEB Finans, SEB Kort,
SEB Securities Services and SEB Foretagsinvest. Income was up 11 per cent
compared with the corresponding period in 1998. Both net interest earnings and
net commission income increased. Costs rose by 12 per cent, chiefly due to
investments in new computer systems within SEB Kort and SEB Securities Services.
The total result amounted to SEK 437 M (SEK 423 M) and return on allocated
capital was 54.8 per cent, calculated on a twelve-month moving average basis.
SEB Finans launched new establishments in Finland and Denmark during the period.
Card-related turnover within SEB Kort totalled SEK 43 billion, an increase of
12 per cent compared with the period January-June 1998. This strong development
continues. On 30 June, 1999 the total custodial account value of SEB Securities
Services was SEK 1,904 billion and the number of processed transactions was 41
per cent higher than during the first six months of 1998. All three units have
high and stable market shares within their respective areas. By the end of June
1999 the venture capital unit SEB Foretagsinvest had invested a total of SEK
125 M in twelve companies.
Asset Management - increased assets under management
Income rose by 20 per cent, primarily due to an increase in the volume of assets
under management, the acquisition of ABB Investment Management in late 1998 and
higher income from equity trading. Costs increased by 37 per cent. This is
mainly explained by an increase in the number of analysts and asset managers,
the acquisition of ABB Investment Management and continued investments in
Norway, Finland and Denmark.
The total result amounted to SEK 422 M (SEK 440 M). Return on allocated capital
was 17.5 per cent, including attributable goodwill of SEK 3,750 M and calculated
on a twelve-month moving average basis.
On 30 June 1999, Asset Management had SEK 549 billion (SEK 472 billion) in total
funds under management, of which portfolio management accounted for SEK 207
billion, traditional life insurance for SEK 172 billion, mutual funds for SEK
112 billion, unit-linked insurance for SEK 44 billion and the non-life insurance
portfolio for SEK 14 billion. Funds under management during the first half of
1999 totalled SEK 519 billion, on average, compared with SEK 443 billion during
the first half of 1998.
During the spring, SEB's Swedish private banking operations were profiled under
the name SEB Enskilda Banken. The reception has been very positive. New
customers have arrived. SEB Enskilda Banken has increased its share of
customers' total business. Private banking activities, not least within SEB
Enskilda Banken, will play an important part in Asset Management's future
strategic development.
SEB Trygg Liv - increased sales
Premium income (premiums paid) increased by 17 per cent, to SEK 7,421 M (SEK
6,351 M). Sales, i.e. new sales and additional payments under existing insurance
policies, rose by 19.5 per cent, to SEK 4,785 M (SEK 4,005 M). In total, income
increased by 12 per cent, due to a higher premium volume and assets under
management, chiefly within unit-linked insurance.
Operating costs and other costs increased by 3 per cent. However, the net cost
increase was reported at 11 per cent, due to lower deferred acquisition costs
between the years.
The total result, which comprises the change in surplus values, i.e. the present
value of future income from signed insurance contracts, increased by 9 per cent,
to SEK 368 M (SEK 338 M). This improvement was due to both increased sales and
satisfactory growth of the policy-holders' investment assets.
Return on allocated capital was 13.4 per cent, calculated on a twelve-month
moving average basis.
Merchant Banking -continued positive development of customer-related income
Income from customer-related operations increased by 11 per cent, to SEK 2,286M
(SEK 2,066 M), following a positive development of trading operations, capital
market activities and investments in new product areas. Income from proprietary
trading was negatively affected by rising long-term rates and dropped to SEK
442 M (SEK 551 M). The cost increase was limited to 2 per cent.
During the second quarter, repayments and sales in connection with Russian loans
were made, which resulted in recoveries of SEK 385 M. No further country risk
provisions have been considered necessary.
The total result increased by 75 per cent, to SEK 1,554 M (SEK 887 M). Return
on allocated capital was 17.1 per cent, calculated on a twelve-month moving
average basis.
Enskilda Securities - continued positive performance trend
The stock market remained favourable also during the second quarter of 1999. At
the same time, Enskilda Securities consolidated its market position within
equity/derivatives trading and corporate finance. Enskilda Securities' turnover
in the secondary market dropped slightly during the second quarter, although it
increased by 23 per cent compared with the first half of 1998. A very strong
result within Corporate Finance following financial advice in connection with
the Astrazeneca deal, some successful market introductions and continued strong
results within equity derivatives trading led to an increase of 39 per cent in
Enskilda Securities' income, including a dividend of a little over SEK 100 M
from its participation in a venture capital fund.
At the same time costs increased by 33 per cent, chiefly as a result of
aggressive investments in the form of recruitment of a number of highly
qualified key persons and a performance related bonus system.
The operating result increased by 61 per cent, to SEK 315 M (SEK 196 M). Several
of the non-Swedish units reported very satisfactory results. Return on allocated
capital was 37.2 per cent, calculated on a twelve-month moving average basis.
In 1999, Enskilda Securities obtained remote membership of the stock exchanges
of Amsterdam and Oslo.
Sale of Trygg-Hansa Non-Life - Expansion in Denmark
At the end of June, SEB signed an agreement with the Danish company Codan and
its British parent company Royal & SunAlliance to the following main effects:
- Codan purchases Trygg-Hansa Non-Life for SEK 4.3 billion. Prior to that, SEB
receives a tax-exempt dividend in the amount of SEK 2.7 billion.
- SEB acquires Codan Bank for DKK 750 M (SEK 885 M), corresponding to
shareholders' equity, 49 per cent of the unit-linked insurance company Codan
Link for DKK 25 M (SEK 30 M) and Codan's 15.8 per cent holding in Amagerbanken
for DKK 80 M (SEK 94 M).
- SEB enters into a number of long-term asset management agreements, covering
approximately SEK 70 billion. To this, custodial services will be added.
- SEB remains the asset manager of Trygg-Hansa's Swedish portfolio, the value of
which is approximately SEK 12 billion.
- SEB makes extensive distribution agreements with Codan regarding life, savings
and bank products in Denmark and with Trygg-Hansa in Sweden regarding non-life
and life insurance products.
- The right to Trygg-Hansa's trademark with respect to non-life insurance
products is licensed to Codan free and without time limitation.
The take-overs will come into effect as soon as all necessary authorisation has
been obtained, most likely around 1 October, 1999. The capital gain is expected
to be approximately SEK 500 M.
The result from Trygg-Hansa's non-life insurance operations, including the
investment portfolio, was SEK -232 M, compared with SEK 2,237 M for the first
half of 1998. The technical result of Trygg-Hansa Non-Life declined as a result
of rising operating and claims settlement costs. However, this decline was
mainly due to the performance of the investment portfolio of the non-life
company. The result from the equity portfolio, which was sold at the beginning
of 1999, totalled SEK 1.8 billion during the period of comparison, following the
stock market boom during the first half of 1998. In 1999 the result from the
bond portfolio of the company has deteriorated, due to rising long-term rates.
SEB will be responsible for Trygg-Hansa Non-Life's operations, including its
bond portfolio, until the take-over occurs. This may have an effect on the net
result of the transaction. Due to interest rate sensitivity, a one percentage
unit change in interest rates would lead to a SEK 200 M change in the result.
Group performance
Income - increased commission earnings
In all, Group income, excluding the non-life insurance operations that were sold
to Codan, amounted to SEK 9,886 M (SEK 9,833 M).
Net interest earnings increased by 3 per cent, to SEK 3,401 M, mainly due to
lower borrowing costs. Net interest earnings from deposits and lending increased
marginally as a result of a continued growth in volumes. Net interest earnings
also include costs of SEK 132 M (SEK 134 M) for the deposit guarantee.
Net commission income rose by 16 per cent, to SEK 3,815 M, primarily as a result
of growing volumes within equity trading and financial advice in connection with
corporate deals. Commission income from mutual fund management and payments,
including credit and charge cards, increased, too. Net commission income has
also shown an increase on a quarter by quarter basis.
Net result of financial transactions, excluding changes in Trygg-Hansa's
investment portfolio, dropped by 7 per cent, to SEK 1,162 M. This was primarily
due to the fact that rising interest rates had a negative effect on both the
bond portfolio of the Bank and on proprietary trading.
A one percentage unit change in the Swedish market rates as at 30 June, 1999
would have led to an increase/decrease of about SEK 0.7 billion (SEK 1.7
billion) in the market value of the Group's interest-sensitive positions in
Swedish kronor and foreign currency, excluding the non-life business, and to an
increase/decrease of about SEK 0.9 billion (SEK 2 billion), if the non-life
business is included. Interest rates have continued to rise since 30 June, 1999.
Other operating income amounted to SEK 1,305 M (SEK 1,781 M). The comparison
figure for 1998 included a capital gain of approximately SEK 1 billion from the
sale of business properties. This year's figure includes capital gains of SEK
270 M from the sale of the Bank's investment portfolio, in addition to current
yield, and dividend amounts of a little over SEK 200 M from venture capital
funds. Furthermore, it included net insurance income of SEK 113 M (SEK 264 M),
excluding Trygg-Hansa Non-Life.
Cost reductions in day-to-day operations
Costs have been pushed up by continued investments within Asset Management,
Enskilda Securities, IT and by the expansion of the Nordic branches. Excluding
these investments, costs dropped by 1 per cent following rationalisation
measures in other areas. The Group's total costs, excluding the non-life
business, rose by 8 per cent, to SEK 7,115 M (SEK 6,561 M).
Staff costs increased by 9 per cent, mainly as a result of contractual pay
increases, performance-related compensation and new recruitment of specialists.
During the first half of 1999, the average number of posts was 12,414 (of which
about 1,300 were in Trygg-Hansa Non-Life), compared with 12,869 during the first
half of 1998. Increased costs for consultants and data account for most of the
remaining cost increases.
As at 30 June 1999, SEK 1,410 M had been used of the restructuring reserve of
SEK 2,255 M (SEK 356 M was used during the first six months of 1999).
Lending losses and doubtful claims - recoveries during second quarter
After recoveries and sales of SEK 385 M in connection with Russian loans, the
Group's lending losses, including value changes in pledges taken over, showed a
positive outcome at SEK +218 M (SEK -518 M).
The Group continued to reduce its exposure on emerging markets. On 30 June, 1999
its net emerging market exposure was SEK 13,908 M, a decrease of 24 per cent
since the end of 1998. The largest reductions since year-end 1998 involve Hong
Kong and China, which were reduced by 28 per cent and 35 per cent, respectively,
and Brazil, which was reduced by 36 per cent.
Following repayments from Russian counterparties, exposure on Russia has been
reduced to SEK 1,185 M, gross. At the same time, the provisions for these loans
have been reversed. The remaining reserve now totals SEK 911 M, which means a
provision ratio of 77 per cent. If the fact that certain loans are secured
through payments outside Russia is taken into account, this provision ratio is
close to 100 per cent.
Emerging market exposure, geographical distribution, SEK M
Total Notes
Asia 1) 7,160 1) Includes Hong Kong, China, India, Pakistan,
Taiwan, Macau and other specified countries
Hong Kong 2,691
China 986
Other specified 2) Includes the Philippines, Malaysia, Thailand,
countries 2) 2,563 Korea and Indonesia
Latin America 3) 4,276 3) Includes, Brazil, Argentina, Mexico and Peru
Brazil 1,711
East- and Central 4) Includes Russia, Greece, Israel, Estonia, Latvia,
Europe 4) 2,146 Lithuania, Poland, the Czech Republic, Slovakia,
Rumania, Hungary, Slovenia, Croatia, Kazakhstan
and the Ukraine
Russia 1,185
Africa and Middle 5) Includes Turkey, Iran, Saudi Arabia, Egypt,
East 5) 2,463 South Africa, Ethiopia and Algeria
Turkey 785
Total, gross 16,045
Reserve 2,137
Total, net 13,908
Doubtful claims, net, decreased by 30 per cent, to SEK 2,749 M, while the volume
of pledges taken over increased by 36 per cent, to SEK 920 M. The level of
doubtful claims dropped to 0.78 per cent (1.09 per cent).
Increase in total result, excluding non-life operations
The operating result, excluding the non-life business, amounted to SEK 2,989 M
(SEK 2,754 M). The change in the surplus value in life insurance operations,
i.e. the present value of expected future gains from existing insurance
contracts, was SEK 436 M (SEK 404 M). If the change in the surplus value plus
pension provision of SEK 280 M (SEK 222 M) are added, the total result,
excluding the non-life business, amounted to SEK 3,705 M (SEK 3,380 M).
Including non-life insurance operations, the total result was SEK 3,473 M (SEK
5,617 M). The decline is essentially explained by the reduction of the risk
level in Trygg-Hansa Non-Life through the sale of that company's equity
portfolio and by the deterioration of the result of its interest-bearing
portfolio, due to rising bond rates.
Total assets and shareholders' equity
On 30 June, 1999, the Group's total assets were SEK 710 billion, compared with
SEK 732 billion on 30 June 1998 and SEK 690 billion on 31 December 1998. The
upturn since year-end was mainly explained by increased lending, including
repos. Shareholders' equity totalled SEK 30.7 billion on 30 June, 1999 (SEK 30.4
billion on 31 December, 1998).
Capital adequacy
On 30 June, 1999 the core capital of the financial group of undertakings (which
comprises associated companies but not insurance companies) amounted to SEK 29
billion, compared with SEK 25.1 billion at year-end 1998. The core capital
includes a so-called core capital contribution of EUR 200 M, which SEB issued
during the spring. The result for the current period, after tax and standard
appropriations, has been included in the capital base, which increased to SEK 38
billion (SEK 33.6 billion on 31 December 1998). In relation to risk-weighted
assets of SEK 328 billion (SEK 309 billion), this meant a total capital ratio of
11.6 per cent (10.9 per cent). The core capital ratio was 8.8 per cent (8.1 per
cent), compared with the target of minimum 7 per cent.
The Baltic states
During 1999, SEB has gradually increased its bank ownership in the Baltic
states. In mid-August, its holdings were as follows: 45 per cent of Eesti
Uhispank, Estonia, 48.9 per cent of Latvijas Unibanka, Latvia and 41.5 per cent
of Vilniaus Bankas, Lithuania.
The earning trend for the first six months of 1999 was satisfactory: SEK 23 M
(SEK -108 M) for Eesti Uhispank, SEK 86 M (SEK -106 M) for Latvijas Unibanka and
SEK 72 M (SEK 71 M) for Vilniaus Bankas. The contribution of the Baltic banks to
SEB's half-yearly result, including goodwill, amounted to SEK 54 M.
The new millennium
Most of SEB's adaptations of computer systems and other technical equipment were
completed according to plan by year-end 1998. During 1999, the preparation work
has mainly consisted of testing activities together with external co-operation
partners, a continuous review of the systems and the completion of a contingency
plan prior to the new millennium. For the rest of 1999, restrictions will apply
to new data applications and to changes within the field of IT. By 30 June 1999,
central costs for preparation work, which was started in 1996, totalled
approximately SEK 440 M. To this should be added about SEK 100-150 M throughout
the organisation. The costs for the remaining work prior to the new millennium
are comparatively small.
President's comments:
Work within SEB during the first six months of 1999 has focused on both growth
and rationalisation. We continued to invest within growth areas, such as
savings, the Baltic states and the Nordic region and stepped up our Internet
banking drive. At the same time, extensive rationalisation work is going on
within practically all our business areas and staff functions, as well as a
continued reduction of risks to make expansion possible.
The stock market development during the first half of 1999 was positive, which
has favoured our customers and the Bank. Interest rates, which remained
relatively stable during the first quarter, started to rise during the second
quarter. This has had a negative impact on our earnings and positions during the
second quarter, chiefly on the bond portfolio of Trygg-Hansa Non-Life and, so
far, the trend has continued into the third quarter.
During the second quarter, we concentrated on selling Trygg-Hansa Non-Life in
the best possible way for our shareholders, the SEB Group and Trygg-Hansa.
Through the agreement with Codan, SEB has found a partner with a strong
position in the Danish market, while Trygg-Hansa has found an owner whose core
business is non-life operations. This is essential to us.
We can now continue to distribute non-life insurance products through SEB's
various channels and, together with Trygg-Hansa, develop combined financing and
insurance products. Corresponding co-operation will be initiated in Denmark,
where SEB Trygg Liv together with Codan, expects to capture considerable shares
of the growing unit-linked insurance market.
Our investment in Denmark is one step towards our goal of becoming the leading
provider of financial services in Northern Europe. Through our agreement with
Codan, we will strengthen our position as the largest asset manager in the
Nordic region, while at once becoming one of the most important players in the
Danish capital market.
Through our purchase of Codan Bank we also create a platform for selling our
Internet services in the Danish market, where such banking has been relatively
limited so far. We expect to start this activity during the last quarter of
1999.
The Danish Internet investment is one of several examples of SEB's great
ambitions as an Internet bank. We are now speeding up our Internet investments,
making our Internet Office a separate unit within the Group. This will
facilitate the follow-up process. According to our "stretch goal", we shall
have five million Internet customers by the year 2005. This means that we will
have to expand our activities both in the rest of the Nordic area and in other
parts of Europe.
According to a recent survey made by the European Commission, Sweden has the
highest share of PC and Internet users within the EU: 59.8 per cent of Swedish
households have a PC and 39.6 per cent are linked to the Internet, compared with
30.8 per cent and 8.3 percent, respectively, for the European Union as a whole.
The experience and knowledge that SEB has built up in Sweden will give it a
decided edge outside Sweden.
All investments referred to, as in the case of our general IT activities, have
occasioned considerable costs. Rationalisation of our day-to-day activities has
continued at a great pace. At the same time we have to say that much work
remains to be done. As regards use of capital we have been successful in
reducing our risk exposure on emerging markets. We have also reduced our market
risks.
In all, the result for the first six months of 1999 proves that we have a
satisfactory underlying earning capacity, with certain positive features such as
repayment of Russian loans, a stronger Enskilda Securities and high
profitability within Financial Services. Among the negative features, the upturn
in interest rates is well worth mentioning. This is having an impact on several
areas within the Bank and that trend has persisted during the third quarter.
A great deal of work remains to be done in order to increase efficiency. At the
same time, our aggressive investments continue and are even accelerating in
certain respects. Both profitability and growth are required in order to give
you, our shareholders, best value.
Stockholm 17 August, 1999
Lars H Thunell President and Group Chief Executive
This Report has been preliminarily examined by the auditors of the Bank.
The Interim Report for the period January-September, 1999 will be published on
25 October, 1999. The financial reports of the SEB Group are also available on
the Internet (www.seb.se).
For further information please contact
Gunilla Wikman, Head of Group Communications, Telephone +46 8 763 81 25
Lotta Treschow, Investor Relations, Telephone +46 8 763 95 59.
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