Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to SEB Quarter Four 2018 Results Call. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone keypad and wait for your name to be announced. I would now like to hand the conference over to your speaker today, Johan Torgeby. Please go ahead, sir.
Thank you very much, welcome everyone to this conference call today. I thought I'd just start with a brief note about how we would like to run these calls in the future. As some of you may know, we've always had what we call the press conference at 9:00 A.M. on reporting dates in Swedish. Today we, for the first time, switched that into English. In the future, we are thinking of having the press and analyst call live-streamed, but in English, only people present can ask questions. We will maintain this call, but we will no longer do the presentation again on this call, rather use it for Q&A session. Thank you. A quick intro. We came out with our fourth quarter result this morning. It was a solid performing during the fourth quarter.
Both in the fourth quarter and across the year, we can clearly see that the corporate banking part of our bank has performed very well, supported by a high demand and decent loan growth underlying around 9%. In the fourth quarter, we had a very healthy rebound in our markets division, which was up 40% Q4 versus Q3, the volatile markets, falling share prices, increasing credit spread. We had, of course, a dual effect, the papers and the AUM and whatever securities we are long, they of course had some challenges during the quarter. We saw a dramatic pickup in activity in markets that more than compensated for that weakness. Yesterday, we also concluded with the board to propose a normal dividend for 2018.
Ordinary dividend of SEK 6, which is SEK 0.25 higher than previous year, that's in line with our long-term aspiration to have a progressive increasing dividend in the long run over time through the cycle. Also given last year's particulars, we will propose extraordinary dividend as a one-off for 2018 of SEK 0.5 in addition to the SEK 6, ending up a total payout of SEK 650. Over and beyond the normal strong performance over the last couple of years, in 2018, we sold two businesses. One was the SEB pension business in Denmark, the other one was a stake we held in a company called UC, which is the credit scoring company in Sweden that we sold to a Finnish entity.
Together, those two gave us a bit of income over and beyond the organic one, and hence, when we weigh those things together, we propose the extraordinary dividend of SEK 0.5. I think I'll just stop there and go straight to Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. We do have questions on the line. One moment, please. The first question is from the line of Ronit Ghose. Please ask your question, Ronit.
Great. Thank you. It's Ronit from Citigroup. Just a couple of questions, please. First of all, on net interest income, you've obviously given the guidance for rate sensitivity. Can you talk a little bit about any offsetting headwinds we should be thinking about when we are factoring in our forecasts for this year, in terms of any negatives to offset the rate sensitivity? Number one. Secondly, in the cost line item, there's a marked drop in the salary cost line. Maybe you've called this out already, and I missed this, but could you remind me why the salary cost fell so much in Q4 quarter and quarter? Lastly you had a very strong ECM M&A fee income performance in the fourth quarter. Can you give us any color on the pipeline, please? Thank you.
Okay. I can start on the rate sensitivity. Previously, we've talked about the increase of central bank rates in Sweden of 100 basis points, resulting in approximately SEK 3 billion of positive profit contribution. We don't need to guess for the first quarter of a hike. Today we've done the numbers, and we've seen where mortgage margins have gone, and we see what benefits you get from the first 25 and conclude that the SEK 750 million positive, including the mortgage margin contraction of five to 10 basis points for 2019 full year results. If you were to think about future dynamics if further hikes would come. It's really this dynamic between where will the market's new equilibrium be when it comes to mortgage margins as the drain from having negative rates on deposits will be reduced.
It's interesting to just say that the first hike we've now seen, and one could argue it's somewhere between five and 10 basis point margin contraction. We did exactly in line with the average of the market, namely hiking our floating rate price list indication by 20 basis points, despite it was a 25 basis point hike. For the two, three-year, I think it was 15. There was no real meaningful change on margins on the longer end. As you know, the majority of mortgages in Sweden are in floating. I think that's the normal headwind one needs to assess where are margins and volumes going on the mortgage book when rates go up. It's not particularly difficult to see the positive side from deposit being less of a drag once we normalize rates around zero or even get into positive categories.
On salary cost, there are two things. One is that there is, of course, a few FTEs going with the disposal of the pension business. There's a little bit less reduction in FTE, but otherwise, part of the salary cost is actually the long-term incentive programs that we have accumulated over the last three years, not yet vested for all employees. Those are correlated to the share price. When the share price drops, the future potential cost of buying those number of shares that we have promised is reduced. There is a little bit of positive correlation on the salary cost from that element. When it comes to ECM and M&A, I would say that last year was a clearly weaker ECM year and a clearly stronger M&A year than we've seen from the previous three years before 2018.
There is no meaningful change in the pipeline. ECM seems to come to a more normalized level. As you know, it was exceptionally low between 2009 and 2013, 2014, then exceptionally high 2014 until 2017. Now there's still a good pipeline, but not in line with what it used to be. M&A has really come back, and pipeline indicated the mix of this year is probably the one we would call for next year as well. As you know, with a difficult probability assessment of what will actually be converted into real business or not. For us, it's great to see a more balanced pipeline where both equity capital markets, IPOs and secondaries, together with largely strategic transactions that requires funding is there because we need to play on both cylinders.
This year really showed our strength in the investment banking business when M&A came back. It's been a quite large shift in the marketplace on who succeeded and who did not when it goes from ECM to M&A. Just a quick word. DCM was actually quite good year, but the mix was slightly more to frequent issuers, high grade and financial institutions, super sovereigns, and hence the fee mix was slightly against us. We didn't have this fantastic contribution, but still an active market. We did see towards the end of the year, DCM on non-investment grade and corporate side come down a little bit. We saw an emergence to a little bit of flow back in the real estate sector, high yield sector as well. Was that the thing or did I forget?
Great. That was great. Thank you. Can I just have one quick follow-up on the NII point, please? I get clearly what your guidance is. In terms of mix shifts or any other headwinds, because we are seeing it seems to be a bit more of a pickup in terms of going out the yield curve, so more longer dated rather than shorter dated. I'm just wondering if any item, mortgage new issuance, mix shifts, or other factors I should be thinking about when thinking about the margin and the NII guidance for this year. Are those still not material enough for this year because it's still small beer?
I'll start, I'll ask Masih to fill in. My personal view is that it's not going to be meaningful to talk about, even though we do see a slight trend to increasing fixed. It depends on where this year will end up in the margins on the fixed rate. You will still see significant NII. It's actually higher gross numbers. Margins might be slightly different depending on where you are on the curve. If there is another hike priced in, these things will move around. It's only going to be on the new business done in the last 11 months of the year. I don't think it materially changes the picture. Masih?
I'm just adding, we mentioned this this morning as well, that going into the rate hike, we did have a 10 basis points lower margins on front-book mortgages than back-book mortgages. That's a headwind in addition to the rate sensitivity that we've already flagged for. When it comes to the corporate side, we're saying that margins are pretty much flat on change. That's neither a headwind or a tailwind in the market, you should obviously be aware of that 10 basis point headwind on mortgages, and it takes about two years for that to fully come through the books.
Got it. Thank you.
I have to add one more thing. We talk about NII and excluding the mortgages, which is still only a part of it, that you have seen credit spread widening, and we've had very little pricing power in corporate lending investment grade. Nothing has changed right now. We're not calling a margin increase, but want to just at least note that the pressure on margins for corporate lending seems over the last three, four months to have completely come to a halt. At least we should see stable margins in the short run for those.
Okay, great. Thank you.
Thank you. Your next question is from the line of Matti Ahokas. Please ask your question.
Yes, good afternoon. Matti Ahokas here from Danske Bank. Two questions, if I may. Firstly, on the net financial income line, do you see any structural reasons why this line should pick up or actually decline in 2019? Is this the kind of normal level we should be looking at? You mentioned about the corporate volumes picking up, but if you look at the LC&FI lending book, it's actually been declining for three quarters in a row. How should we look at this going into 2019? Have you heard any of your clients? What are they saying about the softer economic outlook? Without holding it against you, I would like to hear some kind of view on what could be the volume growth in LC&FI in 2019. Thanks.
Matti, do you want to On NFI, if we talk about structural changes, I wouldn't change anything from what we have said is our guidance on this line. That's 1.2 to 1.4. Given that, we'll still keep at that as it's a reasonable base assumption and allow volatility around it. It's treasury and it's the market valuation of financial securities that really just goes wherever the market goes, in a quarter. But the base and client should generate into 1.2 to 1.4 with a certain degree and sometimes high volatility around it. Matti, anything else on NFI?
No.
When you talk about structural changes, what would it take for us to indicate higher? I would say there is a debate and has been for a long time, and that is what is cyclical and what is structural in the performance of markets as a business line. This quarter, we had a bit better, but as you know, for years, we've had a pretty lackluster development for sales and trading in the market area. It's rather that one should ask oneself, do you think there is a structural shift in markets to these lower levels? Of course, there's no upside. If we would have a normalized yield curve and normalized interest level in this country in particular, where we have a large market share within the financial institutions, would this be on a higher level?
Of course, it's reasonable to debate these two up and down. For now, we're not changing the underlying client-driven NFI. Sorry, what was the other question?
It was the lending volumes and the outlook in LC&FI. You mentioned it has been growing, but actually the reported lending book has been coming down now for a couple of quarters. What's happening there and what should we expect for 2019?
Okay. I don't recognize that the LC&FI portfolio for lending is down. I do know there's a difference between the credit portfolio and the lending portfolio. When I talk, I look at the lending portfolio as a laggard and the credit portfolio as the leading indicator. Here is that the lending portfolio only takes what's actually been drawn, and that is a majority of what we do is actually not drawn debt. It could be credit that is put into place in short term that you won't see being permanently there, but you see good uptick in the fees generation coming from it. That's particularly the event-driven. We do a lot of RCFs, all the really big-ticket loans we do for corporates on an ongoing basis. Those are typically undrawn as commitments.
That means that credit exposure could be EUR 1 billion in one deal, but there's no loan that actually takes up. You get NII and high return on equity from those as it doesn't consume as much capital either. Right now, corporates are performing quite well in our book, even though maybe the drawn side, the loans are less. We can check a little bit here where one can see I have my IR head here pointing to page 32 in the fact book where you can see these on and off balance sheets. Just quickly looking at it seems to be growing to me.
Great. Thanks a lot.
Thank you. Your next question comes from the line of Robin Raine. Please ask your question.
Hi. Thank you for taking the question. This morning you mentioned that widening credit spreads might be pointing to more profitable lending going forward. To what extent do you think that widening credit spreads is also an indication of rising cost of risk? I understand you want to keep capital to be able to serve clients should there, for example, be an increase in the lending demand. You are 120 basis points above the 150 basis points management buffer and still want to keep some capital. Wouldn't it be more transparent to formulate a target buffer range instead of a target figure like today?
Okay, thank you. When we talk about credit spreads, I don't want to overemphasize using it as a leading indicator. It was more of a very transparent way of explaining how we think and how I particularly think. It is definitely always a liquidity and a credit quality assessment that is the fundamental reason for spreads to move. As you know, more or less the enormous monetary stimulus we've seen with too much cash out in the system chasing too few goods, it's been very difficult to actually assess the implied credit quality from credit spreads. They've been very tight. Regardless of why they go up, the difference between our credit spreads and the spreads that we charge our clients is a good proxy for some type of pricing power.
Of course, it could be associated with lower credit quality. You can't just welcome wider credit spreads because it could indicate a deterioration in the general market's perception of credit quality. You should also know that given you have a more or less fixed cost of equity, it is very difficult, as you will see, to make any money in terms of return on equity on investment-grade lending. It's a very nice income generator, a very nice cost-income improver, but it is a very difficult thing to have a super expanding investment-grade book and not struggling with return on equity. Hence, you need to have a very good investment bank and corporate bank over and beyond your lending portfolio to make the whole equation to work. Don't overemphasize my comment this morning.
I'll still point to that widening credit spread, and that's just that the capital markets in form of credit markets have repriced some of the things. There's a low correlation in the short run with loan financing and bond pricing and CDS prices. Over time, there's also a limitation on how the pricing of credit can differ between the capital markets and the bank market. We like to see it this way rather than the other way, just to not forget it. On capital, I'll just say, I hear what you say. It's obvious that we have a communicated management buffer of 150. Even though we do a small, extraordinary dividend, we still have a significant buffer over and beyond it.
In spirit of transparency, which we, of course, strive to be transparent, I mean, we'll just take that comment with us that we might need to come back to how these things are worded.
All right. Thank you very much.
Thank you. Your next question is from the line of Adrian Cighi. Please ask your question.
Hi there. Thank you very much. I have two follow-up questions, one on NII and one on capital. On NII, during the press conference, you mentioned that you under-earned by some SEK 100 million in NII during this quarter. Can you provide us with any additional color and potential range in this NII category over the past nine quarters? Then on capital, do you have any known headwinds that you might be holding some additional buffer for potentially impact from TRIM Program by the ECB? Thank you.
Thank you. Starting with NII, we can't give you the exact numbers for NII in markets for each quarter. What we're basically saying that if we look at the last nine quarters and look at the average, we can see that in Q4 2018, we're about SEK 100 million below that average. It's usually pretty stable around those numbers. In Q2 last year and in Q4 last year, it went a bit away from those sort of averages, in Q2 on the positive side and Q4 on the negative side. We do expect it to come back at some point to that average level that we are currently SEK 100 million below. On capital-
Just to clarify on that, is this sort of NII for markets related or is it sort of other source?
It's market-related business. It has to do with coupons and valuations on different kind of instruments that we hold.
Thank you.
On capital, there are a couple of headwinds in 2019 you should be aware of. I'm sure you're aware of at least one of them. That's the countercyclical buffer that's going to be raised in Sweden, and that's going to cost us about 30 basis points in September. There's also an accounting change with IFRS 16. It has to do with leasing contracts and how you have to account for them on your balance sheet. That's going to cost us somewhere between 10 and 20 basis points on the capital. That's a headwind of about 15 total that we know of. When it comes to the EBA guidelines and those kind of issues, it's way too early to say whether that's going to be any implications whatsoever.
I'm going to repeat what I have said on this in the past, and that is the message from the Swedish FSA that to the degree that EBA guidelines leads to higher risk exposure amounts, the FSA does have the ambition to compensate for that by lowering Swedish banks' capital requirements. In total, we don't expect those kind of changes to lead to us having to have more capital than we have today.
Very helpful. Thank you very much.
Thank you. The next question is from the line of Jan Wolter. Please ask your question.
Yes. Hi, Jan Wolter, Credit Suisse. Just to ask around the primary and secondary market revenues, which were obviously very strong in Q4, and you highlighted that. Could you just give us some color whether or not the primary market fees, there were any catch-up effect there whereby older deals were now booked for one reason or another? Or are these revenues booked now in Q4 primarily deals being made in recent time? That's the first question. A similar question on secondary market revenues, the SEK 575 million, which also were quite strong, and it's a bit different from what we've seen and heard from peers both in Europe and in the U.S. reporting in the quarter.
If you can give us some color whether or not that's a consequence of you taking market share in different businesses, private brokerage, derivative business, et cetera, or what it emanates from. The third question is really on asset quality, which has come up a little bit in the second half, albeit from low levels. When you look into the future, do you see this level being more of a normalized one, or should we move up further from here? How do you view it when you look at your credit portfolio? Thanks.
Thank you. On primary and secondary, we start with primary and the potential lag. There is nothing unusual with this quarter, the previous one, or what we expect for next when it comes to business awarded, concluded, executed and invoiced. No particular overhang. It is, of course, as you allude in your question, it is a lumpy business, and it's quite common it takes between three and six months for M&A deals between they're mandated until they're actually booked. On DCM and those things, those type of fees they are much shorter. You can be mandated in a day, and you're done in the afternoon to a corporate bond, which take a couple of weeks. There's very little on that side. There's nothing uncommon.
Should we have had a pipeline that indicated a lower potential deal volume, we would have said that today, and we just say we don't. Of course, we do acknowledge that volatility in the market during more prolonged periods are not good for investment banking. More trades get canceled, fewer non-quality names can access the market and those things. Of course, we have that as a more of a macro potential impact if things go worse. Right now, we've had a pretty supportive beginning of the year, but you know how it felt in December. When it comes to type, we can just almost conclude the same thing as you did. We've seen some of the other banks who have exposure in fixed income equities and foreign exchange. We do see that we stand out a bit.
I will point you to page 32 again, in the fact book, another exhibit there. It was really a strong FX. FX volatility is of course, coming on the back of higher volatility in any foreign type of securities that we trade. FX get helped. Also that the exporting industry did not have a bad quarter as far as we can tell, and that's also a good driver. Equities did very well as well in the quarter from the volatility and the higher activity. It's one of the best we've seen for many, many quarters. It's on page 32. The most surprising one is that the activity levels in fixed income and derivatives compensated for the drag. Those were all what happened.
I would also acknowledge we are a bit lucky as well, as it was the inventory on the fixed income side or the trading on fixed income that hurt, and we have a bit less of that. That's just DNA. As we are only 23% fixed income and therefore 77% equities in FX, the mix was very beneficial for us for the short-term impact of this volatility. Of course, AUM did get hit on the investment management side by the fall in equity markets. That's not good.
Hi, it's Masih here. On your last question on asset quality. Yes, I would say that the level you've seen in Q3 and Q4, around SEK 400 million or eight basis points when it comes to expected credit losses is pretty much the outlook we also have for the future, at least for the coming quarters, given the current macro outlook that we have. It could obviously vary around that number, but it seems as a fairly normalized level given the current macro outlook. Obviously you should be aware that the macro outlook has changed quite a bit when it comes to at least different market participants out there. If you look at our Nordic Outlook and the GDP growth we have in there, based on that, in line with the second half of 2018.
That's very clear. Many thanks for that.
Thank you.
Thank you. Your next question is from the line of Johan Ekblom. Please ask your question.
Thank you. Just one thing really. Coming back to the dividend and the capital discussion. You've sort of embarked on this split between an ordinary and a special. Is this something that we should consider on a recurring basis as a way to distribute the excess buffers if they remain after the headwinds that you highlighted? Or should you view this purely as a reflection of the extraordinary gains that you had in 2018?
Hi, it's Masih here. It's very uncommon that we do this. It's a combination of several factors that we've mentioned before. It has to do with strong earnings. It has to do with the one-off gains, and it has to do with the general strong capitalization that we have in the bank currently. We cannot rule it out for the future, but I think you should generally look at our history and see how we have behaved when it comes to capital distribution to our shareholders. I think you're going to see that what we did in 2018 stands out relative to the historical pattern. I think in general, you should just assume that we continue to increase an ordinary DPS through the cycle every year.
I guess the question is, if we put in a 0.25 increase each year on consensus earnings, you either need to double your growth or the buffer will continue to grow every year, right? How should we think about managing that and profitability in a medium to longer term perspective?
I'll try to explain why we have the buffer we have today. I think I'll just do it that way instead. The 150 basis points or around 150 is a financial target, is a through the cycle financial target. Our view is that if there's any point in the cycle, you should have more capital than that target. This is actually a pretty good point in that cycle. That is driven by a few things we've mentioned. Widening credit spreads could lead to flow back risk from capital markets to bank financing. We want to be there to be able to take advantage of that, not just for our shareholders, but obviously for our clients in general. You've seen an improvement in asset quality in the last few years, which has led to positive risk migration, so lower average risk weights.
It is possible, I'm not saying that's a base case scenario, but it's possible that that reverses if you have a more negative macro development next couple of years. Now, if you have strong growth on your balance sheets plus negative risk migration, it's very difficult to be able to cope with that if you have a lower buffer than we have today. I think we stand out in a way that we can do both in the next couple of years if this scenario sort of plays out the way I've just described. If it doesn't, and we stand here again in a year's time with an even larger buffer than we have now, then obviously that's going to be an issue for the board again to look at. How they act or behave at that point, it's difficult for us to say right now.
Thank you.
Thank you. Your next question is from the line of Riccardo Rovere. Please ask your question.
Good afternoon to everybody. A couple of questions, if I may. The first one is on, again, to get back on NII. If I remember correctly, this morning you stated that in the SEK 750 million guidance you provided us, you include no repricing of the corporate loan book. In this context, do you think that maybe a portion of the 95 basis points could be somehow translated onto the corporate book at some point over the course of 2019? This is the first question. The second question I have is to get back one second on your previous comment on loan losses when you stated that you think the kind of SEK 400 million that we've seen over the past couple of quarters is the kind of run rate from now on.
Basically that means that the credit losses did more or less double or doubled Q4 and Q3 versus the previous two quarters. The outlook is slowing down, but I would imagine that from an incurred losses standpoint, not much must have changed. The GDP has not collapsed. There is nothing like that. I was wondering, within this new outlook that you are giving us, how much is the impact of having inputted in your numbers, in your models, a slower GDP growth affecting the lifetime expected loss? If that is the case, would you be in the position to tell us what are the major variables you plugged into your models to calculate the lifetime expected loss?
Okay. Starting with NII. What we said is that in the SEK 750 million, we include the mortgage margin pressure that came out of the repo rate hike. We're not including anything when it comes to corporate margins because generally corporate margins they don't change depending on the rate changes because they are fixed versus a market rate in many cases for us, obviously STIBOR or LIBOR, that's why we don't assume any changes to corporate margins. It is possible you're going to see margin pressure or margin improvements. That's up to you to sort of have a view on and model into your put into your models. We're just saying that we're not including any changes there in that guidance. On loan loss, I can start then Johan can sort of follow.
Obviously the models you use are a bit more complicated than just saying exactly what happens if you just change one of the factors in the models. I don't think we can go into that kind of a detail. In general, obviously the IFRS 9 framework should be more forward-looking than the old framework. In the sense that we've had higher losses in Q3 and Q4, and you see a more negative macro going forward, that should have taken that into account. It's sort of expecting, obviously, a deteriorating macro in a sense. When talking about loan losses and reserves at these kind of levels and then discussing a doubling from SEK 200 to SEK 400, it's still very small numbers. I don't think personally it's interesting to talk about doubling or halving loan losses at these kind of levels.
It just happens that if you have large exposures, one of them can default, and then obviously this number could double or halve from one quarter to another. That's what I have to say about that.
When it comes to modeling credit losses in the new world of IFRS 9, I would just say this, that one of the most
Interesting processes we all got to learn over the last year is that every time we remodel our expected credit losses, we start with the macro assumption. The macro assumption in our bank comes in this way. We ask our macroeconomists to give us the base case, which is published in the Nordic Outlook. They construct an upside case and a downside case. You assign a well-balanced probability assessment. How likely is it right now? Are downside risks increasing or not versus upside risks or potential increasing or not? These have an effect on expected credit losses. In the future, what we're doing right now is not really a fair representation of what we actually lost in a quarter. It is what the whole book is expected to lose. There's a so-called mark to market, if you wish, on that going forward.
The idea was, of course, to create through the cycle stability. We know that just by the fact that one could change the macroeconomic projection over the next three to five years, one could also increase the probability of downside scenarios, those have an effect. In the long run, it doesn't matter. Cash flow-wise, it doesn't matter. It's definitely an expected outcome that expected credit losses through these models will be negatively correlated with GDP growth. Then you do consumer and particular regression analysis for retail lending or consumer lending, et cetera, house prices for real estate, et cetera. These are done by Monte Carlo simulation. I think we have seven million Monte Carlo simulations to come up with this number in order to model it now, and this is just the new one.
What we indicated was rather than saying this is normal in the long run, is to say we've had it exceptionally low. The year came out at six basis points of expected credit losses, and we had, I think, eight in the fourth quarter, and there's no drama around it. They're all very low, but the super low numbers are very difficult to commit to. Absolutely, we don't want to use it for our own internal model purposes, or we don't recommend you to do it either, if you want to be slightly conservative.
Thanks a lot for this. Just to be 100% sure, I understand that the majority of the uptick in the credit losses of the past couple of quarters has to do with the lifetime expected losses. It is something that is thrown out of the models, right?
It is.
Am I right?
We had no meaningful credit failures of significance that we can point to, which we do when we have. This is not at all strange for us. If we would have had a big loss or two where we really got hit hard, we would have told you this was broad-based expected credit losses.
In IAS 39 world, in a world of incurred losses, your credit losses would be lower than what we have seen over the past couple of quarters.
I haven't looked at it lately, so wouldn't know. They are different, but in the long run, they're the same.
All right. Okay. Thanks.
Thank you for your question. Once again, ladies and gentlemen, dial star and one to ask a question and hash key to cancel your request. The next question is coming from the line of Jacob Kruse. Please ask your question.
Hi. Thank you. I just wanted to ask on NII. Swedbank mentioned yesterday they had made some net interest income over the past years from short-term U.S. dollar markets. I was just wondering if you have a similar situation, if that's something that has either already fallen out or could come off. My second question was just with respect to the MREL funding. I know you don't really know what the timeline is here, but do you have any sense of the pickup in spread that that would imply for you for your funding cost to issue that? Thank you.
On NII, we have had that in the past that we've been able to make money on U.S. short-term funding. I would say that in 2018, especially by the latter part of 2018, we did not make any money on that. We don't make any money on it anymore. The margin there is zero, basically. On MREL, I think you can just look at peers that are similar to us and look at how much extra they pay for non-preferred senior versus senior, and that's a good indication of how much extra we would have to pay. Obviously, in general, we have a better rating, I think if not the lowest, at least the second or third lowest CDS spread in Europe on our senior preferred. I'm just assuming that it'll be in line with that on non-preferred senior.
Not as low, in line with us having the lowest spread in Europe. We are a few months off, as we don't know the timing yet. We haven't really come to the latter stages of exactly knowing how much you would have to print those kind of papers at.
Okay, great. Thank you.
Thank you. Ladies and gentlemen, once again, please press star one on your telephone keypad if you wish to ask a question, and you can press the hash key to cancel your request. We have another question from the line of Riccardo Rovere. Please ask your question.
Thanks. Thanks for taking my follow-up question. Just to get back to your previous comment on-The pricing of the corporate loan book when you state that this loan book is mostly fixed, so it is not dependent upon movement in short-term rates. I would imagine in a world where rates are moving up, they must be somehow hedged or swapped to variable at some extent. Is that the case?
I'm-
I'd imagine not the whole fundings underlying the loan, but the whole loan book cannot all be fixed rate. Cannot be. It's impossible.
No. I said, in general, the corporate loans are relative to a market rate, a LIBOR or STIBOR base. Since LIBOR and STIBOR move in line with the rate environment in general, there's no margin changes based on a repo rate change. That's what I said.
Riccardo, you're absolutely right. Its majority is floating rate, the credit spread, the margin element is fixed over the life of.
Okay. All right.
Yeah, that's what we meant.
Yeah.
When rates go up, nothing happens. Our funding costs go up because interest rates go up, absolute cost, and absolute income goes up with an equal amount as we have the same benchmark rate. A very small portion of our balance sheet for the corporate is actually fixed.
Okay. Now it makes sense. Okay, thanks.
Thank you.
Thank you. Your next question is from the line of Richard Smith. Please ask your question.
Yeah, hi there. Thanks for taking the question. Just one quick follow-up just in terms of NII. I guess, you were mentioning this morning some of the uncertainties that you have around the rules on MREL and what the ultimate outcome will be yet. Just for the sake of how we should be thinking about it for the next year, 18 months, presumably you'll be continuing to refinance your existing senior as and when it matures into non-preferred, or should we be thinking that you'd prefer to back-end load it once you have more clarity on what the ultimate rules are looking like? Thanks.
I think as I said this morning is that we don't really know whether the timing is going to be 2022 when we have to be fully compliant or 2024, we don't know whether the nominal amount is going to be in range of around SEK 50 billion or around SEK 90 billion. That creates some uncertainty for us. We hope that it's going to be cleared out in the next few months, as soon as it is, we will obviously plan accordingly. If the timeline is that we have to be fully compliant by 2022, I think that during this year we'll start to issue non-preferred senior and obviously that would replace regular senior funding. It wouldn't be in addition to that.
Depending on how much our lending book growth in relation to our deposit book, in general, I think you should assume that just replaces senior, obviously at a higher spread than senior, we'll have to see to what extent you can pass on that higher spread to your customers. If the timeline is 2022, this year is likely. If it's not 2022, if it's 2024, I think it's more likely we're going to start in one to two years' time.
Okay, great. Just to check that higher spread that you were mentioning there in terms of the issuance, what are you assuming there in terms of your SEK 750 million sensitivity?
Nothing. We're not assuming anything.
Okay, great. Thank you.
Thank you. Your next question is from Ronit Ghose. Please ask your question.
Hi. Just a quick follow-up, thanks. On the pickup on the U.S. money market funds, you said you got nothing recently, but for the full year 2018, was there any benefit? Can you remind me what it was in 2017, please? Thanks.
It was close to zero in 2018 and was more than zero in 2017, I can't disclose any numbers.
Okay. The full year was close to zero in 2018.
Yes.
Okay, cool. That's great. Thank you.
Thank you. Now, ladies and gentlemen, we'll finish the question and answer session, and I would like to hand the conference back for closing statements to Mr. Johan Torgeby. Please go ahead, sir.
Thank you, everyone, for dialing in. We'll meet some of you in the near future. I wish you a good day. Thank you.
Ladies and gentlemen, this does conclude your conference for today. Thank you very much for participating. You may now all disconnect.