Good morning, everyone, and welcome to our conference call. Please go ahead, sir.
Hi, this is Johan Torgeby, SEB. Welcome, everyone, to this Q2 conference call. We didn't think we'll go through the material page by page, but I'll just spend five to seven minutes or so summarizing the quarterly results, and then we'll open up for Q&A. Just to begin with, we still find a macroeconomic tailwind to be surrounding our results for the second quarter. One interesting note is that in Sweden we've seen consumer confidence softening a little bit, but industrial confidence remaining higher. All in all, still good indications for continued growth. Flattish equity markets and somewhat higher volatility. It has come down from the serious spike we saw during Q1, but it's still a little bit higher than we were used to prior to the spike.
One interesting theme is that since the catalyst of the election in Italy, we saw credit spread both in the high yield segment and investment grade widen, and it has not really recovered, whilst the spreads of our own CDS in the SEB name has remained flattish. We characterize this quarter as a meaningful pickup in customer activity, particularly on the corporate side, and we've also seen good demand for our products and services. A strong continuation of our capital position, robust asset quality and good cost control. Starting with just looking at the first half. As you probably remember, we had a little bit of a weakish Q1, and Q2 is definitely somewhat of a recovery from the start of the year.
Looking at the two first quarters together compared to last year, we're 1% higher on income, flat on cost, and 2% higher in operating profit before items affecting comparability. In the second quarter, we had two rather meaningful items affecting comparability, and that was the sale of UC, the credit information service that we partly owned in Sweden. We continue to own it, but have sold it to a new entity. It's now listed in Finland. The sale of pension business in Denmark. Together, they recorded a profit of SEK 4.5 billion, so we will exclude them for the rest of this call. First six months, still historically very low credit losses recorded. Unchanged cost income of 0.48, and a 30-basis point improvement in core equity Tier 1 compared to the end of Q1. Return on equity for the first six months came in at 13.9%.
Looking at the second quarter isolated, we had a 10% increase in operating profit, 2% increase in costs, but still roughly in line with our cost target of having a cap of SEK 22 billion, and operating profit up 17%. The return on equity of 16.5% in the quarter alone should be commented that there was an additional item which has a non-recurring effect, and that was a SEK 600 million improvement on the tax line which is a one-off. One needs to keep that in mind before thinking about the future for return on equity given the strong second quarter results. We can also look at the net interest income, which grew 9% year-to-date. Three main drivers. One is the corporate lending was affecting this positively. We had an 11% non-FX-adjusted increase year-to-date in our corporate lending book.
FX-adjusted, it grew by 6%. Of course, the whole result has been meaningfully helped by a depreciation of the Swedish krona one needs to keep in mind. We had a stabilization or a marginal improvement, one could say, on the deposit margins, which we've recorded a lower deposit income quarter in and quarter out for a long time. That's now stabilized around zero. It actually came up a bit, and it's predominantly because we've adjusted the fees that we charge on deposit for professional clients. Slightly lower funding cost also helped in the yearly comparisons on the NII. Fees and commission grew quite strongly quarter-over-quarter in most areas. It was a broad-based recovery. Lending fees were standing out as particularly strong. The contribution from the wholesale division, LC&FI, was 30% improvement from Q1.
CPC, our mid and SME corporate business coupled with private individuals grew with 9%. However, following the weaker Q1, it's back on track. The first half this year, we ended up being roughly in line with last year. Finally, on NFI, I'll just say that we have a rather meaningful decline as of the first half of 13%. That is predominantly explained by a better than normal Q1 in 2017, where we had a strong positive effect from our treasury. Looking at the last five quarters, we've been around SEK 1.5 billion to SEK 1.7 billion per annum. I'll just say a few words on the corporate activity. We have seen an uptick in several of the categories that we follow, but it is relatively broad-based, which is a difference from the past.
Two quarters ago, six months ago, we talked about the lackluster growth we had seen up until that point for corporate activity, particularly given good macroeconomic growth both internationally and domestically in Sweden. Two quarters ago, we saw something was happening, not really materializing in Q1, but we now see a little bit longer trend that we've come up, about 8% currency-adjusted year-on-year change on the large corporate side. The CPC division is growing 7% and the Baltics 12%. It's a geographically broad-based increased activity amongst clients when it comes to demanding more credit for expanding production capacity to meet their demand. We also see an interesting shift beginning where ECM and the equity capital market coming back to more normal levels from having exceptional high activity over the last two, three years, and M&A coming back a bit.
We also are happy to see that this beginning of what we hope will be continued M&A strength that we remain relevant to our client base. A few things I'd like to mention. We all have agreed on what we are saying for the future. The first one is, as we have now concluded the sale of SEB Pension in Denmark, we will still reiterate the cost cap of SEK 22 billion for the full year of 2018. Mainly, this is due to the FX effect that we have year to date, have SEK 150 million increase in cost just due to the weakening of the Swedish krona, and we remain the target to come in below SEK 22 billion of cost for this year. We've also talked about the over-normal increase in NII in one quarter, namely going from SEK 5.0 billion-SEK 5.5 billion.
In our best estimate, about half of that increase, SEK 250 million, is of a more temporary nature that we don't assume for our own benefit to be naturally reoccurring. There's a little bit of FX, there's a little bit of things in the markets division, and there are some events that may happen again, but one cannot take it for granted. Also, we've had an NFI guidance over the last couple of years for SEK 1.3 billion-SEK 1.5 billion. With that, we've always pointed to that's the client-driven point estimate of where we should be if nothing exceptional happens. Of course, with a high degree of variation around it as it is a volatile income row. However, given that we've sold SEB Pension in Denmark, we now revise that to SEK 1.2 billion-SEK 1.4 billion, so SEK 100 million lower.
The fourth update that we have done is, as we are coming into what is expected to be an end of this interest rate cycle, we've updated our kind of ceteris paribus, everything else being equal effect of 100 basis point increase in interest rates in Sweden. Previously, we said that would be SEK 2 billion of a positive impact for 100 basis point increase. As deposits have grown, this has been a negative rate for It's been lower and longer than we expected at the time. We've updated that to a SEK 3 billion of an expected everything else being equal effect just by increasing the Swedish krona interest rates by one percentage point. I think I'll stop there and take some questions if there are any. Thank you.
Yes, ladies and gentlemen, all the participants joined over the phone line. Should you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. Should you wish to cancel that request, you may press the pound or hash key. Once again, it's star and the number one should you wish to ask a question. Your first question comes from the line of Pawel from Goldman Sachs. Your line is now open. Please ask your question.
Hi. Thank you for the presentation. Just two short questions. The first one is on your corporate loan growth. Obviously, you mentioned that there is a change in level of activity and that demand is broad. Yet, if you look at the growth rate for this quarter, even FX adjusted, they seem to be very strong. Could you give us a sense if there is any catch-up in the quarter that perhaps overstates the rates, or you actually think that going forward, the corporate activity can remain strong and supportive? The second question is just on the NII. You mentioned that half of the increase this quarter, so around SEK 250 million, comes from non-recurring items. Can you help us understand how much of NII is actually growth is related to FX alone? Thank you.
Sure. If I first start with the sustainability of our corporate loan growth, we of course don't know if there is a catch-up effect. I think it's reasonable to assume that the Q1 result was slightly more depressed than the market activity actually indicated, as we actually also said in conjunction with it. On the other hand, it's not a one-quarter phenomenon. It's a couple, three or four now. You'd actually seen a different level. Anecdotally, we do a lot of the analysis looking at the breadth or the width of where do the loan growth come from, geographically and customer segment. SME, mid-corp, large corp, different Nordic countries, U.K., Germany, and the Baltics. It looks pretty much like there is a theme of being something of a more sustainable increase.
One could also word it that if you look at the SEK 600 billion we have in large corporate lending or the few hundred billions in the other, there's nothing indicating to us that those levels are not the new levels. However, the growth rates we've seen over the last 12 months, I don't think is sustainable in the medium to long term. They are unusually high, even adjusted for FX.
This is Masih here. Your second question on NII. What we're saying today on the SEK 250 million is that those are short-term effects that we don't think automatically you'll see in the numbers going forward. We don't include FX in those numbers. If you look at in the factor, you can see that Q2 versus Q1, FX improved revenues by SEK 231 million. That's the total impact of all revenues. There's no split there on NII. I think you can also do those calculations yourself by looking at how much of our exposure is in different currencies. On the SEK 250 million, FX is not included in that.
That's very helpful. Thank you. Can I just come back to the level of activity? The catch-up effect. You mentioned that there is none or it seems much more genuine then. Have you seen the level of activity of continuing throughout the quarter? I know the monthly data perhaps is volatile, but has it continued into July as well? Can you give us latest thoughts on how it develops after a very weak-
I won't comment on July, but I will say this. The pipeline that we've seen since mid last year continues to be robust, and we have no indication or not signaling any negative change. The activity levels we've seen over the last few quarters, there's no indication for us that that is not a sustainable level in this current market.
Thank you very much.
Thank you for your question. The next question comes from the line of Geoff Dawes. Your line is now open. Please ask your question.
Good morning, everyone. Geoff Dawes here from Société Générale. I wanted to talk about the mortgage margin comments that you made. I think the comment was that the front book is running about 10 basis points lower than the back book right now. Can you just give us an indication of whether the front book is likely to deteriorate further from that level? Also what you're doing as a business to close that gap or keep the margin pressure manageable on those levels. I'll stick with just that one question for now. Thank you.
Sure. I'll restate what we said. The margin for the whole mortgage book is down 2 basis points in this quarter, we have the leading indicator of where this is going as we are now closer to 10 basis points lower in the new business that is being written as compared to the past. There is a 2 and a half year like timeframe before the front book becomes the overall book. Of course, these are all on floating rates. The mix between fixed and floating dictates if it's going to take a little bit longer. The more fixed people choose, the longer it takes for the margins to actually come through. We have no indication that this is going up or down from this level, so to speak. We're pretty satisfied with this new level.
There is definitely a strategy for our side to try to protect the margins as well as we can, that's really by service, convenience, meeting our client base where they want to meet us, because the real game on is right now to make it very simple for anyone to extract a mortgage. We're doing quite well. We have had a digital mortgage promise now for a year, we're now going into the new phase in actually getting the actual mortgage provided completely digitally. You see a big uptick in demand. The reason why we are a little bit cautious is also that we think we've had an effect of falling house prices since August last year, currently stabilizing, together with a increased amortization requirement if you borrow more than 4 and a half times your annual gross salary.
Those 2 effects definitely means lower demand for mortgages. Lower demand is, of course, correlated with the price. Higher demand increases price, lower reduces it. We think we've had a disproportionate effect of this as we are the smallest mortgage bank amongst the large Nordic banks, we are predominantly in the larger cities. Stockholm, not the least. We think that could be an explanation that this could be reversed once we get a new base to be compared with in the future.
Just separating the components, the list price on the mortgage is obviously unchanged. What is changing? Is it the funding cost or is it the discount on the list price?
It's the discount on the list price that explains why the output price, the price that our clients meet now is recorded by the third party, I think it's FI at 10 basis points lower. One should also be reminded that this is a very difficult number to always explain. If you have a lot of success in your private banking where you have relatively valuable large mortgages, they have a different price point than the average of the economy. We are relatively large among the affluents. When we do well in private banking in other areas, that might affect the mix, which affects the average out price. It does not necessarily tell you anything about the profitability for the group. It tells you about one product on the margin compared to last quarter.
I'm not saying that is the case, it is definitely something to keep in mind when you look at different banks. If you are nationwide reach, you have a very different dynamic to how the output price grows depending on where the demand is.
That's very clear. Thank you.
Thank you for your question. The next question comes from the line of Nick Davey. Your line is now open. Please ask your question.
Yes, good morning and good afternoon, everyone. Three questions, please. First one, maybe just quickly to follow up on that mortgage margin comment. To what extent is rising STIBOR squeezing that front book margin in the way that you think about it? Maybe another way to phrase it is because you're now starting to talk about deposit margins going up, and I would have thought that's sort of flip side of the same coin. On a static balance sheet, which is a mortgage funded by a deposit and a covered bond, is the spread on that combined business going up, down, or sideways? That's the first question.
Yes.
The second question on your SEK 3 billion sensitivity to 100 basis points interest rate move, could you just try to split that out for us in terms of how sensitive you think you are automatically to rising rates? Just bond portfolio and your funding position, and how much of that SEK 3 billion is making some assumptions about passing all of that 100 basis points on to a mortgage rate. If any sense of automatic versus behavioral. The third question, going into the fee line and particularly the market-related fees. I think I took the comment that in ECM you're saying you've had a really strong period and you're down to more normal levels. I just wondered if you'd comment more broadly on if I look at primary and secondary fees. I think you only give us the gross number.
They are down quite sharply year-over-year, both in Q1 and Q2. Do you think those ECM comments go more broadly also to the secondary trading business that you've had a good run, or do you think actually that we've just had a slow start to the year, there might be a bit of catch up in the second half like we saw in 2016? Thank you.
Yeah. All very good and deep questions to answer. I'll start with the STIBOR effect or the funding cost effect on the margin for the mortgage book. I would say no effect. The gross effect comes from a lower list price taken from the clients. This will, of course, on the margin, will be helped if the spreads for the bank go tighter, and as you might remember, we got upgraded a few months back. Right now, there's very little differences in how banks are financing themselves in this part of the world. When it comes to the 100 basis points, it's very difficult to do like this over the phone, but there's one effect which is immediate, and that is everything that is in our deposit base coming from retail clients in Sweden. That's really just offering them zero interest rate when the market reference point is minus 0.5.
As that goes up by 10 or 25 or whatever the first hike will be, it's just immediately a lack of leakage, 100% effect. There is the other side of our deposit, and that's the corporate and institutions. In institutions there's very little delta because we are actually charging professional clients of ours what the market rate is. We have not subsidized them. We cannot have a pass-through. Of course, needless to say, there's not a lot of margins in it, so to speak. You don't make a lot of money on it, but you have less of a leakage. When rates go up, there will not be the same immediate effect.
There will come a new place above the zero where you actually start offering a deposit margin which is lower than the reference rate in the economy, but that might not happen day one, so to speak. The last one was fees. Nick, as you observed, it's down in the year-on-year comparison, but it's very strongly up in many areas from the first quarter. I think LC&FI, if I had a 40% increase in 30 or something of fees and commission, 30%. The sum of the money being made booked in ECM, in IPOs, et cetera, it's not a very large number. It's a very helpful number on the margin, and we need it because that's what drives return on equity for this bank over and beyond what others do. M&A is a much more forceful portion, so to speak, of the investment banking market in the Nordics.
Secondaries actually had a pretty decent in equities. I think you mentioned a decent Q1. I would say this is a little bit of a recovery for the whole segment, and the mix will change. Secondaries we are hopeful on, ECM will continue, but it won't be the only leg for the investment bankers, so to speak. They will also now have to have a more normal environment where you have a mix between equity capital markets and M&A.
Nick, can I just add on this, not here on the M&A sensitivity. The number SEK 3 billion is based on what happens on our liability side of our balance sheet. We take into account how much equity we have, which is obviously interest rate-free, what happens to deposits when rates go up. The only thing on the asset side we take into account is how much loans we have with STIBOR or LIBOR floors. We don't make any assumptions on what happens to asset margins on mortgages or corporate loans in general. I think that's up to you to do in that scenario with rising rates. Only liabilities and the STIBOR floors.
That's really fair. Thank you. I suppose the follow-up question would be, it's still very high sensitivity, and if let's say the group of listeners here today expects rates to be 100 basis points higher a couple of years from now in Sweden, do you really want us to put into our models sort of 15% NII growth in the period from margins? You're totally comfortable with that happening, there's no
No, don't do that. I think that would be
Why not? I think the question is why not then?
No, because in a way, you can't do these things, and I wish in a way we wouldn't have gone out and said these numbers because there are 150 assumptions if you want to model this up appropriately. First, I think you should make an assessment. Where would the normal margins be on the mortgage book, on consumer lending, and on corporate lending, given a higher interest rate? One could argue that the super cycle has really meant very low interest rate despite very good GDP, and the banking system has made up for it by having a loss-making business in deposits, but it's worked on the lending. That dynamic is reasonable to assume one needs to reconsider should rates go up.
This is really an attempt, everything else being equal, to have a base and then make your own assumptions on where do you think mortgage margins, lending margins to corporates, and pricing power will go both on deposits and on loans when you normalize interest rates.
Clear. Thank you.
Your next question comes from the line of Kim Bergo from Deutsche Bank. Your line is now open. Please ask your question.
Hi. Just one follow-up. One question on the economy. You're mentioning that this is probably sort of the end of the cycle. Also talk a little bit about some of the shifts in the Swedish economy. Could you elaborate a little bit on that? How do you see the outlook for the Swedish economy? How do you see it changing between corporate and particularly between corporate and retail lending growth, for instance? What's your outlook for the Swedish economy, also given what we're seeing macroeconomically and geopolitically?
Yeah. I'll start with saying we're pretty constructive on the macroeconomic outlook in Sweden. The Swedish macroeconomic outlook is mostly relevant for SME, mid-corporate, retail. It has quite little correlation to do with the large cap, which represents about 40% of the P&L. That's more the global outlook because 95% or so goes on export. Sweden's domestic market is not very relevant for those. We're pretty constructive. Looking at the discussions we have here is that growth will continue. We have a reduction of GDP growth for Sweden planned in, coming from the two and a half area in 2017, 3.2% in 2016, and we probably think about low 2%. Still healthy, but a little bit less bullish than we had a year or two ago.
The difference in the Swedish economy that we are now pointing to, a little bit just led by the leading indicator that we saw here and now, is that the housing price increases and the asset wealth it has created, we believe have had some effect on a positive outlook on life for retail, for households in general. We've seen household indebtedness, both in the form of increased mortgages and increased consumer loans, which historically was not a big portion of the Swedish economy. It's outgrown nominal GDP for several years in a row. To me, this is a personal reflection. To me, that's when you have a parallel shift in the demand for credit, thanks to very much lower interest rates. During this cycle where we go from positive 3% down to minus a half, you get several years of a new equilibrium establishing.
I think we've seen that now as house prices are no longer increasing, the need to borrow more is therefore less. If interest rate goes up here later in the year, and we break this cycle once and for all in this cycle, you will, of course, once in the near future, start having to pay for the leverage you put on, and that's going to be a test.
Okay. Thank you. That's very clear.
Your question. Your next question comes from the line of Sofie Peterzens from JP Morgan. Your line is now open, ma'am.
Yeah. Hi, here is Sofie Peterzens from JP Morgan. I just wanted to ask about RWA growth going forward and how do you think about that? Your risk-weighted assets grew 3.5% quarter-on-quarter. Your loan growth was also good, but it was slightly below 3%. How should I think about risk-weighted assets growth going forward, and what will drive that? My second question would be around excess capital. How do you value buybacks or increasing the dividend payout versus growing faster and investing basically excess capital in growth? Thirdly, could you just remind me on the fee guidance, and how do you think about fees on an annualized basis going forward, given that we have quite a lot of quarterly volatility? When I look at the past six quarters, it has been up and down double-digit almost every quarter.
More on an annualized basis going into 2019 and 2020 as well. Thank you.
Hi, Sofie. It's Masih here. On the RWA growth, what we've seen so far this year is that we've had some lending growth, which obviously increases RWA. Offsetting that, we've seen a slight improvement in asset quality.
Which lowers the average risk weight. So far this year you've seen that effect. I think going forward for convenience, it's easiest to assume that RWA growth, at least the part that's related to credit growth, pretty much in line with your estimates of lending growth. As you can see, this quarter we had a pickup in markets RWA, it's pretty much come back to a more normal level. That seems fair for that to stay where it is. On capital, as you can see, we have a 260 basis point buffer in this quarter. We saw last week that the Finansinspektionen is considering to raise the countercyclical buffer by 50 basis points for Swedish exposure. That could have an impact of 30 basis points or so for us if that happens.
By year-end, you're going to see a change of the mortgage risk weight score from Pillar 2 to Pillar 1. That doesn't have an impact on the nominal capital buffer you have, it does have an impact on the ratio for us. It could be around 40 basis points. If you take those two into account, the buffer is lower than it is at this point. In Q2, we built about 90 basis points of capital due to the items affecting comparability as well as the underlying profits. We only build 30 basis points of the ratio, which means that the growth we had in the quarter actually consumes more capital than the underlying profit of the bank.
Obviously we want to be relevant when growth picks up, if growth stays the level it is currently, it would be better for us to invest the excess capital we have into that kind of growth with that kind of profitability rather than to distribute it to shareholders. I think we're hopeful on that and hopefully see that happening before addressing this issue by year-end. The final question on fees. We don't give any guidance on fees. We've only given any guidance or indication on the net financial income, and I think we're going to stick to that.
Okay, that's very clear. Thank you.
Great question. The next question comes from the line of Polina Sokolova from Barclays. Your line is now open.
Hi. Thank you for taking my question. I have two, actually. The first one is on cost. Just looking back, since 2014, you've had very little upward cost drift. From about SEK 21.7 billion up to your current cost ceiling of SEK 22. Cost control is very impressive, but just going forward, will you continue to manage cost to an ambitious cost cap? If so, is there a risk that you will be under-investing? Put another way, is maintaining strict cost control a priority over making investments that are maybe nice to have but not critical? That's the first question. The second question is just, I noticed there's been an increase in provisions in Corporate & Private Customers. It's the highest quarterly level since, I have to go all the way back to 2015 to see that level.
Could you maybe comment on what you're seeing in terms of underlying asset quality in this division and whether there are some one-off client files that have driven the increase? Thank you.
Thanks, Polina. I'll start with the cost cap. We don't talk about any number beyond this year, we maintain cost control through the notion of a cap of SEK 22 billion, we'll do our utmost to continue the very successful recent history of being able to keep that. If we reason a bit, I would say that we have up until now been very satisfied with the amount of investment we have done under that cost cap. Very simplistically talking, we've had at least SEK 2 billion every year assigned under that cap for forward-leaning true capabilities-enhancing investments. There is a gray zone, there's several billions that we've invested, not at least to implement the regulatory regimes that we now need to do. They also have, in the long run, some benefits for clients and for ourselves.
For example, transaction reporting, documentation of customer advice, et cetera. More normal course of business. We invest in people. Even though we have over the time period you are talking about reduced the number of FTEs, we still have a pretty large growth number, close to 10% of FTEs that we bring in every year. There is this under-the-hood transformation of competencies as well as investing in some people in the investment bank over the recent times. Going forward, it's actually the million-dollar question. It is where do you invest right? We will not ever come up with a plan where we would say that we're under-investing. We do need to invest to make a better bank for the long-term future.
We have no guidance right now, safe to say, the cost control that has been part of the DNA of people in this bank over the last five years, I would say it's been adopted. It's something we cherish, and we will continue to have it. Exactly in what shape or form we will get back to you on. This is Masih here. On your second questions on the provisions and C&PC, you're right. It's a small uptick Q1 versus Q2. You should remember that we're under a higher IFRS regime, 9 regime now, which means that these are expected loan losses. To some extent, these are driven by macro assumptions. If you have a downward revision of Swedish GDP growth, that has an impact, which is pretty much what's happened now.
Nothing has been materialized at all in that division when it comes to loan losses. These are expected loan losses driven by macro assumptions. If anything, if you look at the bank in total, asset quality is slightly better in Q2 versus Q1. The best way of tracking that for you is to look at the average risk weights of different exposure types, and you can see that they are pretty much unchanged in this quarter, but slightly down to some exposure types. No real change, really.
Thank you.
Thank you for your question. The next question comes from the line of Jacob Kruse from Autonomous. Your line is now open.
Hi, thank you. I guess two quick questions. Firstly, just the discussions around agriculture and farming. I know you don't have a very big book, are you seeing any sign of the poor crops affecting farmers in Sweden from a more economic stability standpoint? Just secondly, on the other income line, the loss there. You talk about there being a number of gains, et cetera. How much of the weakness here was temporary as you talk about temporary NII benefits and perhaps commission? Is there a temporary other income offset here that we should expect to revert back in Q3? Thank you.
Thank you, Jacob. On the agriculture, I would phrase it like this. I would not tell anyone to worry from a, call it, national perspective when it comes to affecting anyone in business and the financial performance. However, it is a disaster for the farming industry. Of course, if a bank would have most of its lending to it, you would be in a tricky position. We don't. As you know, it will be a rounding error, and we'll actually continue with our history of supporting our clients when they go tough, but it's not going to be meaningful. The more meaningful debate here now is actually if we need to import a lot of grain, et cetera, to make the kind of household products normally made in this part of the world.
We have another day of 30 degrees plus here today, so it looks pretty dim. I would not call any kind of red flags for the economy as such for us.
To your second question there. On the other income line, you have a few different things included in that line. You have possible sales of any sort of smaller nature, you have valuation effects, you have dividends. I would say the negative number you have on that line this quarter is not the sort of new normal. You should expect that number to be positive. I think Q1, the SEK 153 is a more likely long-term level. It's very difficult to assess, but negative it's not the sustainable level. That line should be positive in the future.
Okay. Thank you very much.
Great question. The next question comes from the line of Riccardo from Mediob anca. Your line is now open.
Good afternoon. Good afternoon to everybody. Couple of questions, if I may. The first one, this morning during the press conference, you mentioned you would like to redeploy your excess capital in the business. I think those are the words that you used. Is there any particular area where you think it is worth to invest rather than trying to pay out as much as you can in the coming quarters and years? This is the first question. The second question I have is more of, I'm just trying to understand what is the underlying level of NII in a Large Corporates & Financial Institutions? Because the jump we've seen, which is basically enormous, is really difficult to understand what is driving that.
If you would be in the position to say what you think it could be a kind of recurrent level of NII in that division, which keeps going up and down. Maybe there is also some traveling between NII and fair value items, if that is the case. Thanks.
Thanks, Riccardo. Well, on the excess capital point, it's pretty simple actually. We're here to support our client base. The best thing we know is of course, if they grew more than they've done historically, and they require capital to do so. From a strategy point of view, it is very challenging in certain geographies and in high investment-grade state in areas. The really good credit quality names, you don't get the return. We are, of course, always trying to calibrate these lending opportunities to be driven towards the areas where the capital actually has a good return. Those are in three forms. One is any transformational type of transaction, that's the event-driven, and a little bit encouraging to see that M&A is coming back.
M&A is a much more common driver of complete rehaul of the capital structure and acquisition finance, regardless if it's a PE firm or a big industrial who do it. Those we definitely need to protect that we have, call it the powder dry to support. Anything else would be really bad for us. The other is that when the investment banking area increases, that's bonds, that's also the primary side of equities, but also M&A bridges and the velocity on those type of capital commitment goes up. That's a different type of capital deployment, but it's really normally very worthwhile when it comes to the return. They are less permanent in nature, hence the length is shortened and the fees are greater in comparison to the term commitment you do, hence we actually get those two work a little bit better.
The other is the normal growth of the average client that we have. That could be anything from revolving credit facilities and just backups and whatever you have. They need to increase as your business, a client of our businesses increase. Those are really the ways we would like to do it. Only if we cannot do that, we would actually call it excess capital. Otherwise, it's not excess. It's actually there to be used.
Right. Sorry to interrupt you. Is asset management an area, given that rates will probably remain low, even maybe a bit higher than today, but in any case, low for a reasonable period of time, is asset management among, let's say maybe the last among, as part of the last bullet that you mentioned, let's say the normal part of your business. Is that the case?
I'm not sure I understood the question.
I understand that your capital is going to be redeployed in credit. That is the first thing you mentioned.
Yes
is IB.
Yes
in general. Okay. The third one, if I understand it correctly, you mentioned the ordinary course of business for the rest of the group. Now, I'm just trying to understand whether asset management can be included in the last of maybe the bullet points that you mentioned before.
I would say not so much, no.
Okay.
When I say general course, it's actually your first point about credit over and beyond. Also away from the events, the transformational things, someone coming to the capital market or buying something, selling something, or spinning something off. That's what I meant. It's actually the normal finance ability of corporate Europe, if you want. I mean, 70% of the capital provided in the debt format in Europe is bank loans. When our client base in Northern Europe grows, that's the normal business, which is very broad-based. I wouldn't say asset management is a particularly capital-consuming part, and actually the opposite. The asset management is about a savings bet, and it's around us taking our fair share and being sure that we do the right things, and it's very accretive.
All right. Okay. Very clear. Thanks.
Riccardo, let me come back to your question on NII and LC&FI. As we said this quarter, we have about SEK 250 million of the NII in general increase Q-on-Q, which we believe is of temporary nature. I would say that most of that is within LC&FI. If you want to understand the underlying NII in that division this quarter, you should deduct that number. You're right, there is some traffic between NII and net financial income within that division. You should see those two to some degree together going forward.
Right. What exactly do you mean when you say temporary? Temporary, does it mean is the magnitude of the increase or is the nature of the increase, meaning that this will disappear?
It's more the fact that some of this effect you saw this quarter is driven by a markets business, and it has to do with how you value different bonds, different effects there on coupons and all that. That could, depending what happens, be registered on net financial income or NII. When we follow this historically, we can see that the level we had this quarter is a very high level, and that's what we based this assessment that this is temporary. It usually goes up and down, and at a very high level, we assume it's going to come down to a more normal level going forward.
Right. This is to say that they will not disappear. They might eventually be booked in another line of the P&L. Did I get it right?
That's correct.
All right. Thanks.
Thank you for your question. The next question comes from the line of Ian Sealey from Citigroup. Your line is now open.
Thank you. Afternoon, it's Ian Sealey from Citigroup. Two questions on the Baltics first. Can you give a comment on where the Baltic impairments should be going from here? Because obviously we've seen write-backs and cost of risk being quite low for quite a while. Just wondering when that should start to normalize. The second question on the Baltics, if I look at page 38 of your fact book and look at the market shares, we've obviously seen them trending up across all three markets. I was wondering if you could give us a bit more color on that, and any areas you're seeing opportunities in. The second question is on cards.
When I look at the bottom of page 35 of your fact book, we see turnover seems to have increased substantially while the number of cards actually in issuance seems to have fallen slightly. I'm just wondering why that is. Thank you.
Okay. Thank you. If I start with the Baltics and the asset quality, we have had, what? It's a seven, eight, nine-year improvement now since you might remember in 2009, it was the biggest problem of the bank. It's now one of the most best-performing areas of the bank. I don't think there's much left. I think we're getting very close when it comes to the credit quality of getting to the fair level. One thing that has been concluded and been part of this recovery story is the real estate exposure. That is more or less done this quarter. I think we are getting very close to a normalized level. Sorry, I don't have exact details, but you understand my general theme on that. When it comes to the market shares at page 38, we are doing very well when it comes to market share gains.
I'll give you two explanations to what's happening in the Baltics. There are three cohorts of banks that enters into the competition analysis when we look at the Baltic. One is our Swedbank. Two, Swedish banks with a fairly large market share together in all three countries.
You have Luminor and Danske Bank more or less clearly in the middle, where Danske has explicitly said they're exiting. That's a fair share of the marketplace, probably 10% some years back. That is then up for grabs for everyone else. It's a little bit of just a zero-sum game, that if you have someone exiting, it's for the remaining ones to go for. Hence, you increase your market share if you're successful relative to the others. Luminor, I guess you should see from a competition analysis, it's a retake where you've taken DNB Bank and Nordea Bank, you combine them, and during that kind of process, we do find the competition to go down a bit. Of course, one should probably assume that they will come back and become a new third large player in the region. Finally on your card comment.
It is correct that turnover is coming up. I think that's pretty much in line with the fact that consumption is growing, and that even though you've had very high card usage in the Swedish economy, penetration is still increasing. The combined effect of increased consumption and penetration leads to that increased turnover for the average card or the turnover relative to the number of cards.
We should just be clear. On the card increase, we should see that as a positive for the economy, not as a more people using their cards more because they can't pay off their debts in other ways.
I think it's a combination of those two factors. I can split it in two, consumption is still growing by 3% or so in Sweden. Obviously, that impacts that figure.
Love it. Very clear. Thank you very much.
Thank you for your question. Your next question comes from the line of Johan Ekblom. Your line is now open. Please ask your question.
Thank you. Can I just very quickly come back to your comments around the changes on the mortgage risk weights from Pillar 2 to Pillar 1? You said that you'd expect it to have a net 40 basis point negative impact, if I'm not mistaken. Could you just explain how we square that with your earlier comment that it shouldn't be any meaningful negative net impact?
Well, there are two ways of looking at it. One way is to look at the nominal amount of excess capital you'll have. That's not going to change because of this move. Given that you're going to move a lot of risk-weighted assets, or you're going to take a lot of capital from Pillar 2 and recalculate it and make risk-weighted assets of it means that the nominal amount of risk-weighted assets goes up, which obviously means as in ratio terms, the buffer goes down. That's the impact. It's just a mathematical fact in the sense that risk-weighted assets go up quite significantly, which means that the nominal number of capital leads to a lower percentage point. That's the impact. You're going to see the same impact for all banks, depending on how much mortgages they have.
Obviously, we have less mortgages than most of our peers, the impact on us is less when it comes to the impact on ratio.
In SEK terms, it's the same amount. Are you thereby indirectly stating that the 150 basis points will be unchanged irrespective of RWA regime?
We're not saying that. I'm just saying that the fact that that shift is going to happen, it will have an impact of about 40 basis points. We haven't seen the final technical way the Finansinspektionen is going to do that. I think that's going to be announced in August. When we see that, we can guide you then better on it. Based on what they have sent out so far, the estimate is that it's going to be 40 basis points.
Perfect.
Thank you for your question. The next question comes from the line of Adrian from RBC. Your line is now open.
Hi there. Thank you for taking my question. Just one follow-up on the NII sensitivity, please. You mentioned earlier that the mortgage portfolio has seen a compression in the actual yield during the quarter. Looking at the fact table, we see at the group level an 11% quarter-on-quarter increase in the actual loan yield. Are you able to reprice or increase the yield on some of the corporate or SME exposures, or is this all a mix effect? Any more color on this would be really helpful. Thank you.
Yeah, I would say that it's more a mix effect and a volume increase that drives NII than a margin repricing. When we look at the average margin pie by client segment, that is shipping, real estate, large corp, SME, mid-corp for the same risk quality, it's very stable. There has not been a repricing of corporate debt in any meaningful form. The mix, however, does change quite dramatically if you have, like we had in the past, very little event-related financings, and you have more of them. It has a very positive effect on the average margin you charge for your balance sheet. Coupled with a broad-based recovery in the corporate space, of course, you get that benefit too of just the quantum going up. Not margin, volume, and mix.
Just one quick follow-up. You mentioned all things being equal, there was not much margin, but is there any move up the risk curve at all that you may be suggesting?
No, not really. I would think that if you look at RWA or RWA, look at the probabilities of default on the average that we look at, it's actually marginally improved. By domain, it's the same.
Super. Thank you very much.
Thank you for your question. No further question at this time, sir. Please continue.
Okay. If there's no further question-
I'm sorry. My apologies, sir.
Okay.
One last question for Nick Davey.
Sure.
Thanks. Just a quick question on the dividend. I know it's a board decision, but given that you've got this SEK 4.5 billion of items not affecting comparability, you've talked about the Q2 non-recurrings in NII, a low tax rate. What would you suggest we do in terms of thinking about your dividend for this year?
Well, you rightly pointed out it's not we who set the dividend, and the response will be a little bit formalistic saying we had SEK 575 in dividend per share last year. We are committed to have a progression increase of that dividend per share, and that goes actually also through a cycle type of ambition, and that's where we keep it.
Okay, thanks.
Thank you. No further questions, sir. Please go ahead.
Okay. I'll just thank everyone so much for participating on this almost one-hour call. If I don't see you, I wish you all a very good summer break. Goodbye.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Have a good day, everyone.