Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's annual account 2016 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask the question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being broadcast today. I would now like to hand the conference over to your speaker today, Jonas Söderberg.
Okay. Thank you very much. Welcome everyone to the telco for annual accounts 2016. As usual, Annika will do a short introduction to what we said this morning, then we will open up for the Q&A. So please, Annika.
Thank you very much. I'll move directly to slide two, the highlights. It's been an exceptional year in many ways, and each quarter has had a different character. We operate in an environment with low or negative interest rates, and this seems to be continuing actually longer than we thought. We come back to that. The first half of the year was characterized by falling stock markets, but after the summer, stock markets and the sentiment improved, and at the same time, we had several unexpected events that created volatility in the markets, which was good for us. Throughout the year, our customers have increased demand for advisory and risk management services. During the autumn, the level of activity clearly rose among our corporate customers, and we saw and are seeing an increased demand for loans.
We continue to see risks in the macro environment, even though the growth in the global economy has picked up a pace a bit. During the year, we have further strengthened our resilience and asset quality remains very good. On page three, this contributes that today we can report an underlying profit of SEK 20.3 billion. As we stated in previous quarters, there are items affecting comparability for 2015 and 2016. We will exclude those effects, whether positive or negative. For simplicity, I will then present the result of underlying operating profit, excluding the following items. Income fell 3% in 2016. Costs were unchanged and operating profit decreased by 7% to the SEK 20.3 billion. Above all, this is the effects of negative interest rates in Sweden, SEK 900 million, negative market valuations and the stock lending business that have created headwinds this year compared to 2015.
Return on equity was 11.3% and the Core Tier 1 capital ratio of 18.8% for the full year. The board of directors proposes a dividend of SEK 5.50 to the AGM, which means continued dividend growth. On page four, looking at the fourth quarter, we saw a strong finish of the year, we have increased income by 8% versus the third quarter and cost by 7%. Operating profit of 5.6%. That was 6% better compared with the third quarter. Our return on equity was 12.3% in the fourth quarter. We also said in the press conference earlier today that this quarter has also started on a positive note. On page five, you see NII decreased by 1% compared to the full year 2015, increased by 3% versus the third quarter.
Customer-driven NII increased by 10% compared to last year, mainly due to lending, where both margin and volumes made a positive contribution. If we compare the Riksbank's repo rate in 2016 to 2015, this is a negative effect by around SEK 900 million. This is seen primarily on NII from deposits and from our treasury operations, which find it increasingly difficult to get a return on our increasing liquidity reserves. At the same time, we have extended our long-term funding, the larger volume also contributes negatively. On page six, the NFI amounted to SEK 16.6, that was a decrease of 9%. That is mainly due to the beginning of last year, where sharply falling of stock markets, which affected both income from asset under management and also performance fees, totaling a gross decrease of nearly SEK 1.7 billion year on year.
In addition, we had last year the effects of the so-called interchange fees within SEB Card business and the strategic decision to reduce the stock lending business with the large corporate and Financial Institutions, a step towards adapting to the new liquidity and capital regulations. Customer activity was higher at the end of the year, commissions from IPOs, loan transactions, and fund operations increased last quarter. Commission income increased by 14% versus the third quarter and by 5% from the same quarter last year. Asset management attracts continued strong inflows, totaling SEK 77 billion during the year, we see that our bank insurance model gives us extra good momentum. On page seven, the NFI is clearly better compared to last year's, up by 13%.
During the year, customers have chosen to hedge their flows with a focus on the foreign exchange side, the activity has remained good with events such as the Brexit and the U.S. election. Stock markets turned sharply upward during the end of 2016, while long-term rates have risen. All these have contributed to higher customer activity. We've had market valuations working in our favor in the last quarter by SEK 223 million, year on year, there is still a headwind of SEK 822 million. We usually show resilience on this line, I now can look back on eight consecutive quarters of stable development. Learning from my mistake, I will not give any guidance on this one because when I did that last time, it immediately dropped. I just hope that we keep this one very stable.
On page eight, we see the operating leverage. I can just state that the average income is a little bit low in 2016 given the headwinds from, among other things, negative interest rates and lower stock markets. While costs continue to develop fairly well, we maintain to stay under our cost cap of SEK 22 billion. We have also decided to extend the cost cap including 2018 and also, nota bene, including the potential bank tax that according to Jan Erik is slightly more than SEK 700 million when that one comes. We also kept the cost now unchanged or lower every year since 2010.
That can sometimes sound a bit simple if you just keep them stable. It's important to remember that we try to do the transition behind the scenes. We do invest the SEK 2 billion in IT. We also make annual efficiencies of approximately SEK 300 million in the operations to deal with inflation, regulation, and foreign exchange effects that are all within the cap. On top of this is the bank tax and that interest rate deductibility for subordinated debt will also disappear. In total, 2017, with the new tax and also with the interest rate deductibility disappearing, that is totaling to SEK 1 billion that needs to be taken out or within the cost cap this year.
If we briefly comment on the divisions on page nine, if we look at the Large Corporates & Financial Institutions, the result is down by 13%, excluding items affecting comparability. The main reason for this is the negative market valuation. Customer demand for risk management has been high in all asset classes. The number of corporate transactions and loan demand has gradually increased over the last six months. FX-adjusted lending increased by SEK 35 billion during the year. Within Financial Institutions, the year was marked by the big Brexit and U.S. election events. Activity was generally good during the year. It was just that the year started very slow, but since about the Midsummer in June 2016, we actually had a really good activity. The results for the fourth quarter amounted to SEK 2.8 billion, which was 31% better than the third quarter, and credit quality remains good.
This was actually one of the better quarters in LC&FI for a very long time. We also see that the activity has continued into Q1. The Corporate & Private Customers division in Sweden was adversely affected by negative interest rates as well as new rules regarding interchange fees on the card side. Despite this, operating profit increases by 1% versus last year and 4% from the previous quarter. Also here, credit quality is good. On the corporate side, we continue to take market share and have now over 15% of the market. At the end of 2009, when we began our expansion efforts on the corporate side in Sweden, we had a market share of 10% and the goal was 15%. We intend to continue at the same pace in the future and the next milestone is 20%.
Since last summer, we've grown slowly on mortgages, actually half of the pace of the market, 3% annually. We are not really satisfied with this development. It can be explained by we were very early in introducing amortization requirements and also the loan-to-income gaps. We see, however, now that the playing field has leveled out, and we could be more in line for the market this year, and we could see good moves in December. In December, we moved on par with the market. We hope that this will pick up now. Looking at the savings area, we see that customers have selected more strategy and equity funds again. In private banking, we continue to attract a lot of new net inflows of funds, as much as SEK 28 billion last year. We were happy with that.
On page 10, when we see the Baltics, they showed a better result than last year. It actually increased 6%. We also see a continued increase in customer activity and loan demand in all of these three countries, and for both corporate and individual. Baltic companies have been able to mitigate the impact of Russian sanctions, and asset quality remained good. Return on equity is stable above 20%, which I think is really good for a universal bank today, and the Baltics are doing that really well. Life & Asset Management also reports a better result, up by 3% versus last year. Here the stock market fall until the summer hit the asset valuation, and both the base commissions and performance-based income decreased, but have in Q4 gotten a lot better.
Our fund ratings from Morningstar continue to improve, and we maintain our leading position among the big fund managers. Overall, we see that both private and institutional customers appreciate our focus on sustainability in our asset management. We are, for example, the European player that has attracted the largest net inflows in microcredit funds in 2016. That's something we are pretty proud about. The life business results increased. We are, of course, the only bank with a complete savings offering, including traditional insurance, which is appreciated by customers. During the year, we strengthened our position in the market. Of the total insurance market in Sweden, we now have a market share of 8.4%, and that is an increase of almost one percentage point in a year.
In total, weighted new sales in life totaled to SEK 40 billion in 2016, which is slowly but surely building value for the future. Not so much P&L today, but it definitely will be. The entire savings area is an important puzzle piece for us and for society at large. On page 11, you see our balance sheet there, which is strong and has been further strengthened during the year. As always, it's sometimes helpful to look back over the past few years, what we have achieved here. Since the financial crisis, we have, by focusing on our areas of strength, reduced the earnings volatility, which has been really important to us. We have also divested and sold off parts that were outside our core business.
We've increased the cost efficiency. We are today one of the European banks with the strongest balance sheet in terms of capital, liquidity reserves, funding structure, and asset quality. We have around one quarter of our balance sheet in liquidity reserves compared with about 10% in 2009. Resilience was further strengthened last year, asset quality remained very good. Non-performing loans continued to decline, even though there was a slight increase between the third and the fourth quarters, but not much worth mentioning, really. The credit loss there was seven basis points for the full year and eight in the last quarter. We have a lot of respect for that being a low figure. We actually do not see any significant change in asset quality in the near future either. Our core CET1 equity capital ratio was 18.8% compared with 11.7% just in 2009.
Our assessment for the Swedish FSA requirement for the common equity CET1 capital ratio is that amount to 16.9% Tier 1. We have a buffer of close to two percentage points. A few words on the business plan on page 12. A year ago, we presented this business plan and the figures for a three-year plan, and we drew our bow with an ambitious growth plan that will be supported by rising stock markets and interest rates. What we could not foresee at that time when we did the business plan that was worked on in the autumn of 2016 was the sharply negative stock market performance directly starting in January last year and then prevailed more or less until the summer and led to lower activity. Nor could we imagine that interest rates would actually go down by another 50 basis points and get stuck at -0.5%.
Added to this were negative market valuations. Altogether, this affects earnings negatively by approximately SEK 2.5 billion that we couldn't really foresee in the plan. Apart from those external factors, the first year of the business plan actually has developed in line with we had predicted. The things that we could do or we set out to do, those have been executed on, and we have increased underlying results by SEK 1.5 billion, despite the lack of rate hikes, and at the same time also accelerating the transformation of the bank. How should we then look at the back of the envelope the remaining two years and the SEK 27 billion we said? It's difficult to give a forecast. We really don't want to do that. It's two more years than the last plan we actually did in the end of the last year.
By trying to do something, of course, we know into 2017 we will end 2017 with a lower base than we could have predicted. That is the SEK 2.5 billion that I just talked about. We can't do much about that. The future interest rate path is slightly flatter than we thought a year ago. The underlying plan and the higher volumes and the more customer and the growth rates are still firm. All things being equal you take the SEK 27 billion and you deduct the SEK 2.5 billion, and you have approximately SEK 24 billion. Also remember that in that figure we expect also to offset the additional headwinds of around SEK one billion driven by the proposed tax in Sweden that I mentioned earlier and the deduction of subordinated debt disappeared also.
That's what we would think that the reason, I think again the focus on the 27 minus the 2.5, that's what we should think about and we can't really give you any more details than that because everything that we can predict and work with we think still are doable. In summary, we feel confident that with the underlying business plan, even in times such as these we will get there. The activity level is high both within the bank and among our customers. This year started really well and that means that even if the train now changed the driver, the journey with the goal will continue in the same pace and everybody in the Group Executive Committee is very aligned and committed to delivering on this plan.
To conclude my presentation on slide 13, the financial goals are exactly the same. A dividend policy that we will distribute at least 40% of profit, we strive for constant dividend growth, which we delivered on also this year. A quarter one capital ratio of approximately 1.5 percentage points higher than the capital requirement from the Swedish FSA. A check on that one, too. To create a competitive return on equity, which means that over the time we aspire to achieve a return of 15%. We had 12.3 in the last quarter. Of course, we have some more to do there, but that one is still valid. In addition to that, we will maintain the cost cap to stay below SEK 22 billion for the next two years, also including 2018, including the tax. Finally, the strategy and direction is intact. We know what we're doing.
We will continue on this path. The train drives on. It's in really good shape, this train today, I dare say. I dare say that the rails are also carefully looked after. Everyone on board is entirely focused on delivering world-class service to all the passengers who are also on board. I think we feel comfortable, again, saying it's going to be tough to reach the plan, but again, if we get some more tailwind, that will not be impossible. With that, I'll be opening up for questions.
Ladies and gentlemen, we will now begin a question and answer session. If you wish to ask a question, you need to press star one on your telephone and wait for your name to be announced. If you'd like to cancel your request, press the hash key. Once again, press star and one if you wish to ask a question, and press the hash key if you wish to cancel your question. Your first question comes from the line of Johan Ekblom. Please ask your question.
Thank you. I just want to follow up. I think you made a comment in the press interview, Annika, about NII momentum having started very strong this year. When we think about the drivers this year, can you maybe walk us through it? I guess you have the roughly SEK 750 million increase in resolution fees. I think this morning you spoke about volume growth broadly in line with the markets. I guess that's 4% or 8% or something like that. Maybe tie in also what your expectations are in terms of margins, interest rates. Related to that, we saw quarter-on-quarter, quite a big drop in the NII in the corporate center. Is there anything we should read into that or any specific drivers that might be of a temporary nature there?
I think when we discuss also, mortgages is one thing, and I think now we will be up to pace there again. I think also one of the explanations on the mortgages was that we had our own model, and we also could see, even though we have been having very competitive offering, it was much more difficult talking to the customers about an internal SEB price plus the margin. Now we are aligned with the market. We do it with rebates instead, and we have a gross price. It's easier to choose that way. It's easier and more transparent. I think that one will be easier for us, and we can see we're picking up again, and we are making sure that we keep our market share because we want to do that. That will continue.
When it comes to corporate, I think it's both a volume game and at the same time gaining more corporates. We gained another 9,000 corporates last year, and I think we have a really good traction when it comes to Sweden and SMEs and mid corporates. I think also we've been very supportive that SMEs really appreciate our mobile offerings. We have a special mobile for that means the SME corporate, and they do their business that way. They will also hopefully now start to borrow more. We've seen more lending into real estate and building sites, but that will also change. I think also the mix will brought in still quite a few new large corporates. We also hope now that we can have the acquisition finance, the M&A thing that is going on.
I think we're looking both at the slightly increased margins, but also much more of the cross-selling and being able to catch everything that is out there. We could see that on the large corporate side, that both the M&A and acquisition finance mode was quite positive in Q4. Far into this year, it has started off really well. Of course, will that stay on or not? It's hard to say, but I think the sentiment is much better. I think what we've seen at all times now is that the sentiment is changing from last year when we really started with a big stop. I think most things is going in that direction. I think, again, the volume mix on NII is beneficial for us. That's why we think that NII will continue to grow.
I now look at Jonas, you want to add something?
On the corporate center, Johan, we can say that there's a change in the internal fund transfer model that is then affecting, you could say as one of effect between the corporate center and the lending in the divisions. We have refinanced the Tier 2 bond that is maturing in September 2017. That is then adding, and then also now with the new upcoming new NSFR regulations, we will increase the total funding volumes for the bank. That is then increasing the funding cost. Those are the things. You should not extrapolate this negative effect in the corporate treasury.
It shouldn't revert either to the levels we saw in previous quarters?
No.
No. Okay, perfect. Thank you.
Thank you for your question. Your next question comes from the line of Willis Palermo. Please ask your question.
Hi, good morning, thanks for the presentation. The first question is to continue a little bit on net interest income. I didn't get if you were hoping to pass on completely the higher resolution fee to customer, and if not, how much you think you can offset by higher repricing. Still on repricing, how much do you think can you continue to reprice in 2017 compared to 2016? Then the second question is on commission income, as the performance base was quite high in the fourth quarter as expected. Last time you mentioned having high water marks, and I was wondering how much would it be fair to expect to see in the first half of the year as a result? Thanks.
Hi. Jan Erik here. Well, on NII and the ambition to pass on regulatory costs, that's still there. Whether we will be able to reprice fully for the resolution fund fees or not remains to be seen. I think that's the direction that all the banks are going with, not only to pass on costs for that, but also for corporate risk weights, mortgage risk weights. We're done, basically all of us. We think any regulation or tax, we will have the ambition to reprice. When it comes to commission and performance fees, that's very difficult without a crystal ball to say where that's going to go. It's really a matter of where the stock market is going. Seems to be quite positive right now anyway, we'll see.
Thank you very much.
Thank you for your question. Your next question comes from the line of Omar Keenan. Please ask your question.
Good morning. Thanks very much for taking the questions. Firstly, I think, Annika, you're with us for another quarter, but thanks a lot for all the interaction over the years and wish you the best for the future.
Thank you.
The first question is just on the rate sensitivity of SEK 2 billion for 100 basis points or SEK 1 billion for 50 basis points. Can I ask what assumptions are in those numbers? There's been a lot of debate around floors. Is the impact of floors in the lending book included in the SEK 2 billion? If it's not, could you let us know what the share of the floors are? My second question is, if I look at 2016 in totality compared to 2015, fees are down SEK 1.7 billion, and trading's up SEK 1.6 billion, pretty much as you guys said. If the environment improves, I think there's about SEK 4 billion of underlying revenue growth that you seem to need for the plan, aside from rates.
What kind of macro environment or help from the macro do you need to get there, if you can give us an idea of that? Thank you.
Omar, on the rate sensitivity, I think we're just giving you a broad number there that moving from negative 50 basis points up to zero means SEK 1 billion, and then another 50 basis points is another SEK 1 billion. That's basically what we're saying. When it comes to the structures of floors on the asset side, we haven't gone into any detail on that, so I won't do that now either. I will say that the Large Corporates & Financial Institutions division is, through that structure, fairly well protected from negative interest rate movements on the downside. If we start to see our assumption on the yield curve materialize here, we should see a positive traction. On the fees and trading, I didn't quite get your thought there, Omar. Can you just repeat that, please?
Yeah. There's been a balance between fees and trading. Fees have been up 1.7, and trading's been down 1.6. In a mixed macro environment, the trading has helped while the fees has been a headwind. If we look to where we are today versus the plan, there's about SEK 4 billion of underlying revenue growth. What kind of macro help do we need to get to that? I guess in a more normalized environment, trading might come down a bit, but we'd hope fees to be up. Is there a ideal Goldilocks macro to get to your target?
Well, two aspects on that. I think the macro assumptions that are underlying our business plan are there for you to read in the open. They are in Nordic Outlook. You can pick it up there with the exception of what we think about the stock market, which is in that publication, and we don't discuss how we reason around that. Still, I can say we expect it to be positive. Other than that, all the assumptions are in there. That's how we built the plan. I think What you're describing is also the diversification aspect that we've talked about many times. That in different environments, different revenue lines will work. Now when we've seen a lot of volatility and currency volatility and interest rate volatility over the year, trading line has delivered well.
the corporate activity and the underlying transaction activity has been fairly slow throughout large parts of the year, picked up a lot during the second half of the year. You see how different revenue lines work in different environments, and I think that's good strength of the model.
Okay, great. Thank you very much.
Thank you for your question. Your next question comes from the line of Matti Ahokas. Please ask your question.
Yes, good afternoon. Matti Ahokas here from Danske Bank. A bit continuing on the same tone regarding the split of revenues in your financial targets. Is it fair to say that the level of net financial income in your expectations is now higher than before and maybe commission's lower? Also related to that, how are you viewing credit quality and loan losses going forward? Are you assuming now a lower level of loan losses than a year ago? Thanks.
No, we're not building the plan on hoping for higher trading activity. I think the point we're trying to make is that we think we've got good diversification effects. All of top-line needs to grow by about 5% compound annual growth rate. That's what we said last year, and that underlying assumption still holds. Whether it's commission or trading, it depends on the underlying circumstance in the year. When it comes to credit quality, I think we always have said that seven basis points area where we are now is in the long term has got to be too low. That means that when we do three-year business plans, we say seeing gradually somewhat higher credit losses. That's proven to be wrong, frankly, for some time, because the asset quality tends to be very strong.
We do that because we normally say to people, look at the Swedish regulators or the Swedish Riksbank, who in their stress tests and their main scenarios, they usually have 10 to 12 basis points. That's quite a bit away from the seven we do today, that's where we point people.
I think also one can add what we have learned looking back is that we know our customers really well, and we stick to this region where we are. We have the Nordics, we have the Baltics, and we have Germany. It's very well-focused on large corporates outside Sweden, while in Sweden and the Baltics we are a universal bank. I think we know our customers really well. I think also that that plays in our hands.
Just to clarify as a follow-up. If I understood you correctly, that one could obviously think that with the lower interest rate, the credit quality also would remain stronger than previously. The negative on the NII would be compensated by the positives on the credit quality, this is not in the business plan for 2018.
Yes.
That's one way of looking at it, I suppose.
Great. Thanks a lot.
Thanks.
Thank you. Your next question comes from the line of Jan Wolter. Please ask your question.
Yes, Jan Wolter, Credit Suisse. Can you hear me okay?
Yes.
Yes.
Thank you. A couple of questions. First on capital, following up from this morning. You're now at 18.8 quarter one, so that's well above the 150 basis point management buffer that company has set. If we get clarity on outstanding Basel proposals during this year, theoretically, should investors then expect SEB to communicate any capital actions over and above the ordinary dividend? What needs to happen before the bank can communicate anything on that front? That's my first question, please.
Jan, I think, as you say, we are well capitalized today. We're at almost 200 basis points above the regulatory minimum. That leaves us in a positive zone, and then we'll still increase the dividend as Annika talked about earlier. It's always been the case, we've said for years that we strive now for this capital buffer, which needs to be around 150. It doesn't have to be exactly that. Around that number. If we have clarity, and I suppose clarity means full clarity, to actually understand and can project with a reasonable degree of certainty what's going to happen in the near to mid-term. We will adjust accordingly. I think it's a bit premature to engage in that discussion today because it's far from clear.
Maybe you've seen there has been in the market flying around what is apparently a letter to Janet Yellen instructing them to cease negotiations on Basel IV. Of course, that doesn't exactly give support for that process. Who knows where this is going to go. It doesn't give clarity yet, it gives more uncertainty, I think. I think we'll have to come back to that discussion, Jan.
That's fair enough. Just a clarification around the new PBT target or ambition here, SEK 24 billion. I think, Jan, you highlighted in the presentation this morning that assumes roughly 25 basis points repo rate. That would imply three rate hikes from here Give or take. Is that the same thing as the bank adding something like SEK 3 billion to the revenue line due to higher rates? I think that is what the rate sensitivity that you have given implies. You basically add SEK 3 billion to the revenue line in your plan for higher rates. Is that the way you think about it? Thank you.
We're just saying, Jan, that all our assumptions for the business plan are found in the Nordic Outlook. We're just saying that whether it's two or three hikes, I don't know. That's to be seen, what the Riksbank is doing and when they do it. In our assumptions that these things happen towards the end of the two-year cycle rather than in the beginning. The effect from the curve, so to speak, and the addition from a rising interest rate curve happens later and is therefore smaller. There is some in that, and I think you have to make your own assessment of how much happens or when.
We have long debates regarding, of course, us being able to outpace the macro. We're not only a macro case, we're also growing the volumes. We're growing our customers. We are very happy with the business mix in the bank, that we have a much better stability today. We can also, on the other hand, the icing on the cake is, of course, the small volatility that we need on our side. We had that in the last quarter, and we hope that we will continuously have that. The activity and the optimism is likely that continues all the way. We don't know yet. So far, it seems pretty good. Much better thought this year than last year.
That's very clear. Many thanks.
Thank you for your question. Your next question comes from the line of Anton Kryachok. Please ask your question.
Good afternoon. It's Anton here from UBS. Thanks a lot for the presentation. Just a couple of questions coming back to net interest income. Firstly, can you give us an update where your front book mortgage margins are versus the back book? I remember previously you've used to talk about it. Secondly, just coming back on the resolution fund fees. In your management report, you state that you expect regulatory charges to go up from SEK 1.4 to, I think, SEK 2 billion, and that basically implies an increase of SEK 600 million rather than SEK 750 that we have talked before. Just to clarify, is the resolution fund fee increase still in the region of SEK 750? Are there any other things that are offsetting it? Thank you.
Yeah, Anton. The resolution fund fee, our calculation is an additional SEK 750 this year from that. When it comes to the mortgage margins, we don't, in fact, talk about the front book margins, but the back book margins. The back book is at 122 at the moment. I would say that front book margins have been for some time quite a bit higher than that, LCR. So is the prolongation margin. Those two have repriced the back book, and that will continue for some time.
Okay, very clear. Thank you so much.
Okay. No more questions on the line, or? Operator?
Oh, excuse me. Sorry, we had a slight computer hiccup here, but we're back to normal again. Next question comes from the line of Jaan Tallinn. Please ask your question.
Oh, hi. Yes, it's Jaan Tallinn here from Carnegie. You've answered most of my questions, to be honest, but I just wanted to see if I can get a bit of clarification on the NII in getting to your SEK 24 billion targets. I guess what you've said is most of the new regulatory cost is going to be passed on to the customer, but I guess you also need a margin expansion to reach your targets. How do you see that happening with modest volume growth over the next couple of years?
I think you were saying modest volume growth. I'm not sure we're saying that. We're going to aspire to grow a little bit quicker on the mortgage book than we've done in recent months and quarters. Today, our ambition is to grow more in line with market rather than slower than market. We will continue, as we talked about in the previous question from Anton Kryachok at UBS, to discuss the front book margin and the prolongation margin will continue to push the back book up. We talked about earlier, Annika took a question on the mix effect in the Large Corporates & Financial Institutions, more acquisition finance, perhaps more private equity-driven transactions with typically better margins.
I think that in combination with overall better demand in the market throughout and the ambition from all institutions to offload regulatory costs, that's not something we are doing and fighting that battle alone, so to speak. We're all directionally moving in the same way. Another positive, I think, is the Baltics, who have reshaped themselves in a very good fashion over the past few years, and they are now producing 20% returns. The loan demand is increasing in all three countries, I admit from perhaps not so impressive levels, but it's a positive directional change. I think when you start to add these things up, that's what we do. We come out with what we think is a reasonable and credible plan. Then whether it will be modest or not, we can all have different views, I suppose.
Okay. Yeah. Fine. Thank you very much for that.
Okay.
Thank you for your question. Your next question comes from the line of Ricardo Rovere. Please ask your question.
Yes. Thanks for taking my question. Just one clarification from my side. When you were mentioning the sensitivity to rates hike, I just wonder whether you are referring to moving the current short-term rates from -50 to 0. If you were mentioning just movement in the short part of the curve, if that is correct. If that is correct, I was just wondering what would be the sensitivity, if any, of an NII to a movement in the long part of the yield curve. Thanks.
Ricardo, we're really talking about a kroner-based hike of the yield curve. It's basically a parallel shift of the curve.
Okay, clear. Thanks.
Thank you for your question. Next question comes from the line of Andreas Håkansson. Please ask your question.
Yes. Hi. Just one follow-up here. I was listening. Jan Erik, I didn't quite hear, did you say that the margin on the back book was 123 basis points?
122, Andreas.
Okay. If I just look at Finansinspektionen, in their market front book number, they talk about 167, around 45 basis points difference. What's the duration of the fixed mortgages that then should move up over the next couple of years?
Look, Andreas, you cannot really compare that apples and apples with the back book and so on. I think that it's not a fair comparison to drive that comparison. I think that what we are saying is that we can see that we still have higher front book margins than we have on the back book, but the pace that we have had of 17 and 18 basis points is maybe not possible to have at the same extent, but we expect higher margin back book at the end of 2017 than in the beginning. We can also say that we have already factored in the resolution fund fee in our back book pricing here. I think that the 122 is actually what we're starting on a net basis from the 1st of January this year on that.
Okay. Still, if we exclude the three-month variable mortgages, how big portion of your loan book is then fixed? What's the average duration of the fixed?
It's roughly 30% that is on a fixed basis. I would say the most popular tenures are between one and three years. You will have an average duration of just over two, I would say, on that portion.
Excellent. Thank you.
Thank you for your question. Your next question comes from the line of Jacob Kruse. Please ask your question.
Hi. Thank you. Just two questions. Firstly, there was some comments in the news this morning that the FSA had sent letters to the banks regarding their view on the Panama examination. I was just wondering if you could comment at all on what you've learned from that. My second question was, when it comes to the mobile and online banking offer that you discussed for SMEs, but also retail, roughly how much of the bank, in terms of product suite, can the clients in those two segments access on the mobile or online relative to what is accessible if they go into the office? Thank you.
I can talk of the Panama letters. Yes, we have received the letter, and we have answered that and sent it back to the Finansinspektionen. Let's see. We don't know anything more than that, but it wasn't difficult for us to answer that letter. We will see what will be the next move from the Finansinspektionen. When it comes to client onboarding and what kind of services that they can do, it varies a bit on what kind of demand that they have, actually. The two main things have been client onboarding and also being able to do a lot of things on the mortgages side. For the SMEs have been also some of the simpler things to do, but you cannot do everything online yet. You can do many of the usual simple stuff.
One of the most important one has become just becoming a client online, where actually you couldn't do that before in SEB. You also had to visit a branch, which you don't need anymore.
Okay. Thank you very much.
Thank you. Next question, and last question comes from the line of Nicholas McBeath. Please ask your question.
Hello. Thank you. I was wondering about the bank tax. It's been receiving lots of pushback from several stakeholders recently, and it now seems quite controversial to implement. Do you have a view on how likely you think that it is that the tax will be implemented based on any potential recent feedback from the government? Secondly, also, assuming that the tax would not be implemented, what would that imply for your SEK 22 billion cost cap? Thank you.
Hi. Well, I think the likelihood of it happening we've deemed to be more probable than not. We built it into the business plan as you know we talk about it here now. I think once politicians get the appetite for SEK 4 billion-SEK 6 billion to be sucked out of the Swedish banking system, then it's difficult to walk back on that. At the same time, criticism in the consultation period now has been immense and from many areas. I think the fact that the proposed tax hits not only the banks but thousands of corporates who engage in financial activities was perhaps not the intention from the beginning, but that's in fact what would happen.
Pressure is building up to, if not abolish the whole thing, find a different construction of the whole thing, perhaps that would mean it would be delayed or watered down or something. I don't know. We'll see. We factored it in just for it to be cautious on that anyway. If it doesn't happen, we'll assess that there. Obviously we won't immediately run away and spend it on something else. It would be more a question of lowering the cap, I think, when we get to that point. If and when that happens, we'll talk to you about that again.
Okay. Thank you.
Thank you for your question. Ladies and gentlemen, once again, if you wish to ask a question, press star one.
Okay. We understand from the queue that there is no further questions. We thank you all for participating in today's telephone conference. We wish you a good rest of the afternoon everywhere where you are. If there are any further questions, just call in to any of your IR contacts. Thanks a lot.
Thank you.
Thank you.
Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all now disconnect.