Thank you for standing by, ladies and gentlemen, and welcome to the Q2 2015 results 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 a question, you will need to press star one on your telephone. I would now like to hand the conference over to your speaker today, Annika Falkengren. Please go ahead, ma'am.
Thank you very much, and welcome to the presentation of our results for the second quarter 2015. Today we present a report of operating profit of SEK 5.3 billion. We continue to demonstrate a good breadth in our earnings, which is proof that our focus on growing together with our customers produces results. Turning to page two. During the first quarter, we did see increase in stock market valuations, a trend that was reversed during the second quarter of this year. Moving forward to page three, our diversified business mix has once again shown resilience, and we can therefore present a strong result. I would like to highlight three items that characterize this quarter for us. First of all, there was a high overall customer activity, which we benefited from. There were also strength and resilience. Our capital and leverage ratios have continued to improve.
Thirdly, we continue to have high credit quality and also improved our own efficiency. We move on to the P&L on slide four. As you all remember and what we announced in May, there is a one-off effect in this quarter related to the decision by Switzerland's Supreme Court on withholding tax for the years between 2006 to 2008. The total amounts to SEK 902 million and affects the net interest income by SEK 82 million and the NFI by SEK 820 million. I will now continue to present the quarterly underlying operational results, i.e., I will exclude the one-off item so you can understand the underlying momentum in the bank without distorting the figures. This means that for the first half of the year, operating profit rose by 18% to SEK 11.9 billion.
Total operating income increased by 10%. Total operating expenses increased by 3%, mainly due to the previously mentioned higher pension costs and also currency effects. All the time excluding the one-off Swiss costs. On slide five, net interest income decreased by 1% compared with the first half of last year and decreased by 5% against the first quarter. The customer-driven NII decreased by 3% compared with the same period last year, primarily due to the lower and lower deposit margins or inexistent as a result of the interest rate environment. At the same time, deposit volumes increased. Lending margins were relatively stable and lending volumes also increased compared to last year. Rather volumes. Page six, net fee and commission income remained strong and amounted to SEK 9.1 billion for the first six months of the year. That is an increase of 14% compared to last year.
On a seasonal basis, fee and commissions are typically higher for us in the second quarter, that is due to higher payments and card fees as well as securities lending during the dividend season. This year they increased by 13% compared with the first quarter and by 14% against the second quarter last year. Foremost, because securities lending was strong in the second quarter. Wealth management is still showing good inflows, but given the lower stock market values during the second quarter and lower so-called performance-related fees dropped in this area in the quarter. NFI on slide seven is perhaps this quarter's most positive contribution and amounted to SEK 2.8 billion during the first six months, of which SEK 1.6 billion was in the second quarter, and again excluding Switzerland.
During the second quarter, large corporate clients remained active by reallocating their assets and managing risks due to higher volatility in the market. In this quarter, though, the so-called CVA, DVA and OVA, the market values, we have them with us in this quarter, we also all know that they can vary from quarter to quarter. We continue to exhibit a clear long-term trend of stability in our business, as you can see on page eight. I say now what I've said I think for many quarters, that the average income continues to increase, costs are stable, our operating profit is increasing. This is also fully in line with our anticipated delivery of our business plan. Our cost cap of coming in below SEK 22.5 billion this year remains also for next year, 2016. A short comment on the divisions on slide nine.
They all show a return on equity of at least 14% this quarter. I have slightly different developments during the first six months. Again, for the first half year, they're all above 14%. Negative interest rates is the most pressure in the retail banking and also Baltic banking, while merchant banking wealth and life benefited from higher customer activity and the trend of increasing long-term savings. In common for all divisions is that customers in each of our segments continue to give more of their business to our bank. We are proud of the stability the business exhibits, which reflects, I think, the well-diversified actually corporate bank that we are. On page 10 is activity for large corporate and institutions. At the end of last year, we did see an increase in the activity in the form of major acquisitions, IPOs and bond issues.
The market for these actions was especially advantageous when volatility and interest rates were low. The first half of this year looked very little different. Sorry, it did look different. Volatility has increased in both interest rates and currency markets, this has contributed to uncertainty and caution regarding more loan-related activities. It also explains why loan growth is low and why demand for risk management products increase in line with customers balancing their holdings and risk. This also shows how important it is to offer customers a complete offering no matter the external environment. In the second quarter, for example, there's been high activity in IPOs. We've taken the largest share of this market with our 11 deals, once again prove that our customer-driven business model is appreciated by our customers. Last on page 11, we do manage and care a lot about our balance sheet.
It has continuously strengthened further also this quarter. The loan loss ratio is six basis points in the quarter as well as in the first six months of the year. That means of course our asset quality remains very good, and we still have around one quarter of our balance sheet in liquidity reserves. Our Core Tier 1 capital ratio was 17.2% and return on equity was 14.2%, excluding the one-off item. Last, we stick to our long-term business plan with focus on our customers. All parts of the bank are delivering, and we're growing together with our customers. We do operate a rather unique global economic environment with negative interest rates and where underlying global growth has not really taken off. With today's result, we show that our customers appreciate that we can offer full service solutions and advice even in these difficult environments.
We have a very strong financial position, we are well-positioned to continue to grow along with our customers. With this, I'd like to hand over to you so we can open up for questions.
Thank you very much indeed, ma'am. As a gentle reminder to ask a question, I'd like you to press star one on your telephone keypad and wait for your name to be announced. Now your first question from Exane comes from the line of Andreas Håkansson. Your line is now open.
Yes. Hi, it's Andreas from Exane . Just to follow up from the local meeting this morning. On RWAs, we talked about it quite a bit, you talked about that you expect RWAs could be flat from here. Could you tell us a little bit about your assumptions there? What type of loan growth would you expect? Also was that with or without the SEK 20 billion of further efficiencies you expect from RWAs? Could that potentially come on top if and when that materializes? Thanks.
Hi, Andreas. Yeah, I think I was saying this morning that in response to a question on whether it would be kept flat, that we've managed to do so for quite some time or flat-ish at least. I think this time around you need to remember that we've been helped by the FX development so that's holding the risk-weighted assets development down. When I say it as an outlook for the future, I think I'm not extending that too far in time. I'm just saying that we will continue to factor in the efficiencies in terms of modeling changes. I add those in when I say that, and I'm also just reflecting the fact that the loan demand is slow, and it's moving sideways. If that starts to pick up at some point then maybe that statement can't hold anymore.
Okay. Thank you.
Thank you very much indeed, sir. Your next question from Goldman Sachs comes from the line of Heino Lutz. Your line is now open.
Hello, Malik. I got two rather brief questions. Malik, the first one is on one of the other slides, you show basically how your average Morningstar rating went on funds. I was just then sort of wondering if you can rather give us the percentage of funds that are in the top 10, because that tends to be the funds that drive inflows. Because having an average rating also might just mean that you have a lot of average funds. That's one thing that would be interesting here. The second thing is in terms of capital, Malik, you had very strong formation in this quarter and rather weak one in last quarter. The volatility quarterly seems to be quite high.
Generally, do you continue to feel positive with the amount of buffer you looked at, or you would say the quarterly volatility is a bit above what you expect even your buffer?
Sorry, can I ask you to repeat that last question please?
I think you have quite large quarterly volatility in capital. In this quarter to the positive side, last quarter less so. I just wondered if you look at the volatility of your capital, do you feel your capital buffer is still adequate, or you would feel the capital volatility is a bit more than you would generally expect? 60 basis points on the positive side is a very strong move, but at the same time, it just raises a question to what extent you expect further volatility on that side going forward.
Okay. I think we're happy with our buffer and the size of that. If you look back to the communication when we set that buffer at the 150 basis points around year-end, we factored in quite a bit of volatility in that. The answer is yes, we're happy. Keep in mind that, as I said earlier, FX has pushed risk-weighted assets down, which has helped the ratio, and more so the rise in the long-term interest rates have made the discount rate go up on the pension liabilities, which have added quite a bit to the ratio as well. I suppose in a way you're asking about the volatility of those two factors. I think we're pleased the ratio went up, but I did caution this morning that one should keep those things in mind. Long-term interest rates may well come down a bit again.
We didn't bring discount rates up all the way to perhaps where it could have been. I think we could have brought it up a little bit more, there's some conservatism already built into that. I feel fine about that.
That's fine.
Regarding the Morningstar, Heino, I think they are using all the funds that are distributed and marketed on the Swedish market, the development on that one is depending on Morningstar's own research.
I think also we've had a lot of work the last, I would say six, seven years, making sure how to ensure the long-term performance and how we work with the funds. We offer, of course, more strategic funds where some of the inflows are higher than others, the weighted average from the Morningstar is their own model. We work consistently with that one for a long time, and we are now sharing the first place.
Okay. Very helpful. Thank you very much.
Thank you very much indeed, sir. From Barclays, your next question comes from the line of Christoffer Rosquist. Your line is now open.
Thank you. One question is on your investment banking, the coverage fee income, M&A and DCM, ECM. I wonder if you could just give us a little bit color on your expectation on the volumes. Perhaps not necessarily the volumes that you, or the deals that you take part of, because I appreciate that could depend on the other banks and how they behave, but more customer interest pipeline. Is this very cyclical? If so, where are we in the cycle? Do you see another pattern, perhaps driven by cheap funding, or do you see a more stable environment? That's one question. Secondly, if I can follow up on the comment from this morning regarding interest rate sensitivity. It seems like most of the interest that you've had is in the retail bank deposits.
Is that you actually cannot, for relationship reasons, say no to those inflows and/or is there any way that you can manage the sensitivity, perhaps migrating those customers to other savings products? Finally, I just wanted to confirm, I thought I heard in the morning as well that you actually had more corporate CapEx-driven credit demand. I just wanted to confirm if that was correct. Thank you.
When it comes to investment banking, I think what we see at the moment is that the pipeline looks really good. Again, you never really know what will materialize or not, because, of course, we said this for quite a few quarters, and now we've seen a lot, but if it's going to continue or not, I don't know. It was stalled a bit regarding Greece, but it looks like the activity will continue. I think what I tried to allude to at the press conference regarding the cheap funding, I think the challenge is on a higher level when you start to see that a lot of financial institutions issue bonds from small corporates that probably shouldn't even be in the bond market. Of course, you could worry some of these when they need a real bank limit again.
We might not even have a limit on that client. Of course, the challenge is that more from a liquidity perspective if we come into trouble again, what will the market look like? Of course, shadow banks are not as regulated as we are, and we will not carry limits on all these corporates in the future. That's a different question. That was what we were discussing a bit at the earlier press conference. I think all in all, we see a lot of activity and a lot of a good pipeline. Where we are in the cycle, it's difficult to say, I think, because we don't really know what the cycle is at the moment with all staying in these negative interest rates and all the others we have here. I'm fairly optimistic that investment banking will have a continuously good quarter.
Q3, again, as I warned before, is always a weaker quarter for us anyway because of activities going down. When it comes to interest rate volatility in retail, yes, you could transfer some of the deposits to other products, again, interest rate products per se are not very profitable for the client. For the client's best and the interest of the client, it's better to stay on a zero basis account than enter a fund and after fee, you might even have negative. I think from that perspective, we have been, and we can also see it out of our clients, some of them have even sold funds and are now keeping the deposits. It's not huge. We will, of course, find ways, but I don't think you will be able to charge in retail.
We might be slightly more, if this is going to stay negative, I don't know if we have to be more creative, this is the way it is. Hopefully we can compensate by higher activity in other areas. To compensate the net interest income on retail will be challenging.
Another thing on the corporate lending, I think we haven't said, Christoffer, that there has been a big pickup in the CapEx related loan demand. What we said was that we saw in the retail division that they gained market share in the SME segment, and that was the driver behind the growth in their lending volumes in the quarter.
It's not growing margins, but they did acquire some new clients and contributed with volume.
The statement that we still lack a big pickup in CapEx related loan demand, that still holds.
Okay, understand. Well, thank you very much for answers. That's very clear.
Thank you very much indeed, sir. Your next question from Citi comes from the line of Ronit Ghose. Your line is now open.
Great. Thank you. I had a couple of questions just around drilling further into the fees and commissions line. The first one is on the line that you have called secondary markets and derivatives. I know these are gross numbers, but the number in second quarter is SEK 1.7 billion, and second quarter last year was SEK 1 billion, and the second quarter in 2013 was SEK 647. I don't know if you could give us some more color around how much of this is securities financing driven, how much of it is driven through the big wave of IPO and equity capital market activity participation you've alluded to and referred to, or if there's any numbers you can give us on a net number, because I know there's a gross number, because that seems to have done very well.
On the contrast, on the negative side, or I guess the comparisons are very tough. On the wealth management side, you've seen a couple hundred million SEK decline quarter-on-quarter. Is the majority of that performance fee related, or is actually quite a large part also just AUM related? I just wondered if you could give us some color around the mix of wealth management revenues going. Finally, the life insurance result is mainly traditional life driven by Denmark. If you could clarify that for me. Thanks.
Yeah, I can clarify. It was the Danish traditional portfolios that were hit by higher interest rates in Denmark. That hit negatively. On the other hand, what I mentioned, which is not in the P&L, but actually embedded value is growing. That is a sale for like Sweden, particularly in selling life insurance to entrepreneurs and SMEs is really growing and really doing well.
That is not transferred into P&L yet, but embedded value is growing on that one.
Ronit on the mid question there on wealth. Yes, that's primarily performance fees. I think it's a little bit weaker in Q2 than in Q1, which was particularly strong, I think. We said this morning we think we have moved up to a sort of a higher level on that, so that keeps coming in better than in the past. Q2, as you say, point out it's a little bit weak than Q1. On your first question on the commission line, the securities finance business and the IPOs certainly contribute, and we haven't specified or broken apart what the numbers are behind that. I think that business is growing as Joachim Alpen, who co-heads the merchant bank today, commented this morning. This is the result of long and hard work on building a broad customer base.
I think the IPO is certainly something that is starting to pay off and the securities finances as well, even though they're only in Q2.
Right. It wouldn't be, sorry, the securities finance, but it wouldn't be a majority or it wouldn't be the key delta, would it? Either year-on-year or quarter-on-quarter?
Well, it's a good contributor. I won't break it down further than that. We haven't done that in other place.
Okay. Thank you. Helpful. Thanks.
Thank you very much indeed, sir. Your next question from Nomura comes from the line of Matthew Clark. Your line's open, sir.
Good afternoon. Just wanted to ask a question on your differentiated mortgage model. It looks like your margins aren't benefiting as much as maybe your peers are from repricing. Just wanted to check, are you still committed to that mortgage pricing model? You don't seem to be taking mortgage market share, I guess is there room for you to be a bit less generous on pricing, or do you feel you have to be more generous than competitive in order to maintain your market share? Maybe just some thoughts around those general issues. Thank you.
We have a different model for pricing mortgages where we started to be more transparent ourselves, which was of course in hindsight quite a difficult decision we made at that time. That was the bank's cost. Adding a margin on that. Of course, we come out very competitively, or we will now see where things come out. On the other hand, our customer base is higher affluent individuals in the cities. They, of course, have mortgages, but also very good income. Of course, from that perspective, the whole business is quite attractive to the bank to get hold of. We did increase from 89 basis points to 103, which was four basis points. Sorry, 93 this quarter. I think it continues with approximately one basis point a month. I think what we have seen now, of course, is that we seem to be quite competitive.
That means, I guess, that the only thing that can happen is hopefully that we can slowly but steadily increase the margins while our peers, of course, is getting more challenging. I can look at this from a positive side, saying that hopefully we will be able to reprice it in a good way and have a better opportunity to do that than being on the other side. We take this step by step forward, and I think also that we have very satisfied clients. I think it goes hand in hand, and also having a share of wallet on our more affluent individuals that has worked quite well. Let's see how well we can reprice this slowly but steadily during the autumn.
You intend to do that repricing relative to your published blended funding costs rather than as a discount to an advertised rate. You're sticking with the existing model, I guess is the question.
We will, of course, try to stay competitive, but we'll, of course, also keep a close eye to our peers. There's one more thing, though, and that is for customers domestically, when we negotiate the margin, that margin kind of stays. While for some competitors, the margin has to be renegotiated every time you renegotiate your loan. I think, again, depends on, of course, how the market will look at. I think we have a good potential renegotiating and, of course, increasing the margin a bit further. That's what we have an ambition to do.
Okay. Thank you.
Thank you very much indeed, sir. Your next question from UBS comes from the line of Anton Kryachok, your line is now open.
Good afternoon. Thank you for taking the questions. Just a couple of follow-ups, please, on the divisional trends. Firstly, in the markets business of your merchant bank the quarter-over-quarter change in net interest income and net fee and commission income is interesting. We've seen quite a steep reduction in NII and a significant pickup in fees and commissions. I was wondering whether there is some flow between the two P&L lines. Given that this NII line used to be stable historically, do you expect it to recover from the current levels or whether this is a new run rate that we should look at? The second question, please, on the corporate center NII, we have talked in the past about pressure from lower reinvestment yields in the current interest rate environment.
Given that the long end of the yield curve in Sweden has steepened recently can you comment on trends that you see for this divisional NII line in the corporate center? Thank you.
Anton, the movement you're seeing on the markets it's just as you say, some flow between the lines there. I think one way of thinking about that is that the positive development on commission is as we discussed earlier, partly generating from securities finance and the stock lending business. This means that the markets business is holding some inventory of securities during the quarter, and that's funded through the NII line. Those two things one should look at together. Just as commissions will not be there to the same extent the next quarter, neither will the funding cost for that security. That should come up a bit.
Okay. That's very clear.
In terms of the corporate center, the investment yield on the liquidity portfolio has been further hit, of course, by the rates. I can only hope that the rates will not move further south. As you know, the Swedish Riksbank charges the banks straight through for the negative rates, and that's different to, as some of you will know from places like Denmark or Switzerland, where central banks offer better rates to the banks than is done here.
Anton, you should also remember that the one-off item on the NII, the SEK 82 million, is booked under markets NII.
Okay. That's very helpful. Thank you very much.
Thank you very much indeed, sir. Your next question from Deutsche Bank comes from the line of Omar Keenan. Your line is now open, sir.
Good afternoon. Thank you very much for taking the questions. I just had one on net interest income and then one on capital. Has the rate sensitivity changed much from SEK 3 billion in the sense that, I guess, was there any unexpected items that perhaps explain the higher rate sensitivity than the SEK 3 billion figure in the second quarter? Just thinking about the movement in funding and other, could you perhaps just give us a bit of color as to what proportion of the decline was due to the liquidity buffer, and whether we should expect any kind of over spill into the third quarter as well? My second question, just on capital. The SEK 23 billion increase in RWA from market risk and underlying op risk.
Just on the increase in market RWAs, which I think was about SEK 13 billion, could you tell us was that because of more risk being taken on or were there model changes in the quarter or anything related to the regulator? What was the other increase for? Finally, now we've reached the 17% Tier 1 hurdle, is there any more communication around payout and distribution? Thank you.
I can start with your last one saying that, Omar, it's a bit prematurely asked, I think. We just had one quarter now reaching the target. Another challenging thing is this Finansinspektionen in Sweden who regulate that has also come out quite recently talking about harmonized risk weightings and the Swedish banks still keep a high capital level. As frustrating as it is, we need to get this clarified because before we've heard that if it's the case that we would get more harmonized risk weightings, we would have relief on the capital side by the more different Pillars. We need to see that. Yeah. Of course. Sorry, Jan Erik, it seems to me that this of course goes for all banks, and that is naturally so.
I think also here it's important what we learned, what happened with the capital banks the other year is not to actually domestically provoke and be too early in things. We have to try to play things by the ear and stay here. I think we will try to stay put and see what comes out during the autumn. Anyway, this is the board decision. We need to come back towards year-end and see whether this is enough or not. I think the board was very clear that the 17% is what we want to have. We just have to make sure that it's not something that is now going on with harmonized risk weight or other changes.
Yes.
Again, that goes to all banks.
Yeah.
I think also that we should try not to provoke. Sweden seems to be very sensitive towards that also.
Yes.
Very politically sensitive.
Omar, on the rate sensitivity, you said this morning that the negative interest rate is putting pressure on the deposit earnings, and it's costing us today some SEK 300 million per quarter, is what you said this morning. In terms of sensitivity, the 3 billion number you quoted is probably more 3.5 billion today for 100 basis point move. That relates to the fact that even though negative rates have gone sort of deeper into negative, we attract more deposits on top of that discussion we had earlier.
Yeah.
On the market risk development, that is more an optical effect this time than a true underlying increase of market risk, and it has to do with some of the hedging activities taking place in the corporate center and in treasury, where we can't use hedge accounting to the extent that we would like to quite yet. We're working on that and developing that. I think going forward, you will see that one or two quarters from now, I think you'll see that number come down a bit.
Perfect. Thank you very much. I was just a little bit surprised to hear the regulator, was it last Friday or the Friday before, saying that they thought there was space for model approvals to Or, sorry, not model approvals, but limitation to the risk weights and more harmonization, because the thinking was that the regulator was very much a fan of the models. Do you get a sense that the regulator might have capitulated on this in the face of what's clear pressure from the Basel Committee and the Riksbank in terms of the way they want to go?
I think there is a pressure on Sweden that, of course, we have very low risk weight. We have very low risk weight for a reason, that the credit losses have been low, and also that the very sophisticated modeling has paid off, of course. The challenge is, of course, that the risk weights are very low compared to peers in Europe. I guess that has been challenging, and I think there was guidance piece that we want some kind of floors also on the corporate side. We think that's very wrong. We have the Finansinspektionen support, but I think they are the odd one out here. I think they have a difficult time in the Basel Committee and also in the European discussion.
On the other hand, I think the harmonization could be in that case that we get some relief on the capital, and that was what the Finansinspektionen initially said, but they didn't say it last Friday, and that, of course, surprised us also very much. I think also that we've come to an end almost in Sweden with relief on capital, that most banks' models are now working and all the capital reliefs are almost done. I think that would probably support Sweden also that we start to see maybe risk weightings starting to go up slowly but steadily again when we are growing the volumes with new customers. That hasn't really happened yet, but I think that will probably help the Swedish discussion because, of course, otherwise we just see every quarter that we are growing, but nobody's growing risk-weighted assets.
I think from a political point of view, it's been also quite sensitive, I think.
Okay, great. Very clear. Thank you.
Thank you very much indeed, sir. From Macquarie, you have a question from the line of Edward Firth. Your line is open, sir.
Yes, good afternoon. I just had a quick question about Swedish house prices, which I guess continue to go up almost like a rocket. I suppose my questions are firstly, are you concerned about current levels of house prices in Sweden? Secondly, I saw the finance minister was talking about taking powerful action, I think she said in the autumn to try and get them under control, and whether you had some sort of idea of what those might be and how they might impact, I guess, the market and the bank. Thanks so much.
No, I think all in all that we have a lot of respect that there are no trees growing to heaven. Of course, that the house price market has kind of, "Is there a bubble or not?" is a constant discussion in Sweden. I think we try to monitor it by, of course, every loan is individual and going through, that people can afford to stay in their houses and homes, and making sure that in SEB, nobody is in debt. You can't borrow more than five times your revenue income of the household.
That's been one thing that has supported, I think, because anyone could almost, at the moment, afford almost anything to make sure this is probably affordable long-term. We also stress test everything at 7%. We have amortization 2% every year. We try to get it all the way down but at least down to the 50% loan-to-value.
I think we're working with that. I think, again, it is a political discussion saying that first of all, you should take away the interest rate deduction on your own taxes, I guess it can't be cheaper than now to do that. That is a reform that you will not be reelected when you implement it. I think they start to discuss it now because you don't get the same deduction on savings, which is a bit weird, actually. That is one thing to do. The other thing is, of course, to start to build, making sure that it will be cheaper to build in Sweden. If you build a few skyscrapers, I guess we won't have the same problem in Stockholm, actually, if you do that. There is a long discussion why it is so expensive in Sweden to also build them.
I think also close to the cities, you have the municipalities around going and saying, "You can't take a park or some part of wood," because people get crazy and saying that they want the park to remain a park. The challenge is where should people live? A lot of political discussions also on how to make this more sustainable. From the bank's perspective, I think we had a loan loss of SEK 4 million. Four. I mean 4.0 which is nothing on mortgage loans of a portfolio of SEK 400 billion.
Yeah.
It still shows, of course, that it's
I guess if interest rates return to a more normalized level, you would expect those impairments to go up quite rapidly.
Yes, what is a normalized level? I think, again, that the unique model we have in Sweden where you pay, we follow you really to the grave. You can sell your house with a loss, but you still owe the bank. That's a very different model than what people have abroad, where you just leave the keys to the bank as they take care of the security. We follow you. You have to make sure that you pay back, and I think that's a very different model that has paid as well.
Sorry, just one supplementary. Is your impression that perhaps the finance ministry is looking now more towards the building side of addressing the problem? It seems to me that all the caps on loan-to-value, all the increased risk weight to assets, all this, none of those had any impact at all.
No. I think actually interest rate deduction on your tax-
Yeah
That will have an effect. I think they need to, hopefully, all parties need to agree to that, because otherwise it's going to be an election activity.
Yeah.
I think they are discussing that. I guess it wouldn't be cheaper than now to slowly but steadily take that one away. That is one thing that we do think will have an effect. I think the challenge is, of course, that it's so different living in a city or living outside the city, where housing is very different and where people don't earn the wages that you earn in the cities, of course. That is also something that's quite challenging. I think that is only the first one. I think the building will take time. I think it is a discussion now, but it takes a very long time.
Yeah. Okay. Thanks so much.
Thank you very much indeed, sir. From RBC, your next question comes from the line of Adrian Cighi. Adrian, I hope I've pronounced your name correctly, and your line is now open.
Yes, you have. Thank you. Good afternoon. One question on loan losses, please. We have had another quarter with very low loan losses. Do you see this benign outlook continuing in the near term, or do you have any red flags in oil or other related exposures? Thank you.
I think we've been through the credit portfolio with a lot of stress testing and don't really have any red flags. We went through the Baltic exposures thoroughly in Q1 where we were worried about the Russian sanctions. I must say that it's surprising how that has held up really, and how they found new export market for dairy products, et cetera. We were a bit worried about that. I must say that the portfolio looks really healthy and very well performed. The answer is no, we don't really see any red flags at the moment.
Thank you.
Thank you very much indeed, sir. Now from Mediobanca, you now have a question from the line of Riccardo Rovere. Your line is now open, sir.
Thank you. Thanks. Good afternoon to everybody. Just one question from my side. The regulator have started, they've increased the risk weight to 15 and then 25. They keep increasing the countercyclical buffer. It seems to have no impact at the end of the day on real estate prices.
On the level of debt of the population. Aside the amortization of the debt of the population sooner or later, what else do you think the regulators could do to try to cool down all these issues in Sweden? This is another way to say, what else could we expect? Let's call it ambushes from a regulatory perspective. What else should we expect?
I think it is, as I answered the previous question regarding maybe taking away the tax deduction for interest rates on loans, for example. That will be something that will be hurtful for the market. I guess it is starting to build, so there will be more alternatives instead of the same apartment being resold many times at a higher price. That needs to be changed as well. I guess more expensive to borrow, which is, of course, extremely challenging in Sweden while interest rates are negative. We talk about it should be more expensive to borrow. At the same time, it's very hostile regarding the banks' loans. Every time we try to increase the margin, we are on the front page and front news.
It's very politically sensitive rather than looking at it from a very crisp perspective, saying what should it be? I guess that we will come to the conclusion it's difficult. It's a mixture of building more in the cities and maybe also infrastructure. Maybe you could live a little bit outside Stockholm, but you could commute, then you need high-speed trains, for example, et cetera. Maybe more building infrastructure, but this, of course, takes time. I think it has cooled off a little bit, but quite marginally. Of course, with these interest rates, it's still very challenging. It doesn't really matter what kind of margin you put on. Amortization has changed a little bit.
Is it fair to assume that one day the Swedish population will be asked to pay back the debt? The whole of it, not 20%, 30%, or whatever.
What would be the trigger for that?
Because this is the only way, maybe the only way to stop the level of debt to population, because obviously it makes sense to pile up debt when the level of rates are at zero, and you never pay back the capital.
They started now. I agree to that before it was just paying, like you rent your apartment because you only paid interest rates. Now you don't. Now you also start to really amortize, which is a different way. On the other hand, Sweden as a country, we have very low government debt, but we have high household debt. Most other countries are opposite, that they have low household debt and high government debt. It's a little bit if you look at the whole country as such, savings are improving in Sweden, and net debt is not as bad if you look at the totals. It depends on do you have it on the private individual or do you have it on the government or the state. In Sweden, it is on the persons itself rather than the state. That's how it looks.
I don't think you need to pay back the whole thing, but of course you need to amortize. You need to make sure that you go down in debt. I think it will take time, but I think the sentiment is changing to Sweden, and everybody's talking much more that a debt on a loan should be paid back slowly but steadily, and not only interest rates. That's a mental shift that has happened.
Okay, thank you. Thanks.
Thank you very much indeed, sir. Ma'am, your last question is a follow-up question from Barclays, from Christoffer Rosquist. Your line is now open, sir.
Thank you. Yes, just following up really on your answer or discussion before on the models. I don't know if you would be willing to share any color on how the discussion goes and what your answer might be during the consultation to the floors that are being discussed by the Basel Committee. I almost interpreted what you said before, that risk or credit losses are low because of the models, and that the models help you to actually drive down losses because you know which customers to avoid. Is it the other way around, that it's worthwhile investing in the models because Swedish credit quality is better for completely different reasons?
I think I can also say that, no, of course, I think the sophisticated models that we have invested SEK hundreds of millions. It's not like we try to do it on our own. I think also historically, we know our clients very well, and of course, we know where they operate, and we know them very well in this region. I think that is, of course, a big support to all, I dare say Nordic banks and Swedish banks. That's one of the reasons, of course. I think the only challenge with the models is that they're only looking backwards, and I think that has been the discussion. Of course, if you only look backwards, are you really being everything into it?
I think our models have proven quite right. We can see quarterly, the risk weightings on quite a few clients, it goes up and down, but rather slow. Like the rating agencies a little bit, are you ahead of the curve or behind the curve? Moving along those lines, through the cycle. I think it served us well during the crisis, and I think we have also proven that we take the losses as they come. I think the models in Sweden have proven to be correctly and well-monitored. I think from that perspective, rather than saying that, I think my worry is that if you say that all car industries is a risk class 10, you don't really look at the different kind of car factories, and you don't look at what kind of loan either.
I think there's a challenge that you suddenly have things on your balance sheet as you go for higher risk weights, really to make sure that you get your return rather than making sure that you do it more cautiously. I worry about that you can't. On mortgages, I think it's quite fair because if you live on the same street, neighbor to neighbor, it's really difficult to say what the big difference, because location is probably one very important thing when you lend mortgages, as well as the household's payback. The corporate is very different, I think. I think you miss the whole sophistication and the whole profession of being a banker, trying to make your judgment correct.
Are you presenting any sort of golden middle road between the models and floors as a counteroffer to the Basel Committee or?
I think we are only discussing with the financial section. Our impression is that they support the Swedish banking model systems very well. I guess there could be probably some kind of lower flooring, which might not be wrong from the perspective that nothing can have a risk weighting of zero. We all know that. You have to take something. It depends on where that goes. In that case, as we discussed before, would that mean that we would have any relief maybe in Pillar 1 or Pillar 2 to compensate for that? Because I think the correspondent has been here that we have lower risk weightings. We believe in the models. On the other hand, Swedish banks are more well-capitalized on quality one than our peers.
You can't have both, because then I think we're not really reflecting that the Swedish banks are doing fairly well, and we have done fairly well for a very long time, and that must say something about how we know our clients and how we stick to our models.
Okay. Thank you very much.
Okay. Thanks a lot for participating. We would just like to remind you that we are having the breakfast tomorrow at our own premises on 1 Carter Lane in London at 8:00 A.M. local time. See you there, and thanks a lot.
Thank you. Bye.
Thank you.
Thank you very much indeed. With many thanks to all our speakers today, that does conclude our conference. Thank you for participating. You may now disconnect. Thank you, Ms. Falkengren.
Thank you very much for your help. Thank you. You were very helpful.
All the very best. Thank you. Bye-bye, ma'am.