Welcome everyone to the telephone conference that we're hosting. We will start just as we usually do. Annika will then go through the slides, and then we will open up for questions. Annika, please.
Thank you. Welcome to the presentation of the results of the first quarter 2015. Turning to page two. In this environment with exceptional negative interest rate environment, a stock market boom, growing geopolitical turmoil around the world, and the sharp decline in oil prices, our diversified business mix has once again shown resilience, and we can therefore present a good start of this year. I would like to highlight three things that have characterized this quarter. The volatility within fixed income and currency trading has led to increased activity among both large corporates and institutions that have hedged their currency and interest rate exposures. We've also had good inflows to our wealth management business. Customers continue to review the long-term savings and also seek yield in asset classes other than fixed income products. Also strong performance of the stock market has contributed, of course, to the results this quarter.
We do maintain our focus on a strong balance sheet and show very good credit quality with a credit loss level of five basis points. On page three, the results amounted to SEK 5.8 billion. It's up 19% compared with the same quarter last year. Income increased by 11% from the same quarter of last year and costs rose 4%, that is as a result of increased pension costs that we have previously announced and from exchange rate effects. Operating profit increased by 18% compared with the previous quarter, excluding positive one-off effects. Our Common Equity Tier 1 ratio was 16.6% and return on equity was 13.8%. Net interest income on page four increased by 3% from the same quarter last year, decreased 1% from the previous quarter.
Low interest rates followed by zero interest rates and now even negative interest rates have put great pressure on deposit margins, that trend looks set to continue. Customer-driven Net interest income decreased by 2% compared to the same quarter last year and by 3% from the previous quarter, primarily due to the decrease in deposit margins. Lending margins were stable during the quarter. They are, however, under pressure, driven by market competition and large flow of liquidity in markets as a result of central bank action. Both deposit and lending volumes are increasing, this is mostly due to currency effects from a weaker Swedish krona exchange rate against the US dollar. Other Net interest income increased slightly due to recovery in fixed income trading.
Net fee and commission income remained strong and amounted to SEK 4.3 billion for the quarter, an increase of 15% from the same quarter last year, but down 6% from the strong fourth quarter 2014. Turning to the next page where we can see that on a seasonal basis, fee and commission are typically lower for us in the first quarter. This quarter we had tailwind from good net sales institutions, good performance on the fund side, and clearly higher so-called performance-based commission within asset management. Moreover, we have seen an increase in value for assets under management, which benefits wealth, life, and also our custody businesses. There has been continued good activity among large corporates, even though the first quarter is always slightly lower seasonally.
NFI on page seven is perhaps the quarter's most positive contribution this time, ending up at SEK 1.3 billion compared with only SEK 343 million last quarter, and SEK 1.1 billion though if you compare to a year ago. In 2014, the results declined for this line quarter after quarter, primarily due to interest rates, low volatility, and low volumes hitting the fixed income side. In the first quarter, the market has seen higher volatility, and this has led to customers being more active in securing their position in both fixed income and currency trading. The equity side has done well, but it is usually the case in the first quarter, there have been fewer initial public offerings and large-scale transactions. We have shown a clear long-term trend and stability in the customer business we are building.
Average income continues to slowly but steadily increase, costs are stable, and operating profit is thereby increasing. Our cost cap is coming in under SEK 22.5 billion. It still remains for this year and also for next year. As we did explain last quarter, we made allowances for costs increasing by more than SEK 500 million this year due to already known pension and also exchange rate effects. On page nine, we are proud of the stability of our business operations, which reflects the well-diversified corporate bank that we are. If we look at merchant banking, the result is 8% better than the year before. The underlying business was strong and credit losses were low.
The difference from the previous quarter is that investment banking has lower activity when there were fewer transactions in the market, which led to lower volumes in areas such as corporate bonds and bridge financing, while markets, as I described earlier, has seen increased customer activity. Retail in Sweden continues to perform well, both in the private and corporate segment. However, operating profit decreases from both last year and last quarter by 3%. This is mainly due to the interest rate level, which puts pressure on the profit margin. Life and Wealth report good progress in this market. Both the Life and the Wealth business increased earnings from the same quarter compared to last year. One could probably simply say that about 40% comes from new sales and actually as much as 60% this quarter comes from the market upturn.
Wealth attracted SEK 25 billion in net new assets under management during the quarter, mainly from institutions. The Baltics delivered stable operating results for the first quarter. Resistance to developments in Russia and Ukraine and the Russian import sanctions remain strong, and we see good profitability and write-backs in the quarter. Performance, however, varies a little between countries and Latvia has a more challenging situation. Altogether, this means that we as a bank have been able to generate annual profit growth of 15% since 2010. Turning to page 10. We care a lot about our strong balance sheet. The credit loss level in the quarter was five basis points. NPLs increased slightly, but this is the consequence of some individual activities and not a sign of changes in any credit quality.
Effects on the crisis in Russia, including the impact on Finland and the Baltics, along with developments in oil prices, do not change our view of credit quality. We still have a quarter of our balance sheet in liquidity reserve. Our Common Equity Tier 1 capital ratio was 16.6% and return on equity was 13.8%. To conclude on page 11. Even in this environment with global growth not really picking up and the exceptional developments on the interest rates and equity markets, we stick to our long-term business plan with focus on our customers. Market conditions for banks continue to be in flux with heavy pressure from the regulatory side. We have strong financial position, and we are well equipped to grow together with our customers, and we do invest in our long-term customer relationships.
With this, I'll be happy together with Jan-Erik and Jonas to answer questions.
Okay, thank you, Annika. Let's open up the questions.
Thank you, Tim. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. That's star one to ask a question. Your first question comes on the line of Ronit Ghose from Citi. Please go ahead.
Hi, good afternoon. It's Ronit Ghose from Citigroup. I just had two questions to follow up on your presentation. Clearly, you've had a very strong set of results in life and asset management in the quarter, and I just wonder if you could flesh out a bit more, Annika and Jan-Erik, the balance between AUM or annuity-like revenues in those two divisions and transaction-based or new sales. In the presentation or in your comments, Annika, you mentioned a 40/60 split. When I look at the fee income that you attribute on, say, page 17, it's like SEK 335 million of fee income from performance and transaction fees and Wealth, which is about 20% of the Wealth revenues. I'm just wondering how you got to the 40/60 split. And also if you could comment on a similar split in life, please.
The second area of questions is to do with the merchant banking division, where markets clearly had a great quarter on trading, as you alluded to, CIB's had a softer quarter. The fee income run rate in CIB that we saw in Q1 is one of the weakest quarters we've seen for a while. I'm just wondering if this is a particularly unusually slow first quarter, because I'm looking at Q1 last year, which was quite a bit strong, and obviously Q4 was much better. If there's anything any more color you could give us around, is it just that we had a slow quarter in IPOs and M&A completions, or is there anything else going on in that line item? Thank you.
I would ask Jonas and Jan-Erik comment on the 40/60. I think all in all, I think the most important thing that we have done is that we have worked the last six, seven years on fund performance. It's taken a long time. It's everything from Morningstar rankings to everything to really make sure that we have quality and that all our funds are really performing. You who don't read Swedish newspapers, there was actually a comparison in the newspaper on Sunday where SEB last year, nine out of our largest 10 funds, nine out of 10 have outperformed their indices. I think all in all, our quality and the way we perform is much better. From that perspective, of course, I do think that this will continue in a way.
When it comes to performance fees on some special funds, you could say more institutionalized, of course, that's more on ad hoc basis. If you remember, every time we say that this will continue, it never continues. I do think that all in all that, of course, it was a very good quarter. Again, we have also done a good job all in all. I think inflows when it comes also in asset under management, we had an inflow of SEK 25 billion in the first quarter net on sales in total funds. That's also a record high for SEB. I think all in all, we are doing much better. That is the forecast that hopefully that will continue. I think where you can comment maybe on the split a bit, we haven't done that scientifically, Ronit. I know you want to comment.
It's not very scientific, but I think, Annika, you said it. Obviously we've been helped by the market, but I think one shouldn't always discount things as one-off. There are underlying improvements. The offering in the quality of the asset management and also, as Annika said, in the sales. I think it's all from a better base.
Yeah. If I comment on markets versus CIB, I think we say yes, CIB is always weak in the first quarter. The seasonality is very clear on that one. I think I commented on the press conference this morning that there, I think it was zero IPOs actually in an M&A transaction, but it doesn't necessarily mean that will continue. That the seasonality maybe was unusually weak. I don't know, but it was pretty weak, but it doesn't mean at all that we don't think it will come. I think I rest assured that business will pick up. Markets have been a little bit up and down because of course it's been challenging also with the Swiss bank, which was also for us, but activity all in all the market is back. Of course, we love volatility in SEB since we are so flow-driven.
I think for us, that has been a really healthy quarter. Hopefully that will continue. If it won't continue, hopefully some other parts of the bank will perform better. I think all in all, the business mix of the bank is creating all in all this kind of stable operating profit in total.
Oh, absolutely. Yeah. Hence I was asking about the split of annuity versus new sales, because I'm just trying to reconcile your I know it's not scientific, but the 60/40 comment, because on page 17, you break out the fees in quite a lot of detail, and it only looks like if I just did it from reconciling page 17 of the deck and say, the fact book, it would be more like 20%-25% that would be transaction based and 75% annuity based. I was wondering if I'm missing something and you obviously know much more about the numbers of the bank than I do, so I was wondering why you got to 40/60.
I think, Ronit, we were just trying to say that it's maybe one split in Wealth and another one in life, and we're just saying that it's 40/60 broadly, if you look at those two in combination. It was just a broad statement.
Okay. Thanks.
Your next question comes line of Omar Keenan from Deutsche Bank. Please go ahead.
Good afternoon. Thanks very much for taking the questions. I just had a follow-up call from the press conference, where it sounded like you were quite happy with the measures that you've taken to offset the impact of the negative rate environment so far. Just so I understand, you seem to be saying that there's more work that you could do on the asset side and more measures that you could do to protect margins in the case of another rate cut, which is your house view in the second quarter. Could you just help us understand the moving parts from here? Do you have an updated rate sensitivity? What do you think the value of offsetting measures could be? Is it more in the merchant bank than the retail? Thank you.
Hi, Omar.
Hi.
I think the rate sensitivity is as before about SEK 3 billion for one percentage point. I think the things you can keep in mind for Q2 is as I commented on this morning that it sounds like a small thing, but there's an extra day of interest accrual in Q2 compared to Q1. That's about SEK 50 million worth. There is of course the ongoing battle of keeping margins up. I think we certainly work with the assumption that we will continue to push mortgage margins upwards. The back book is today at 89 basis points, and as you know, the new sales are above that today. We haven't commented on that specifically. We continue to roll over or prolong mortgage loans at higher levels than that still. Mortgage margins and mortgage volumes should help on the MBS side.
There is hopefully going to be help from volume as well, even though that demand is not very strong. We commented earlier on that the margin pressure is there in the merchant banks. I don't think that we should expect too much in terms of a margin pickup from that segment. On top of that, the treasury business has been doing well in terms of looking after its risk mandates. That's gone fairly well in Q1, and that perhaps can continue. A final component is that you remember how we took up AT1s not too long ago, and some of the old ones matured in March. We will get some payment from that as well. All in combination, we will try to mitigate what's going on on the liability side by different actions as I just outlined on the asset side.
Having said that, the further we're going to negative territory on the rates, it'll become increasingly more difficult. Did you want to add something, Jonas?
Yeah. You can also add, Omar, that we haven't seen any broad-based demand on the SME or large corp side for CapEx or
CapEx financing, which also would be a positive contributor to this if demand would pick up going forward. That would then bring up volumes and help us keep NIM stable since the margins there are hopefully attractive.
Great. Thanks very much. Just to clarify, you said that the front book on SEB's mortgage margin had expanded. How much above the 89 basis points back book is it?
It's a bit higher, Omar.
Okay. All right. Thank you.
Okay, next question.
The next question comes the line of [Anton Kryuchkov] from UBS. Please go ahead.
Thank you. Good afternoon, thanks for taking my questions. I just have a couple of questions on net interest income in the quarter, which has held up better than consensus expected despite the challenging interest rate environment. On page 11 of the fact book, you provide a very helpful breakdown, and the line that I'm interested in is the interest rate that you're receiving on the interest earning securities. It seems that it has come down by around 50 basis points over the last two quarters. I was just wondering whether we should expect further compression of this yield on your securities book in the coming quarters, given what has happened to the rates, and also which part of your P&L will this pressure be evident in. The second question, please, again, slightly technical on NII.
I've also noticed that interest income that you receive on derivatives and other assets has gradually increased over the quarters as interest rates were falling. I was wondering whether this is an indication of some sort of a hedge that you have taken at the group level, or whether I'm just reading too much into the recent numbers. Thank you.
I think you're reading a bit too much into that. There are no hedges put on in the company that's generating that. It just varies a little bit between the quarters. In terms of the interest bearing securities, I think it's reasonable to expect that to come down when we see the developments that we've seen on the interest rates. That could well be put under more pressure. Again, keep in mind that there's a limit to, I suppose, how much things can move down from here. There's still some way to go, we will continue, I won't repeat all the arguments that I put forward to Omar just now, there are ways in which we will try to compensate also for that.
Thank you. That's very helpful. Which division will this pressure be most evident in?
I think on the liability side, it's primarily in the retail division that we see pressure on the deposit side, whereas on the asset side, I think the margins are under more pressure in the merchant bank, as I said, than in retail, where I think we would continue to try to boost them up.
Excellent. That's very helpful. Thank you.
Your next question comes the line of [Johan Ahlbom] from Bank of America. Please go ahead.
Thank you. If I can just follow up maybe on both net interest income and fee income. I think we've covered a lot of bases, but we saw a rather dramatic fall in the Baltics. Can you give us some indication on what part of that is related to FX and what part is related to underlying changes in interest rates versus margins? Just to get to the bottom on the fee income, is it fair to say that going forward, you expect continued good inflows, but maybe less performance fees unless we see another similar sharp rise in the market? Do you expect to fully compensate that in the merchant bank as the pipeline comes to fruition?
Yeah, if I start on that last question on the commissions, I think yeah, we've been clearly supported by the performance fees in this quarter. Again, as Annika outlined earlier, it's a result of good work and the asset management capabilities and the offering there is better than it was before. There has been improvements made, and I'd like to think that will support that line also going forward. When we move forward, you should remember also that the seasonally weak performance on commission income that we see typically in Q1 is attributable to things like payments and cards who typically have a very strong Q4 with Christmas sales and all the things that are going on there. Normally that would bounce back in Q2 and going forward.
I think as Jonas was touching on earlier, in the merchant bank, when you've got a lot of volatility, that normally filters through into the trading line by customers asking for more hedging products. If we have a more stable environment, then performance fees kick in in terms of more M&A-driven things taking place. I think it's difficult to predict what's going to happen and what the climate will be in the coming quarters. I think the takeaway is that the bank is well diversified, and there's always one or two lines that are working if another one is weak. I think we've seen that time and again now, and the swings and roundabouts work as complements to each other.
On the Baltic NII?
Sorry, on the Baltic NII, I think a large part of that is actually attributable to FX. I don't have the exact number here on the Baltics, but it would be. I don't think that we've seen much in terms of rate compression there.
You also now won't have every country is now a Euro country, which will then affect that also further.
Yeah.
We would also have lower volumes in the lending books are not growing in the Baltics.
Just finally, did you say how much the savings on the Tier 1 maturities will be Q2 versus Q1?
We haven't specified.
Okay. Thank you.
The next question comes from Daniel Pawsey from JPMorgan. Please go ahead.
Hi, good afternoon. I just have three questions. The first one is on trading income, the last two on the performance fees. Just on trading income, you single out in your report that central bank intervention and volatility around the FX peg in Switzerland and Denmark were key drivers for the pickup in FICC revenues this quarter. Could you perhaps just give us a sense of how much of a tailwind you received from the latter, i.e., the FX peg, which presumably tailed off towards the end of the quarter? Second question and third question on performance fees. I understand that these are now more evenly distributed across the year. Could you just give us an idea of what proportion of performance fees are now booked on a quarterly rather than a year-end basis?
Third question, if I'm not mistaken, in the past, when you've booked performance fees, you've also typically taken higher or seen an increase in cost, which, however, doesn't seem to have occurred this quarter, or at least not to the same extent. I was wondering whether this was perhaps due to changes in product or where these performance fees were booked in, or perhaps am I reading into this too much? Thank you.
I can comment on the trading income. I think also it's difficult how much you read into everything. I think, as I said, that a good thing was the volatility that was created around all this. Of course, starting off the year with the Swiss franc, if you look at our trading days, that was not one of our best days because that was quite challenging. On the back of that, a lot of corporates and institutions have now decided to start to hedge a lot of the cash flow. I think that was due to the krona probably would stay weak for a while. That was the message that came out the 10th of February. That created a lot of hedging strategies that suddenly came to place that before hadn't been executed on.
I think, again, saying that it's hard to say exactly what is what, but of course it did create volatility in the market, and it has continued, but mainly because the corporate started to hedge flows much more systematically after that. Since we are in the middle of all that's more beneficial for us.
On your questions on the performance fees, would you repeat your second question, please?
The second question was around costs, which if I look at some of your previous quarters, have typically risen in quarters where you've also booked performance fees, presumably because you're paying some of that out to your fund managers. That's something that I didn't see happen this quarter, and I was just wondering whether that was due to any changes in product mix of where these performance fees are being booked or whether I was just reading into this too much.
No, it works exactly as you say, and whatever performance-related pay is linked to the fund performance is included just as normal. But maybe there's been some other compensating factors taking place at the same time, but it's all there. Sorry, the other question you had of performance fees was?
The other question on performance fees was regarding the booking of these on a quarterly or a year-end basis. If I understand correctly, compared to several years ago, more of these are now being booked on a quarterly basis rather than on a year-end basis. I was just trying to get an idea of what that mix was like or what that mix is like now between quarterly and year-end booking. Thank you.
I think you could say like this, that on the performance fee generating funds, there is individual agreements with the different investors. It can be everything from monthly bookings to quarterly to semi-annual and annual bookings. In the funds that has been contributing to the high performance fees in this quarter, we have had a higher proportion of monthly bookings in those on the revenue side.
Okay. Thank you very much.
Your next question comes from Jan-Arndt Wolter from Credit Suisse. Please go ahead.
Yes. Hi, Jan-Arndt Wolter here, Credit Suisse. Two follow-up questions. First, so far the growth in SEB's corporate business has been driven by acquisition-related activity. When we look out one year or six months, not the Q1 specifically, has the bank then started to see any signs of improving corporate credit demand on the back of better economic sentiment, although Q1 has been muted? Secondly, around the cost target, in what areas could investors see costs coming down nominally this year to offset the salary increases and higher pension costs that SEB is guiding for as well? Thank you.
When it comes to corporate demand, I think that's the big challenge for Sweden and also all in all in the Nordics, that we see little demand there. We see more outside Sweden than in Sweden. I think the challenge is that if you talk to SMEs and mid-corporate, they're actually quite worried. Why negative interest rates? What should I think of what's going on? We also have the election in Sweden with a lot of messages that have been changed. Do I dare to employ? Is it cheap to employ young people, or it's going to be more expensive to employ young people? It's a mixture of political decisions as well as, I think, a worry about where is the economy going that has led to that corporate demand has been almost zero, with the exception of the commercial property segment.
We also mentioned that SEB has a policy that we are more cautious into that segment. We think that segment is usually where you can go wrong. It's very easy to grow, low risk weightings, good return, but maybe long-term you turn into a property company rather than a bank. We've been consciously cautious there for the last three and a half, and continues to be there, but that market has grown a lot, and we have not been part of that. When it comes to costs, I think we can easily say that we have the cost target, and everyone has signed off to the cost target, and everybody knows how that will play off. I don't think you will see any big differences between the divisions, how it looked before. It's all in all what we reach.
I don't know, Jonas, do you want to comment further on that one?
I think it's difficult, Johan, to point out any particular cost lines in advance. The setup here is that we set the targets from the center, and then everyone as close to point of sale as possible makes the priorities. They may come up with different priorities, but I think everyone needs to look after the cost. The large cost lines, obviously, in a bank are things like staff, it's things like IT, it's consultants, and it's premises. Those are probably captures 80% of the cost base. You have to address all those four.
Okay. That's fair enough. Many thanks for the help.
Thanks.
The next question comes from Matthew Clark from Nomura. Please go ahead.
Good afternoon. A couple of questions again on net interest income, I'm afraid. First question is on the funding and other line. I'm just a bit curious that every quarter average STIBOR has trended downwards, and yet that funding and other line bounces around quarter-to-quarter. Maybe if you could just give us a bit more color on what's driving that funding and other line. In particular, is this a fairly static positioning that gets affected by external conditions? Or is the fact that you made SEK 400 in the third quarter, SEK 300 in the fourth quarter, et cetera, determined by decisions that are taken by the treasury team during that quarter on their positioning? That's the first question.
The second question is on the timing of the impacts or the negative impact of lower rates on the deposit business and the positive impact of mortgage repricing. Am I right to be thinking that you get hit up front by the deposit spread compression, whereas the relief from somewhat related mortgage repricing is coming in over time? Should we actually be relatively constructive that despite the fact STIBOR is still falling, you've also got an accumulated benefit from mortgage repricing that's going to be flowing through materially in coming quarters? Should we be thinking positively or negatively in terms of the net of those two impacts going forward? Thank you.
If I start on that second question on the mortgage repricing and the effect from or the delayed effect, as you say, I agree with your reasoning. If we have hits on the deposit margins, they take place more or less overnight, whereas mortgage repricing has a built-in delay. Now you will see some of that take place, and it'll roll in as we go along. I don't think that we will want to quantify the net effect because that all depends on what happens on the deposit side. I think what I would say, though, is that there's not much of additional margin to be lost on the liability side from where we are now. In terms of your first question on NII, on funding and other, I think the way that line is affected is primarily, I suppose, in two ways.
One is from the internal funds transfer pricing mechanism between treasury and the divisions, where changes to the ITPs take place immediately in the treasury line. There may be a delay effect from how quickly the divisions can change their pricing to the external world from the guidance they get from the ITPs. The whole purpose with that is, of course, to reflect the correct price of the raw materials of funding into the divisions. Another component is the risk mandate that treasury holds in its own right. This quarter we've seen them doing quite well. That's another one that's quite hard to predict. There will be a little bit of volatility. I think that line has been in this quarter was SEK 380 something, and I think the 10-quarter average is around SEK 375. We are pretty much on average.
On the risk mandate, is the fact that it was better first quarter versus fourth quarter due to repositioning of the balance sheet? Or is it just you had the same long-term positioning of the balance sheet and external conditions meant it was more profitable this quarter than last quarter?
It might be a combination.
Okay. Thanks very much.
Thank you.
The next question is signed with Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Just two quick questions. Firstly, on the asset management business. Swedbank cut a lot of rates at the end of last year and the beginning of this year. Are you seeing any pressure on some of these fee margins? On a related topic, you say you're quite cautious on the commercial real estate market. Are you seeing other players becoming more aggressive? Are you seeing margins and covenants on corporates being eroded as a result of either domestic or foreign competition? Thank you.
If we start on your last question, I think the answer is yes. Clearly so. Of course, all banks here are very well capitalized. We are all looking, of course, for ways to support clients. Of course, that also leads to that you see weaker covenants and you see weaker structures all in all. I think yes, that's clearly a yes to your question. No, I know. I wanted to mention that I think that we are not that active in that sector right now. When it comes to funds, I think the thing is that SEB has, a couple of years back, we did cut fees in some of our funds. We also were one of the first banks to offer a complete free index fund with no charges whatsoever. I think we have it all.
We have some expensive funds where it's very connected to performance, while some others are cut. I think all in all, this pressure on fees going down, that is clearly there. I think actually even more important for the client is to get the value added and making sure that the funds that they have, that they are really performing. I think transparency when it comes to it. I think actually the market is much more transparent than we get credit for, because if you look at all the different funds and you want to find out how they look and how they are registered, you can find a lot of information. I think in Sweden, we talk a lot about this, but it's already done, part of it.
I think what we are benefiting on is a lot that our funds are now, since last couple of years, really performing and really showing that it is worthwhile to invest in them. All in all, yes, there is a cost pressure on funds for retail in particular.
Okay. Thank you very much.
The next question comes from Riccardo Rovere for Mediobanca. Please go ahead.
Good afternoon to everybody. A couple of questions from my side. First of all, I'm not sure I understood correctly what is going on in the NII in, let's say, in the corporate center. I have noticed that the size of your bond portfolio has grown significantly, I suppose on the back of the growth on the deposit side. I see that the NII in that specific, let's say, division has been more or less stable, which was against my personal opinion. Now, what is going on there? Is it just the amount of bonds that you have bought over the quarter that is supporting the NII there rather than while you are seeing an underlying pressure on the liquidity portfolio? Or is there any hedging strategy? Sorry, I bet I did not get before. The second question I have is on risk-weighted assets and leverage ratio.
I see that the leverage ratio drops quarter-on-quarter significantly. The exposure on which you calculate the leverage ratio goes up significantly, also on the back of the fact that the balance sheet has grown quite a lot. On the other hand, the risk-weighted assets are, well, I don't want to say stable, but kind of stable. Just wondering why the exposure on which you calculate the leverage ratio has gone up so much and risk assets do not actually move. I see that risk weights are not much changed. Just what's going on in the risk-weighted assets and the leverage ratio? Thanks.
Hi, Riccardo. I think on the leverage ratio, you're right. It's come down a bit since year-end. I think year-end was 4.8, we're now at 4.1 at the end of March. The primary reason for that is, as you said, a growing balance sheet. It's almost the entire explanation. Risk-weighted assets have been fairly stable as a result of very slow credit demand, there's a bit of an FX component in there, but that's pretty much the whole thing in risk-weighted assets. Jonas, did you want to comment on the first question?
On the liquidity portfolio, I think it's
In a stress scenario, you're allowed to calculate the fixed income part of the portfolio that the bonds that they are holding for our customer-driven fixed income business. That has, so to say, been a driver of the other currency line where you can see our Danish krone, Norwegian krone fixed income business then in that. It's not something else than customer-driven inventory to be able to cater for that business. It's not a position or a hedge in the liquidity portfolio. That is the reason behind that one.
Okay. Thanks, Jonas. If I may abuse 30 seconds of your time. If I'm not mistaken, during the call, the presentation, Annika mentioned some regulatory uncertainty. What are you actually referring to? What is still a matter of uncertainty for you? Is risk-weighted assets harmonization, is leverage ratio, what?
Well, Riccardo, I think it's a long list potentially, depending on what sort of probabilities and timeline you put into that. I think the comments that were specifically made this morning were around the standardization of risk weights and the potential realization of that in, I don't know, two, three years out. We were saying that today we are in a phase where the Basel Committee is trying to get its arms around or its head around how that should look. I think it's fair to assume that the Basel Committee will come up with standardized risk weights in one shape or form. That isn't the end of that story. Of course, that needs to be implemented in all the EU member states, and I think it's fair to say that that body is much less unified in its views on the merits of that.
There may be a lot of things happening before we see the end result of that. That was the comment this morning. I think we said that the Swedish government and the Swedish regulator has a clear view that they want to have risk-based view of the balance sheet, and they don't want standardized risk weights. It works well in this country. We have a long history of it working well, and I think we see the results of that in four strong banks in this country. That is a firm view here.
Okay, thanks. On this topic, if Brussels or Strasbourg, let's say, goes on with trying to standardize risk weight, correct me if I'm wrong, Stockholm will have to incorporate it in its legislation. No?
I think that's a fair assumption. Again, I think one should keep in mind that Sweden went ahead in its [Swedish finish] with raising the capital bars for all banks, and it did it under a regime which was risk-weight based. If the world around us changes completely and we move into something like standardized risk weights, then the height of the capital bar will be revisited by the regulator. They've made comments in the past in that direction. I think we shouldn't get too excited about that development either. That can be worked out over the coming years.
Thank you very much. Very clear. Thanks.
Okay, I think it's time for the last question then.
Thank you, sir. The final question comes in with Kristoff Carlegrim from Barclays. Please go ahead.
Hi, this is Kristofer. Thanks for taking the question. I'm just coming back to a statement that you made last quarter in London regarding your strategy to convert your new retail customers to universal customers. I'm trying to reconcile that statement with the growth that we see in fee income quarter-to-quarter, which is 2%. I was just wondering if you could give some color. Is that explained by the seasonality that you've spoken about regarding corporate fee income and seasonality at the group level for fee income, or is there a slowdown, or is this actually the kind of quarter-on-quarter growth rate that is consistent with a successful implementation of this strategy to convert the new retail customers? That's the first question. The other question I had was just on a follow-up on the pension cost.
Thank you for the clarification so far, but could you just explain or confirm what interest rate assumption lie behind the SEK 500 million that you have mentioned or planned for, if there is a scenario where that would go up as well? Finally, regarding the insurance that you mentioned this morning, the health insurance that you're now beginning to offer, is that the beginning, or is it the first or the beginning of a product expansion or entry into new products for the insurance division? Could you just try to help us understand a little bit on has this already been contributing to growth, or do you expect growth within insurance to accelerate as you begin to offer new products? Thank you.
Okay. I think I start with the last one on the life business, because it's yes and no. As I said on the press conference, it's not material. I think what we have sought to do in life is we have found a segment in Sweden of SMEs that are not interesting enough to go and have individual visits for any life company because it's quite expensive to go out there and meet with them. At the same time, they lack, for example, health insurance, and they are small corporates, and it's quite dependent on themselves to actually work with them.
I think that what we have found out is that we can offer by having what we call shared screen, is that we can talk to the clients and show them on the same screen as the advisor is looking at and making sure we're going through the whole economy, what is happening with the city, et cetera. You can make 10 visits a day instead of maybe maximum one a day because of the distance to the clients. Of those 10, the hit ratio is really high compared to maybe comparisons to one visit and being turned down. I think that hopefully this will turn out, this can be built into something. It's not material yet, but this is one way, of course, exploring your message and finding a client segment that has been neglected before because it's been too expensive to penetrate.
I think that is why we are thinking this is a fun thing to show. Also I think the uniqueness in SEB, that we can offer really banc assurance. We are one of the few banks that can do that, and it really works well between the life company and retail that now have combined sales offerings and advisor offerings, and that we will open our traditional life company so we can also offer traditional life, which we couldn't do before.
Should I understand it that this is a quite unique opportunity? Do you see that it will, as you mentioned, that it will become material or that there is further opportunities for product expansion, that this is something that you're looking at?
We certainly hope that this will become material, but it's early stages yet. I think we started with this just after Christmas, and I've been up in Sundsvall visiting the big telephone bank that we have in Sundsvall, as well as starting with this kind of screen sharing. Of course, if this plays out as good as we hope, of course it will become different. We're starting from an extremely low base. We're starting from zero. So far, I think we've been quite excited over how this has played off.
Okay, thank you.
Kristoff, on the conversion of retail customers to full service clients, that's been very much part of the business plan in retail for many years, and I think we've done very well on that. How does it affect the fee line? I think in this quarter, the little drop you've seen there isn't from a change in that pattern. It's from, I think we touched on it earlier, it's primarily from the lower payment fees and what comes out of the core business as normal seasonality. That shows up in retail.
If you go one year back, there was a 9% drop quarter-on-quarter on that line. 2% growth is actually an improvement compared to that period, even if it's a slowdown versus the year-on-year growth rate, of course. I suppose 2% in that, if I put it that way, is that due to success with the cross-selling or it's
I'll put some of that towards success in cross-selling. I think we've done well. I think there's been, sometimes a misunderstanding that we've been pushing a mortgage product, whereas in fact, it's been all about client acquisition and the ability to build a broad and deep relationship with the client. That success has been there from the very start, I think, and it's growing even stronger. Agree with that. You had another question on pension cost, when we quoted the SEK 500 million effect on the cost line coming into 2015, that was a combination of the lowering of the discount rate on the pension liabilities and of FX effects. I think SEK 300 or so we attributed to the pension effect. That was based on the assumption that we would move to a discount rate which was 1.6, and that's exactly where we've gone.
I think that's very much in line with that prediction.
Is there a risk that that well done discount will grow if the discount rate moves further down?
Yes, not during the year. We change that discount rate normally on a yearly basis. During this year, we will be staying at 1.6 if nothing very dramatic happens. If we have changes during the year in the rate, we may see some changes to the other comprehensive income line, but not in the P&L itself.
Okay. Very clear. Thank you so much for that.
Thanks.
Okay. Thank you everybody. With that, we will close the telephone conference, and we hope to see you then in London tomorrow morning at 8:00 A.M. local time. Thanks a lot.
Thank you. See you tomorrow.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.