Earnings Call: Q2 2014

Jul 14, 2014

Thank you for standing by and welcome to the Q2 2014 Results Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to your speaker today, Ulf Krenioui. Please go ahead, sir. Thank you. And with me in the room, I have Annika Fakkari, CEO and President of SEB and Jan Erik Becker, our CFO. And Annika will start by running through the presentation and slides you have on the web and then we will conduct the Q and A directly after that. Please Annika. Okay. Thank you and welcome to the presentation of our 2nd quarter results. Today, we are presenting an operating profit of SEK 5,300,000,000. This quarter is characterized by higher activity level among our corporate customers and an increased rep in our earnings base. Turning to page 2. Business sentiment among our corporate client has improved. Activity levels in the Nordic capital markets have been higher and companies have also done more deals. Our long term growth strategy is progressing well. We are welcoming more customers to the bank, both businesses and private clients and the larger corporates especially are increasing their activity levels. The growth is happening in our home markets and that means the Nordics, the Baltics and also in Germany. We have increased the breadth of our earnings, which is the confirmation of our strategy as a long term financial partner to our customers. And we continue to keep a firm control of our costs and are becoming even more effective also with regards to capital. The Boston 3 common equity Tier 1 ratio was 16% at the end of June. Turning to Slide 3. Operating income was $21,500,000,000 and operating expenses was $10,900,000,000 in the 1st 6 months of this year. On a quarterly basis, operating profit was up 10% compared to the same quarter last year. Credit quality continues to be high. Credit provisions were 8 basis points and non performing loans continue to decrease. Our NPL coverage ratio increased to 74% this quarter and return on equity in Q2 was 13.8%. On slide 4, the net interest income increased by 7% compared to the first 6 months last year. Customer driven NII was up by SEK1 1,000,000,000 or 12 percent compared to the first half of twenty thirteen. Higher volumes and stable lending more than offset the negative effect of lower short term rates on deposit margins. NII from other activities fell, mainly driven by an increase in our long term financing and that the flatter CEC yield curve impacts the NII on our liquidity reserves. And compared to the same quarter last year, NII is up 6%. Net fee and commission income on page 5 was $7,900,000,000 for the 1st 6 months. The increase of 12% was driven by several factors and we believe demonstrate the breadth and stability of our franchise. We saw increased results from financing, advisory services, securities lending, our card business and at the same time asset values are up driven by global stock exchanges, which has been strong during the quarter. And as you can see in the fact book, the expense side of fees is not allocated as a result of the gross income numbers was somewhat elevated. But if you look at the net securities commission after expenses, they increased by 12% in the quarter and net payments and card fees by 9%. Assets under management are now more than SEK1.6 trillion and assets under custody are about SEK6 1,000,000,000,000 and compared to the Q2 last year, net fee and commission income was up 10%. And as I said, it is not any single driver of the fee side. It is a result of a number of customers we have attracted the last 4 years getting a bit more active. So much more cross selling is slowly but steadily taking place. And as a result, we believe it is large degree also sustainable. On page 6, the NFI was down 6% in the 1st 6 months of the year. And to evaluate our trading business, one needs to look to the net commission income and the other income lines for the business area markets within merchant. That is what the gray bars above show. Together with the NFI, the blue bars, you can see that the market's total income was up both compared to this quarter and last year. And this despite the fact that volatility in the market was at an all time low as you can see on on the right direction. Average income continues to slowly but steadily increase. Costs are slowly but steadily falling and operating profit is rising as a result. Average pre provision profit has increased by almost 60% since 2010. To then turn to the divisional performance on slide 8, which have all seen better results year over year. We continue to allocate capital at 13% common equity Tier 1 level, but we have also added the effect of 25% risk weights on mortgages. With that add on, the average allocated capital is at the 14% level. We start from merchant banking. They increased its result by 27% during the 1st 6 months of the year. And here several factors are involved, but we clearly have more customers and they are more active. And in addition, we're growing where we said we would grow in the Nordics and Germany. Return on equity increased to 14.3% despite the 50% more allocated capital the Merchant Banking had 2 years ago. Retail Banking continues its positive development and is growing with both corporate and private customers. Operating profit is up 26% compared to the same period last year. Our mortgage portfolio has grown 6% on annual basis or 6 $1,000,000,000 in the quarter. This is in line with the market share. Lending margins are stable. As usual, our card business has a good result in the 2nd quarter. SCB is the leading player in corporate cards in the Nordic with some 4,000,000 cards issued under brands such as Eurocard, Mastercard, Visa and Diners Club. In May, as earlier announced, we agreed to sell our acquiring business Euroline for SEK 2,200,000,000. Wealth Management increased its operating profit with 16% compared to the 1st 6 months 2013 driven by good inflows including on institutional side higher asset values and more private banking customers and we have attracted over SEK 40,000,000,000 in new savings. But then move to the life business, they increased the half year result to 23%, but that was also difficult time for life insurance last year as high long term rates affected the traditional portfolios negatively. We are seeing renewed interest for guarantee products especially in Denmark and premium income for life as a whole increased by 17% and asset values increased. And last but really not least this time in the Baltics, operating profit for the 1st 6 months increased by 35% driven by an improving NII line and a release of provisions in Lithuania. Return on business equity is now above 15% or even 17% if we exclude the Baltic Real Estate Holding Company. Moving over to page 9. In the plan we presented the first time in 2010, the focus was on growing our corporate business in the Nordics and Germany, but also ensuring becoming the leading universal bank in Sweden and the Baltics as well as growing in the savings area. I will now go through some specific areas at the bank starting with the development of our business in Sweden, which makes up about 55% of the group's results. Sweden has remained unscathed through the recent crisis and we can see an emerging optimism for our customers. We are investing and continue to grow our Swedish franchise. As you can see on the slide, the number of large corporates has increased by 7% during the last 12 months, Almost 10,000 new or 7% more SMEs have chosen SVB as their payments provided since last year. The number of full service customer of the private segment has also increased by 5%. And within private banking, assets under management have increased by 24% during this period. And the customer driven operating profit for the business divisions as a whole has increased 19% during the last 12 months. We are also growing outside Sweden as you can see on slide 10. The 6 month operating profit in Denmark has increased by 42%, in Norway 15%, Finland 27% and Germany 46%. This is exactly what we have been working towards in our merchant banking growth initiative. And in the Baltics where we have a universal bank, the operating profit increased by 37%. Slide 11. Another area of the bank in which we are gaining ground is Germany. 10 years ago, our German bank was more focused on commercial real estate than corporate and our income generation was substandard. Today, our operating profit has increased by 46 percent during the last 12 months, 85% of these belonging to the corporate business. We continue to decrease the commercial property related share to focus even more on corporate clients. More German corporate customers see SEB as one of the best corporate banks in Germany. On the slide, you can see some of the public transactions in which we've had a leading role year to date. Going forward, focus will be on increasing cross selling to existing customers, original prospects we identified, albeit at a slower pace than in previous years, focusing harder on the cross selling on existing clients. We see that German corporates are increasingly seeking international and export share of their business outside Germany. For example, our businesses or our branches in Asia like Singapore, Shanghai and Hong Kong. So before I wrap up, a quick overview of our financial situations on slide 12. Asset quality remains very strong, funding and liquidity well balanced and we continue to build capital strength. The increase of 16% common equity Tier 1 ratio was due to retained earnings. SEK1 1,000,000,000 upstreaming of earnings from Life as we usually do in Q2 and a positive risk migration offsetting the foreign exchange effects from the weaker Swedish krona. IAS 19 effects did not impact our capital ratio as we continue to have a surplus in our pension If our capital ratio had been 13%, our profitability would have reached 15%. This was the goal we set out to achieve when we communicated our financial targets after the annual accounts of 2013. So to conclude on the last slide, improvement of customer satisfaction, operating profit and profitability show that our long term business plan remains viable. And this means that it's about strengthening customer relations and growing in areas of strength. It's about being available for our customers and having a balance sheet that can take care of a growing customer franchise. The new regulations are falling into place after several years of uncertainty. We will get back to you with an update of our financial targets once all regulations are finalized and hopefully by the end of the year, I. E. Q4. Thank you. Thank you, Annika. So operator, we are now ready to take Q and A. Thank you. And your first question comes from the line of Roni Gose from Citi. Please ask your question. Great. Thank you for taking the question. It's Ronen from Citi. I just have 3 questions regarding net interest income. The first question is in your Merchant Banking division. Your NII was very strong quarter on quarter about 10% up. I can see loans have grown, but this seems to outpace loan growth. Could you give us some color around margin trends? Looks like I guess margins are going up. If you could give us some color around that that would be great. The second question is one of clarification in your other division. Annika, you noted that the yield curve flattened and then you're terming out some debt. Is there any is there much of that base? And the final question on NII is could you give us some updated numbers on your short term U. S. Funding? I know we've talked about this in the past and based on data we can see you're one of the biggest CP issuers of foreign banks in the U. S. And if I take all CD and CP, you must be up there in the top 10 or top 12 of the foreign banks issuing in the U. S. Could you give us some color around what the numbers are there? How that's trending? And if there's any color you can give us on how much of an NII pickup you get from that activity? Thank you. Ron, it's Jan Erik here. I think on the NII line for MB, it's been I think the margin development Magnus Karlsson described earlier in Stockholm Play as fairly stable. I think we see competition in certain segments of course. But overall, I think we feel we can hold our margins quite well in the merchant bank. And I think for the immediate future that should continue. I think in the Other segment and when it comes to the short term U. S. Funding, perhaps I can sort of put it all together and give you a little bit of an outlook on the NII line. Sure. I think rather than commenting on specific lines the way we talked about it this morning in Stockholm was that on the positive end there is volume expansion. There is stability in the margins in the merchant bank. There is probably over time an increase in the margins in the retail bank. And there is the release of some of the funding costs that has been quite expensive in the past. Now that's going to take more effect when we come into Q3. On the negative side there is obviously the decrease in rates that took place just a couple of weeks ago or a week ago or 50 basis points in Sweden and to a smaller but still an extent of sort of terming out the duration of the funding as well. But all in all, we sort of summarized that this morning as thinking that in Q3 and Q4, we should be able to hold the NII level that we showed now in Q2. So I'm sort of grouping all of those things together and giving that outlook. Janard, can I just have a couple of quick follow ups? On the Merchant Bank division, there's something else going on. It's not margin expansion in Q2. It's simply because the NII looks like it's outpacing volume growth in Q2 quarter on quarter. And is there any chance you can give us the number for dollar U. S. Dollar short term CD and CP funding at the first half? Or should I just look at the fact book and assume most of that is U. S. Dollar when I look at the relevant line item, we just find it? I think Ulf wants to come in here, but I think I didn't say we had margin expansion. I'm more saying that we're holding our margins. But Ulf, please? Yes. And then as regards to U. S. Dollar funding, it's I think to start off with the position we have in dollar is from a loan to deposit point of view more or less matched at 100 percent. So the funding we do in the U. S. Is used for 2 particular reasons. 1 is to put it into the Fed in order to have a liquidity reserve. And as we have said before, the liquidity reserve isn't really on behalf of the bank, but rather on behalf of our clients because if there were to be any problems or disturbances in the funding market, the clients we have would need probably to access the bank as a backstop solution rather than sort of finding someone else to go to. And therefore, we want to have that liquidity already on the balance sheet. And we're holding around $22,000,000,000 or something in the Federal Reserve in order to meet that. We have probably another $10,000,000,000 or so in funding from the U. Create cheaper Swedish kroner funding by having dollar funding already. That is then giving us some benefit, which of course has an impact on trading side, but it's not really any big numbers. So I wouldn't put that as a major driver. So we're not really, I would say, opportunistically using the CPC market as such. What we're trying to do is to create funding in the market we want to build the brand awareness. And as you know we have also stopped sort of prolonged the duration of the commercial paper program and we have furthermore issued senior and covered bonds into the U. S. Market. And we feel that we have very good momentum in the U. S. Market and therefore we are using that to tap it. Just one final, final question. Just to clarify the $10,000,000,000 that you raised in the U. S. And swapping back into other currencies, Is that how much of that would be CPCD? And I guess the CHF 22,000,000,000 in the Fed is mainly all money market funded. But if you take the Genki CDs and the commercial paper U. S. Commercial paper program and put it all together, we're talking about something like $35,000,000,000 to $40,000,000,000 that we are having in total. But that's taking both the CD program and the CP program. Great. Thank you. Thank you all. Thank you, Erik. Thanks. Your next question comes from the line of Matthew Clark from Nomura. Please ask your question. Good afternoon. A couple of questions. Firstly, on the cost line, it looks like there was a + 164,000,000 other operating component this quarter. Could you just give a bit more color on what drove that and what we should expect it to do going forward? Secondly, on the corporate loan growth, just wondering how much of this is permanent? Are these buy and hold positions? Or is this temporary inventory that you will distribute and we'll see volumes shrink back down next quarter? Thanks very much. I think on the cost side, that particular sort of the other side of the cost one, I think we've said earlier that it tends to move very much with the IT cost because when we spend a little bit more on the IT and we haven't concluded the project, what we do is that we of course book it as an expense, but then we activate it on the balance sheet and then it gets amortized or depreciated as we sort of run through the life of that project. So you accumulate the cost while the project is running that you on the balance sheet. And then when the project is over, you sort of start to amortize that out and it hits that particular line. So this is an offsetting part of the spend we have on IT or data costs and of course a little bit on the consultancy side. Then it's probably a little bit more in there than that that I don't know of the cuff. But it tends to move very much in line with what you see on the data side and the consultancy side as well. That's the reason. Okay. And then to your second question please could you repeat that? The second question was just on the very strong corporate loan growth this quarter. I'm just trying to understand whether is temporary inventory syndicated deals that you intend to sell down quickly and therefore will fall away? Or is this buy and hold or hold to maturity positions that will still be there in a year's time? And so we should expect the volume to continue to grow next quarter from this quarter's level. Okay. Because if we look at the corporate credit portfolio, if that's what you mean, the onethree of that increase has to do with the foreign exchange movements and the weaker krona. And you may remember that the majority of our lending tends to be non Swedish krona because the relatively limited, particularly on the merchant banking side. So roughly 2 thirds would have to do with commercial transactions. And what we commented upon earlier today was that it's not really any general increase of funding needs of our clients, but it's more to do with a number of transactions, not only a few transactions, but the number of transactions that have taken place tends to be a little bit more deal driven. And for example, M and A and acquisition finance and so on and so on that type of nature. And that may also come back a little bit to the question that Ron had earlier regarding the margins. Of course, when you do that particular type of deal, the margins tend to be higher than if it was just a general credit facility used for traditional cash management. So that's another reason why it looks relatively healthy in the merchant banking side and margins or rather than NII going up a little bit more than the volume trend that you would see. So it's a little bit of a mix effect in there. Other than that, we haven't really put ourselves into any sort of position on the buy and hold on the corporate side, no. So just to come back to it, I mean, even if we take the 5% to 6% headline corporate loan growth, adjust it down to 3% to 4% for the FX effect. I mean that's still a very high annualized pace of growth. Should we expect that to continue? Do you have appetite to grow at that pace? If you look at lead tables from the minority markets, you can see that we have been relatively active in helping our clients to conduct certain transactions. Some of them are public, some are never really disclose any names of what we've done. But from that point of view, it's part of the business. It's whether we have another few of those in the next quarter, we don't know for sure. But as part of our business franchise that when they do these transactions, we tend to help them to lead it. And sometimes we do the funding and financing for it. And then it may get amortized down over a period of time and then we do the next transaction and so on. So I wouldn't view it as it's not that we take the 3% and view it as it's not that I would take the 3% and annualize that and say that it's 12% in the full year then you're going too far so to say with the analysis. But it's showing that there is life and activity levels and it's likely to come down a little bit in the quarter, of course. So that would be my guess. Great. Thank you. And your next question to the net interest income, I guess, you're flagging sort of 2 negative effects, one being the impact of the flatter yield curve, which I guess is what we're seeing in the corporate center and secondly, the deposit impacts from the recent rate cuts. Am I right in assuming that if the yield curve stays where it is, the result in the core percentage should stay at this rather negative level? Or is there anything else going on there? And then just secondly, given the adjustment you're seeing to mortgage pricing so far, do you feel that the volume growth and whatever pickup you've had there is enough to offset that? So when you talk about stable NII, that's stable in SEK terms. So that's the first question. And then secondly, just on fee income. I mean, it's pretty clear that there's a positive underlying trend, but also you've pointed out several times that you've been involved in a number of transactions, etcetera. How should we think about the underlying growth rate in fee income? I'm assuming it's something less than the 12%, 30% we've seen. And then finally, just you have 2 big capital gains coming in the second half, which totals about SEK1 per share after tax. How should we think about this? Are you in a position where this could be allocated or you're thinking about how this could be returned to shareholders? Or will that just be part of the sort of overall capital discussion towards the end of the year? Right. If I start on the NII question, I think you said 2 negative things, say, yield curve and deposit impact. I think I agree with those. But the third factor, which is positive is the fact that we have maturities of some of the old funding that we took earlier that's maturing. We had a little bit of that now in Q2 not very material, but there's a little bit more coming through in Q3. So I think I added those things together. And I also added in over time increasing margins in the mortgage book even though that is going to be playing out over a number of quarters I think. And I added to it the fact that the merchant bank should be able to hold its margins. I think all that in combination meant that NII should be flattish for the next couple of quarters. And then on the second question for fee income, Erika? Fee income, I I think again that when you look at SEB, it's important to say that we will never be an NII bank. I mean, we are so dependent on our large corporate institutions doing kind of activity. I think what we've tried to show over the last year is that you can actually be a stable activity based bank. But of course, it goes up and down. I would rather say that if you follow the Q2 back a few years, you can see that always have good fee income in Q2. And in particular that is because the Securities Finance business is pretty lumpy, but that's what most of the activity is. And then also some other businesses. So I think rather we're quite proud of that that shows Q2 every year and that was it has grown a little bit this year. That also shows the traction that we're working even harder with clients and we're gaining more business. And this is one of our core businesses that we are investing in that we believe in and continuously I hope that we will continuously deliver good. And if I may only add to that that remember that we since 2010 has probably on average increased the number of clients across all the segments by some 20% or so. And it took some while before we could see that the activity level started to have an impact on that. But we now have a different parts then of course that in summary turns out to be a relatively good growth number as such. So it's more to do with having a larger number of clients doing a little bit more, but not doing a lot more on the book right now. And therefore, we believe it to be sustainable. Of course, we're not going to see exactly the same transaction come back the next day, but we're going to have a number of transactions that are swings and roundabouts and that in general creates that sort of growth. And that's what we're trying to talk about this sustainability by having the franchise and why it sort of turn into a little bit of the NII tick go as well. So that's kind of how we look at it as such. Then to your third questions on the capital business and how we anticipate we'll see a nice bottom line from that point of view. I think that's just a question we're going to have to come back to. I think it you talked about distribution to shareholders and I think it's as Annika said the financial targets and whatever we do around that is going to have to be clarified around Q4 hopefully. As you know, there are a couple of things that the regulator needs to straighten out still when it comes to capital. 1 is around the countercyclical buffer and what how that is finally going to work and which level it's going to be at. And the other one is the Pillar 2 components where methodology has to be harmonized among the banks. And once we know that sort of thing, we can factor in whatever we're going to do on things like capital gains and other things. Thank you. Your next question comes from the line of Christopher Rothquist from Barclays. Please ask your question. Yes. Hi. It's Christoph from Barclays. Just two questions. The first one on trading and the second one on the cost of liquidity buffer. So on the trading income or financial income in the Markets division, I think you described in the report that the decline quarter on quarter was due to two factors among those, the flattening of the yield curve and secondly, less volatility. And I appreciate that volatility is, by definition, difficult to forecast. But when it comes to the yield curve, would this current level that we saw in this quarter be what we should expect going forward if there is no change to interest rate levels or even a continued deterioration if they continue if the development in Q2 in rates continues in the Q3? And the second question I had is that you're also right that you just you distributed cost of capital reserves. You also distributed the cost of the liquidity buffer. I just wondered what assumption you've made there regarding your corporate deposits, if you've used sort of your own internal assumption regarding the stickiness of corporate deposits or if you used the Swedish authorities' current sort of assumption that they're Christoper. Liquidity buffers, if I start there, what we do is actually mix. We try to obviously take some lead from both the LCR and the NSFR in how we do our allocation to the divisions. But we also look at behavioral maturities rather than contractual maturities important to keep doing I think it's important to keep doing that until we know what the NSFR measure is going to finally look like. It's already changed quite a bit. And as you'll recall last year end it changed materially and it meant that we got about 10 percentage points better NSFR once that new definition came in. And we still have to wait until the end of this year before we know the final calibration of that. So I think until we know for sure how that all works, we're going to work with a mix of internal and external assumptions so to speak. When it comes to the trading income, I think you pointed to the flattening of the yield curve and the volatility or rather lack of it. And I think the other thing you need to keep in mind, which is depressing trading line a little bit is the fact that the spreads have tightened for SUV's own debt. And it's tightened actually more than on the asset side, which means it's a little bit of a sort of headwind on that. So that's another component, which is you need to factor in there. Okay. Thank you. Your next question comes from the line of Alvaro Serrano from Morgan Stanley. Please ask your question. Hi. Thanks for taking my questions. Just more clarifications more on question, but three quick ones for you. Derek, you mentioned that overall you would expect Q3 and Q4 to be relatively flat. Should I assume then the 135,000,000 in the other division the drag is the run rate we expect going forward? Or should they be less negative? And second, obviously loan growth was very strong in Q2, might not be recurrent all of it at least. But going forward, when you see the prospects of improving corporate demand as you've highlighted, do you think you can still accumulate capital based on the demand and the pipeline you're seeing over the next few quarters? Put it another way, is your appetite still towards increasing dividends via special dividend if necessary or towards investing more in the business versus investing more in the business? And lastly, in terms of mortgage pricing, obviously, the rate cut of 50 basis points has been put through. Most banks, I think, have reduced my understanding has reduced their offerings only 25 basis points including yourselves. Can you confirm then? Do you expect that to be sort of should we interpret that as a spread increase of 25 bps what we should model going forward? Thank you. Well, Alvaro, I think on the NII question again, I think I was trying to say that in total for the whole bank, I was saying that NII is probably something that we will defend on this level for Q3 and Q4. And I didn't want to go further out in time or to break it out or break it down into the separate divisions for more than that really. So I'm just trying to give a little bit of a guidance on the back of the fairly large rate cut that we saw. So again, I was arguing that we can compensate some of that through increased volume holding the margins in the merchant bank, increasing margins over time even though it will take time in the retail bank and a little bit cheaper funding cost in the center of the treasury. I think on the loan growth and the rate we saw in Q2, I think looking forward, if the sort of macro conditions don't deteriorate and the confidence levels in the market remain where they are today. I think the corporate demand is probably going to continue to be positive, whereas I think there are reasons to believe that retail expansion is going to slow down a little bit and perhaps not have the same pace as it's had Association are discussing different measures to curb that development a bit and so does the regulator and the politicians. So I think from one source or another or a combination of measures will mean that, that growth pace is probably going to slow down a little bit. Whether there will be capital to distribute or not at some point is going to be something we will have to return to when we come to our financial targets, as Annika said earlier, around Q4 results. I think that's when we will know the two things that I pointed to Pillar 2 and kind of cyclical buffers. I think it'll just be pure speculation before we know that. But I think are we building capital at the pace where we can sustain the organic growth that we do? Yes, we feel very comfortable around that of course. Mortgage pricing? Mortgage pricing given the repo rate cut. How may Yeah. Maybe I could comment that. I think the challenge is here that we do it differently all banks. I think SBB we're now into our 6th year of kind of transparency where we show our clients our finance costs and that's an average of a 5 year bond for our bank cost margin. We don't really look at the rate, but what we try to do is of course we follow our peers a bit and we try to be in the middle somewhere what we show. But actually we have a much more transparent and exact way of pricing our mortgages. But of course mortgages are coming down. Margins are fairly stable, highly competitive still. All banks are very active here. But again, we are waiting. The finance inspection have said that they will during the autumn come out with clarifications regarding how all banks should show more open in the mortgage margins. So I think we need to wait before we can actually compare and see how this exactly looks, because it's quite difficult today. But we have our own way of doing it and it seem like it has been very well appreciated by clients. We don't really want to change it now. We are waiting for the finance inspection to see. But if you look at the reaction from the different banks and what your competitors are doing, what you think they're doing, would you is it fair to assume that it seems like margins are now increasing or set to increase? I think that slowly but steadily the margins are increasing. Okay. Thank you. Your next question comes from the line of Nick Davy from UBS. Please ask your question. Yes. Good afternoon, everyone. Three questions, please. Most of them follow ups. The first one is on this question of divisional net interest income. And sorry to harp on this one. I know you've given us very helpful guidance at a group level. But I just want to better understand if I may the flow of this net interest income in Corporate Centre because I remember you saying last quarter you changed the FTP. And I just want to understand that you basically had a SEK400 1,000,000 swing in the net interest income in Corporate Center. And if I understand it well, you're saying some of that's then been passed internally to the merchant bank for the shift in your view of corporate deposits. I just want to make sure I've understood that correctly. And then just to think out, you're talking about the reinvestment yield risk, which all banks face from lower for longer rates. Just want to understand then, I guess that risk then is borne by the divisional net interest income lines, if I understand that well that liquidity is now sort of boosting divisional NII. And if there is some reinvestment risk, this Merchant Banking NII, which has come up may come down again and we just shouldn't get too worried about corporate lending margins on their own if we see that playing through? That's the first question. 2nd one, sorry to come back on these questions of sort of temporary. What is a temporary and what is a recurring fee and commission income? But I just wondered if you could comment on the German business. I know you've got a slide in there, but just looking at revenues in Q2, 'fourteen, €1,100,000,000 you've had a run rate for the last three quarters of €600,000,000 to €700,000,000 Just could you help us understand, is there some any sort of step shift in Germany structurally? Or is this high revenue base reflective of a couple of big transactions this quarter in Germany which may reoccur in another quarter somewhere else? Just to understand that P and L in isolation that would be great. 3rd question and final question on capital. Just to square the circle here. We've had some discussions already in the call of special dividends and these kinds of things. I know there's a lot of uncertainty out there. I know you're waiting for H2. I'm just trying to understand if I read the most recent FSA release, it's pointing you towards a target Core Tier 1 somewhere near 17. Do you have any strong belief that that's way off the right number? And anything in there that you're particularly pushing back on? Or would you be okay with us to plug that into our models? Thank you. Hi, Nick. Let me try to run through on the NII side. First of all, I think the change on the other eliminations, which is where we have our treasury NII, between Q1 and Q4 when it went down by some 2 €30,000,000 had to do to a large extent to that we changed the internal funds transfer pricing, but we're paying more for deposits in the divisions. So that was a transfer from treasury to the merchant banking and retail, because we wanted to make sure they were pricing the deposits according to what Jan Erik said earlier, the sort of behavioral part of the deposits. Then we also prefunded maturities coming up later in the year and that had an impact on the NII on that side. This quarter, we have continued to raise around $30,000,000,000 of long term debt in the treasury part. We haven't had many maturities because they came late in the quarter in June. And then we had a relatively expensive sterling transaction you're running here in July, for example. So we were running with double cost and then we took in some more funding. Furthermore, we issued a Tier 2 paper in May that also created a cost for us of course on the treasury side that may over time get allocated back to the divisions because they need to carry the cost of capital and so on. So there were many things in this particular start of the year that brought the NII for the treasury part down. And as John Eric said, we think now in the Q3, it's more likely to jump up back up again towards a higher level since we have maturities that will then help us of course. And we will also get given the repo rate cut it's not only negative because it's not only deposit rates that will impact the retail part, but it also gives us a little bit cheaper cost of funding of course for the business. The problem with treasury is where they put the funds when there is very little yield to the reinvestment risk of that and what type of risks you want to have on the book when rates are so low. For example, duration risk doesn't really give you anything. So is it worth to sit on that credit spreads are very narrow and tight. So do you want to sit on any credit risk on the paper side and so on? And you end up putting a large part of the cash in to basically very secure cover bonds and into central banks. So treasury would benefit now from this quarter on given that we have cheaper funding costs and we have also then the maturities of some older more expensive debt and so on. So that is likely to help us. And the divisional part is then going to go down a little bit deposits we have of course is getting more and more into the 0 range as we can't lower the savings rates on these deposits more turn to 0. And therefore, we have the floor risk on that. Then regarding Germany, if you go back and look at the Q2, there's always been a little bit of a high end to it in Germany because of the securities financing business. And we are getting a larger part of the market in there because we also are able to create relatively cheaper cost of funding and we are broadening our customer base. So the same sort of trend showed up in Q2 last year and it actually showed up in Q2 in 2012 as well. But the magnitude is a little bit larger in this quarter than it was in the earlier Q2s because we have an increased number of customers that we're doing this business with. So it's not something that model that would come model that would come back in Q2 or next year again. So on a rolling 12 month basis, it's actually very sustainable and it's increasing. Very clear. Thanks. I think on the capital question, I think the uncertainty is there. And if I is 17 the correct number or not? Well, I think you work you need to work with some sort of bandwidth here and to sort of accept that the regulatory paper that came out on 8th May. I think it was actually said we would be just south of 16%. But the two uncertainties again are kind of the countercyclical buffer where the National Debt Office, the Swedish regulator and the Swedish Central Bank meet and discuss and the ministry. They need to or they sit down and discuss macro prudential tools and they need to sit down and talk about these things as well. And after that last meeting, the National Debt Office thought the countercyclical buffer should be set at 0. The regulator felt it should be higher and the Central Bank felt it should be at 2%. So there you have 3 different answers from 3 different bodies. That's where they are right now. And of course, whether it's 0 or 2 or something in the middle makes a difference for what the end result is going to be. The other one is pillar 2 where they have to work out the methodology for things like market risk in the banking book. How is that going to be done in a uniform way in the banks? How are the different banks going to calculate the pension risk in a uniform way? And I think there's uncertainty around those things as well. So I think for you to assume anything just south of 16% all the way up to perhaps 18% depends on what you think on those. And of course, 17% happens to sit right in the middle of those. So I think that's all the bandwidth I think Nick is what you can get from what we know today. Very, very clear. Thank you. Your next question comes from the line of Omar Kinan from Deutsche Bank. Please ask your question. Hi, good afternoon. Thanks Just firstly, a question on your targets. I mean, the quarterly run rate is now exceeding the €20,000,000,000 operating profit target. So they do look kind of rather dated now. It's probably kind of a little bit early especially ahead of elections in September and new measures potentially on capital. But can we expect an update on targets perhaps in January with the full year results? And would it be safe to assume that the long term 15% ROE ambition is not going to change even if that implies kind of high operating profits on a larger capital base? And then I just had a second question on fee income. In the second half typically the Q3 is seasonally weaker in the merchant bank, but then you have some the counterbalance is that in Q4 you have your performance fees from Wealth Management. You've given us some very helpful guidance on NII progression in the second half. But can we expect the second half fee income will at least be in line with the first half? Are you able to give that kind of guidance? Thank you. First of all, I mean, targets, hopefully, if we get all this information now during autumn, when we release the Q4 figures, I guess, our ambition is that by that time, late January or early February that we will also be able to announce new financial targets of course. At the press conference today, I did not let go of our long term ambition to reach the 15%. And I guess the simple answer to that is as far as some of our best peers have 15% and that's kind of what the best banks have. We have to go for the same. So our long term ambition is not to let go of that. But of course, it has to be within reason, of course, regarding the capital situation and everything. But the long term ambition is still there. And then we need to see exactly as generics and how these three different parts are trying to get along with what will be the new rules for us. And I think we are also a bit worried about being too gold plated compared to rest of Europe. So there is a lot of discussions going on to Sweden at the moment. I don't think it's a problem very much today. I think we must worry about maybe 5 to 10 years out on the curve if you are too harsh on Swedish banks. When it comes to Q3, Q3 is always weaker because activity is down. So again, being a much more of an activity based bank, activity usually goes down a bit in Q3. So I guess Q1 and Q3 are always weaker quarters than Q2 and Q4. But again, performance fees, you never know if you have performed or not. It's quite difficult to say in advance if we have or not. But of course, we are optimistic that we have a good team and hopefully that we're doing our best. But it's very, very difficult to say today that we will deliver exactly what we hope that we will deliver. And to add to that, that's why we so much come back to this picture that you know of average quarterly income and so on that we're sort of working on the averages because particularly quarter may be a little bit here and there, lumpy with one way or the other. But on average, we are through having more clients creating better leverage on the investments we have made. And that's kind of what's there. And whether that's going to yield you better numbers or equal numbers, etcetera, into H2, it's difficult for us to predict, but we believe we have a bigger base to stand on and we're continuing to attract new clients. Okay. That's great. Thanks very much. Maybe if I could just follow-up with one question on sort of regulation and I just sort of push my luck. In the past kind of 2, 3 months, we've had a lot of news flow in Europe, but also kind of locally on sort of risk weights and leverage. In your discussions with the Swedish regulators, is there something new other than the countercyclical buffer, the finalization of individual Pillar 2 requirements and potential action housing measures that we should be aware of? Is there kind of increased focus on potentially kind of raising or say gold plating leverage kind of sort of ratio sort of regulation in the Nordics or doing something on corporate risk weights? Or is there nothing new there? Fundamentally, nothing new, Omar. I think the as we've commented many times before the Swedish regulator and central bank and politicians are the fundamental believers in a risk weighted They don't want that. But they at the same time they recognize the sort of the skepticism in other geographies and they realize that they can't sort of for perception reasons or real reasons take or pick sort neglect the notions of the leverage ratio completely. So they're looking at a standardized underfin as a world. And they are I think listening to debate around quarter risk rates as well, but that's not something that is going to happen in the near future. I think that's going to be pushed forward in time if ever. So sort of slight change in tone perhaps in that they recognize what's going on in Europe more than before. But their own conviction of the merits of risk weighted balance sheet is still there. Perfect. Okay. Thank you very much. Your It's Ed Firth here from Macquarie. I just have two quick questions. The first one was so back to fees and commissions. But if I look in your note on page 21, secondary market and derivatives revenue was up more than double. Is that the securities finance business that you're talking about? Because it looks to be pretty much more than double any quarter in the last 2 years. So it just seemed to be a huge leap for what seems to what you're describing more of a sort of incremental business. So just sort of comment about that and how we might expect that going forward? And then I guess the second question was a slightly broader question looking at over 2 or 3 years. It seems that Sweden is sort of skirting on the edge of deflation and may well go into a deflationary environment. And I just wanted to ask you how that affects the way you look at your business? And how that affects as you look into a new strategy, which areas of the business may or may not be more or less attractive in that environment and whether that is the way you're looking at the business going forward? Hi, Ed. It's Ulf. I think on the net fee and commission side. Yes, absolutely, the secondary market and derivatives jumped up. But equally, if you look at the fee and commission expense in the same table, you can see that that jumps up as well by SEK 400,000,000 or so. And the 2 of them are very much connected because it has to do to a large extent with the securities finance business. And then of course, if you do transaction on one side, you get income and then in order to offset that you pay someone else part of that income. So you'd be acting as a broker in a way or intermediary in between the 2. And therefore, the expense side goes up as well. And for that reason, we added this sort of at the very bottom of that table where of net securities commission, which basically puts the two sides together. That is of 12%. So the sort of the very sharp jump of the secondary market and derivatives is to almost but not fully, large part offset by the jump that you see on the expense side. And therefore, the net of them is only 12% up or so. And we have made comments that we're talking about that securities lending probably produced something in the neighborhood of maybe 100 or so more than they did this quarter than they did in Q2 of last year. So it's not really any big number and that's not the main factor. The main factor has to do with, as we said before, many, many different sources of fee income in many different places within the whole group. And if you look into the divisional as well as the geographical split, you can see that that's a factor that happens in many different places. And I would just like to come back to what Annika said in terms of the geographical split that we see big 4 out of 5 countries or regions actually producing more than EUR 1,000,000,000 in 4 out of 5 countries or regions actually producing more than SEK 1,000,000,000 in operating result for the 1st 6 months. So it's not really that particular business. It is much more of a broad based increase of the fee and commission side across the whole bank actually. Correct. Yes. And the recurring activity, I think it's important to say that Excuses Finance is more business for us and we can see many competitors that have not been very successful in that area. It demands a lot of IT support and solutions and really being at the top end of doing that. So I think also it shows that we are a major player in this also on the European level. So I think it will continue. Defasitions, no, not really. That's not really our target yet. And I think now with the last big cap from the sentiment, that's not what we anticipated. But we will go into business plan during autumn and we will, of course, simulate different scenarios. But that's not really in our radar screen that we would change. I think going back to again, we have the client base we have and we have the cross selling. So for us, it's more kind of really being close to the clients and doing the best we possibly can. And then we need to simulate a bit, but we have not been into deflation yet. Okay, great. Thanks. And your next question comes from the line of Riccardo Rovere from Mediobanca. Please ask your question. Good Just three questions from my side. First of all, just to get back one second on loan growth, which is clearly outpacing the economic growth in the euro area and in Sweden too. So can you provide us a kind of breakdown of what you are financing? How much is especially in corporate? How much is working capital? How much is investments, CapEx? How much is in M and A? Just to have a feeling of what is driving such a very good performance that you're showing quarter after quarter? The second question I have is on the leverage ratio, which is down 10 or maybe 20 basis points in the semester. In light of the macro prudential actions that are put in place in Sweden, is something that you look at? Is there any way that you can which you can improve the leverage ratio over the next few quarters? And last thing, just to have your feeling, is there anything in this set of numbers that you would consider as clearly kind of one off or maybe not sustainable? Thank you. Ricardo, I think in terms of the loan growth, when Magnus Carlsen, the Head of the Merchant Packing Division was asked about that this morning, he said that it is not working capital. It is not CapEx. It is to a large degree driven by transactions where our clients are using their strong balance sheets in order to make acquisitions and other sorts of transactions in order to improve their franchise. So it's more that than a general the the kind of growth we are seeing. Okay. Shall I interpret what you say, Ulf, as a kind of M and A euphoria? And maybe the euphoria is going to go away one day? No, I wouldn't say euphoria. I think we have made comments earlier in earlier calls rather that the Swedish corporates are really in a very strong position because they have had a lot of cash on their balance sheet. They have had relatively good sort of crisis or post crisis scenario. They have been growing in many areas and they have a banking system that also can fund them relatively competitively. And therefore, they historically have been very active in making acquisitions and growing their franchise in other parts of the world. For 5 years, nothing has really happened. And now we're seeing a little bit of sort of effects from that that some companies started to do a transaction and make acquisitions into other regions. And that's part of what we normally would see in Sweden. So I would say more bringing back to the normal level that we have seen earlier. So we're not talking about euphoria because it's nothing that's sort of the difference is to the very lame period we have had in the last 5 years rather than sort of be it being normal compared to what we are used to having before the crisis happened so to say. So it's more going back to normal. Okay. So you would consider this sustainable, let's put it this way. This is my understanding from your wording, correct? Yes. I would as I said before, it won't be the same company making the acquisitions in the next month, so to say, but as part of the overall number of clients, it's ideal. Okay. Okay. All right. And on the leverage ratio? And it's confidence building. I should remember when a few of the companies have started to do that, you can see that other companies may get more sort of confident about making similar transactions into other areas and so on. Riccardo, on the leverage ratio, I think as we commented on a previous question, the fundamental belief in the regulator in Sweden is on risk weights rather than leverage. I think the fact that we've reduced a little bit from 4.2 to 4 in this quarter is no big deal in my mind. We are well above the 3% that Basel talks about. And if and when we need to adjust leverage, we can do so. I think the balance sheet can be addressed in many different ways. And as you know, we have fairly large trading operation with both the which is customer flow driven. But we do have possibilities to steer how much of that we keep on the balance sheet. And there are the lines that we can work on as well. So I think it's not something that's going to take effect overnight and sort of come and bite us. It's something that we can manage. Okay. But just to finish on this, is it correct to say that the leverage ratio at the current stage is not driving your management decisions? Well, it's no, it's not a primary constraint in our minds or in the regulators' minded. But at the same time, one needs to keep an eye on it. And it's something that we can't sort of disconnect ourselves from completely. It's another ratio that needs to be managed in my mind. It's not the primary one. Okay. Okay. I think just to be clear, Ricardo, I think this is a detail, but when we calculate and publish our at the end of June, the actual end of June 30th June so to speak, if you look at that balance sheet on that day, it's actually 4.3. That's the detail, but there you are. Okay. Okay. Interesting. And finally, when I asked when I was asking about if you see anything that is clearly not sustainable or one off in these respective numbers, did you spot anything? No, I don't think there is. We've had the long debate around securities finance business and that impact and whether you want to call that one off or not, it is in the year a one off because it takes play in Q2. But it's going to it recurs every year so to speak in Q2. So but other than that I don't think there's anything in particular. Very clear. Thank you very much. Okay. Your next Your next question comes from the line of Arjash Bawa from Societe Generale. Please ask your question. Hi. So just a quick question. Just wanted to know there's some potential COCO issuance in the near or medium term in the pipeline and the plan. If you could throw some light on that? And maybe the legal clarity or the tax implications surrounding that if you plan to issue Cocos and something on the trigger? That would be helpful if you could give some color on that. I wish I could. I think the only clarity we've gotten this far from the regulator is was enough to make us issue a Tier 2. Okay. Was that 3, 4 weeks ago? Now Cocos additional Tier 1 issuance or tax implications are still to be clarified. So we'll have to come back to you on that. I don't really want to comment on that today because it's too unclear. Okay. Got it. Thanks a lot. I think maybe sorry just to add to that, you have to factor in also that in September we've got elections. And I think on pretty much all those topics and there are variations of the theme from different parties. And we'll just have to see what the outcome is of that. Whatever the sitting government says today, it may be very different after September. We just have to wait and see what happens on that. Okay. Okay. Thanks a lot. Yes. Thank you. Your next question comes from the line of Adrian Sergipe from RBC. Please ask your question. Good afternoon. This is Adrian Cighi from RBC. I have two questions please. On the Wealth Management division, the net new money showed a very strong quarter across both institutional and private accounts. Is this indicative of SEB taking market share? Or are there any other developing factors there? And the second question is on the timeline. I'm trying to understand the timeline of re pricing of liabilities. What proportion of your covered bonds are either on variable rate or that you swap into variable rate immediately after issuance? Thank you. Hi, Adrian. If we look at the inflows within the Wealth Management division as such, I think there are 3 different stores going on at the same time. The first one is the private banking where we've been able to attract around €20,000,000,000 €25,000,000,000 of net new money every year and that has been a 7, 8 year story right now, which means that we're getting to these healthy numbers where growth is 20%, 24% or something very nice growth. That's continuing and it's been the case for a long time showing that we have a very good franchise there. The second story has been around our distribution of SEB produced funds itself, where we have had a situation where maybe our funds weren't fully up to par and the distribution of external funds was a little bit easier. So we had external funds distributed to our clients through our retail network. And now by making inflows into our own funds whereas we earlier had outflows and then we had inflows into external funds. Now we've been able to turn that around. So we have inflows into our SEB funds, which then of course also creates good numbers in terms of the growth. We're talking about relatively small volumes, but still it's there. And then also you can see from the fact book that the institutional client side within Wealth Management for a relatively long period of time has had relatively modest outflows, I would say, not inflows overall. Now we have come through a situation where we have reworked that and we this year have seen a material pickup in terms of the institutional flows we are getting. They are up actually by SEK 26,000,000,000 in this quarter. One of them has to do with a bigger mandate with 1 of the insurance companies in Sweden that is public. But then they attracted another SEK 10,000,000,000 or so as well by just getting more and more clients. Performance is key to being very good in terms of attracting new flows on the institutional client side. So that's why it's important to us to be able to sort of show these numbers. So €40,000,000,000 is a relatively strong number. It has to do with the sort of acquisition of a mandate, but that's only maybe 1 third of that and the rest has to do with good inflows. But there you have the three factors behind it. In terms of covered bonds in general. And then we manage the interest rate risk by swapping them to the duration we want to have in order to match our book and so on. We very rarely have floating rate covered bonds being issued. They tend to be on a fixed basis and then we swapped them to the duration we think we want to have in order to match the duration on the asset side. So I would say that the repricing is happening more according to 3 months, 6 months cyber and Uribor etcetera rather than being repriced in terms of and using the swap curve rather than being used to sort of reprice the underlying bond itself because that tends to be stuck there at the fixed rate that we entered into from the beginning. Okay. Clear. Thank you. Your next question comes from the line of Jacob Kruse from Autonomous. Please ask your question. Hi. Thank you. I guess, Annika, I think you were in the press earlier today or yesterday talking about amortization requirements being potentially welcoming them being even harder. Is that following any kind of discussions with regulators? Is that just a view you're taking as a bank around in terms of how mortgages should be run-in Sweden? Thank you. Thank you. There is a debate in Sweden and our Finance Minister has been quite vocal about that. If banks don't do anything about this, they might come a regulation regarding this. So it's a lot of discussion. And in the bankers associations, we are today discussing how to proceed. A couple of years ago, we decided in the bankers associations to have forced amortization down to loan to value to 70%, which actually today works. So 90% of all new loans today is amortizing. The challenge has been that the old loans are not still amortizing as well. And I think coming back to a more kind of a savings and amortizing culture, the culture of Sweden has been on the poor when it comes to that. I've been quite vocal in saying that in SEB we've used 50 years as a kind of guiding principle of trying to get our clients to amortize in 50 years. I think you could actually shorten that to 40 years because interest rates, the loss interest rate cap is almost equivalent to 40 years if you have the same rate. So people could actually use the situation of paying back to themselves and also getting less leverage. So I think we're all trying to find ways forward of make sure that the households are not too leveraged. And this is one way of addressing it. I think also we worry about this. We will not agree or suggest something along all banks that there might be legislation regarding it, which would be more unfortunate. If you look for something to the Netherlands, it was very unfortunate when they were too aggressive on this. So it's a delicate balance in how we do it. But we have started and I think we'll continue. And I actually do think it's a good idea. And I think probably one could do a little bit more shorten the total horizon maybe down to 4 years or something. And that's what I had a discussion about in the Swedish paper. Thank you. Welcome. There are no further questions at this time. If you would like to continue please. Thank you very much and thank you all for those questions. And since we're getting into the summer period, we will try to be on the lines and be able to respond to your questions at least during this week. And then it may be a little bit more ad hoc next week since then we're getting hopefully some rest all of us. With that, thank you for participating and hope to see you and hear from you. Bye. So that concludes our conference for today. Thank you for