Earnings Call: Q1 2014

Apr 25, 2014

Thank you for standing by, and welcome to the Q1 2014 results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I would now like to hand the conference over to your speaker today, Ulf Grunnesjö. Please go ahead. Welcome to this presentation to the first quarter results of 2014. My name is Ulf Grunnesjö, and I'm head of investor relations at SEB. Also on the line are SEB CEO Annika Falkengren and CFO Jan Erik Back. Annika will start by giving a short introduction to the results, after which we will move to the Q&A session. Welcome to the presentation of our financial results for the first quarter 2014. Today we report an operating profit of SEK 4.9 billion. This quarter, just as last year, continues to be characterized by the cautious recovery of the world's economy. Moving to slide two. The key takeaways from the quarter are the improved corporate sentiment, and that the small and large companies in Sweden have reported higher levels of activity in recent surveys. Public data also shows that merger and acquisition volumes in the region have more than doubled versus a year ago, up 160%. Initial public offerings have more than doubled, up 90%, and also debt issuance is higher by around 30%. As the corporate bank in this region, we have seen this increase in activity. Our customers continue to do more business with us, while at the same time we continue to increase our customer footprint and we do increase our cost and capital efficiency further. This more positive development in the capital markets, however, does not mirror the real economy development, especially in Europe. Increased geopolitical risks due to the recent unease in Ukraine can have a negative effect on trade and lead to a more careful business environment in the short term, and mainly so in the Baltics. Page three. Our operating income was SEK 10.4 billion and operating expenses decreased to SEK 5.3 billion for the first quarter. Credit quality continues to be high, and credit losses of seven basis points remain at the same average level as those of our Nordic businesses during last year's. We continue to build capital, and with a Basel III capital ratio of 15.7%, we reach the return on equity of 12.6%. On slide four, our net interest income increased by 8% versus Q1 last year. Customer-driven NII increased by SEK 469, or 11% versus Q1 last year. Higher volumes offset the effect of lower short-term interest rates, and NII from other activities decreased to SEK 100 the same period last year. We have raised SEK 40 billion of long-term debt in the quarter, and only SEK 15 billion matured. Maturities will take place in the second and third quarters of this year, and liquidity reserves have also increased by approximately SEK 100 billion. In comparison to Q4 last year, NII decreased by 2%, while margins remained stable. On slide five, where the net commission income was SEK 3.7 billion. The increase of 15% compared to the first quarter last year is driven mainly by higher levels of acquisition finance and higher corporate advisory activity. Also income from assets under management and assets under custody increased due to higher activity and higher valuations. Assets under management reached the SEK 1,500 billion level for the first time. SEB is the leading custodian in the Nordics, and our assets under custody have surpassed the SEK 6,000 billion mark. Compared to the previous quarter, net commission income decreased 4% due to the usual seasonal effects in cards and other payment fees. Slide six shows that NII increased by 13% versus the same period last year. Both activity and volatility in the financial markets were drivers for this increase. Stock market volumes were up during the quarter, and the income level of SEK 1.2 billion continues to show stability as it is driven by customer flows. The summary slide on operating leverage on page seven displays the stable progress of our business plan. We see a continuation of last year's trend. Income is at the same level as the average level last year. We are increasing efficiency at the bank, and we continue working hard. Cost-income ratio in Q1 was 0.51, the same level as in the previous quarter. I would like to take you through some of the trends in the divisions on page eight before Q&A. Merchant banking increased operating profit by 40%, but from a low level in Q1 in 2013, given the concerns about Cyprus and Europe at that time. Capital markets have developed positively during Q1. SEB has been very active in the issuance of corporate bonds during this first quarter and is the largest player in the Nordic region. We also have a larger and broader customer franchise, given the good development of our corporate expansion in the Nordics and Germany. Norway and Denmark were up 20%, and Germany was twice that number since last year. Retail banking continues to develop positively and grows in both the private and corporate customer segments. Operating results increased by 32% versus the same quarter last year. Wealth management increased operating profits 13% versus Q1 last year due to higher assets under management and continued inflow of new customers at private banking. Life operating profits increased 5% versus the same period last year, also driven by higher levels of assets under management. Unit-linked insurance volumes have increased 13% on a yearly basis. The operating profit from traditional and risk insurance decreased somewhat. In the Baltics, operating profit increased 43% versus Q1 2013, driven by the recovery we have seen since the summer of last year. We're seeing a slight decrease in export volumes due to the recent concerns around Russia and Ukraine. On slide nine, you can see that we've built a strong balance sheet, regardless if it is capital liquidity, funding, or asset quality that we look at. Our capital ratio according to Basel III is 15.7%, and asset quality continues to be very high. To summarize on page 10, we will not surprise you with new financial targets or a revised business plan. We will continue to execute on our long-term business plan that we presented more than a year ago. It is all about strengthening our customer relations and growing in our areas of strength. It is about being where our customer wants us to be, being available when they want to reach us, and having the financial resources that can support a growing customer franchise. We are now waiting to get the clarity on the final Swedish regulatory framework on capital. It has taken a long time to finalize the international, European, then Swedish regulatory framework. We do hope that the framework will be well-balanced and that the rules will not hamper too much the needed economic recovery. With that, I think we can open up for questions. Thank you. Ladies and gentlemen, 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. Your first question comes from the line of Omar Keenan. Please ask your question. Good afternoon. Thanks very much for taking the questions. I just have two questions, please. Firstly, you referred to the remaining SEK 20 billion in model approvals on the press conference. If I calculate that as a pro forma core Tier 1 ratio, that gets me to about 16.3% from the 15.7% that you reported at Q1. I was hoping you could give us a bit more color as to how the SEK 20 billion is split between various portfolios and also timing around applications and approvals. Could you say, for example, that the SEK 20 billion will come through by the end of the year? Then I just have one more question. Thanks. Hi, Omar. I agree with that. SEK 20 billion equates to about the numbers you quoted, i.e., 16.3%. I don't want to give a breakdown of that by line items or in time, because it's really with the regulator until it's approved. To pre-empt that, I don't want to do it at this point. We'll see if and when they approve. I suspect them to do so, and hopefully we'll have it by the end of the year, but I won't be able to go further than that on the press. Okay, thanks. That's helpful. Just my second question was around funding. You raised SEK 40 billion of funding in the first quarter, which is quite a lot. I was hoping, could you give us a sense of, firstly, what the cost of that new funding was, what your remaining plan for the full year is, and then lastly, what you think the back book cost of funding that's rolling off in the remaining of the year is? Thanks. Again, I won't be too precise, but we've taken the opportunity that the market has provided of the past quarter to do a little bit more and to be a little bit front-loaded on the funding. As I said, we've taken up SEK 40 billion and SEK 15 billion has matured. I also said at the press conference here this morning that we have some things coming off the books now in Q2 and Q3. Some of that was fairly old, so there will be a tailwind in NII to an extent from that. We'll give more color on that when we get to Q2, when we see exactly what the effects are. I think I'll quote on that. Okay. Thanks very much. Your next question comes from the line of Johan Ekström. Please ask your question. Thank you. Just two questions. Following up on NII. Annika, you said that the customer-driven NII was up something like SEK 450 million year-on-year. Is that excluding the impact of the change in fund transfer pricing? Or is that boosting that effect? How should we think about the customer NII development going forward? Then secondly, you've kindly provided some disclosure on your exposure to Russia and Ukraine. It's a net number, though. Would you be able to give us the gross exposures to get a sense for what the worst-case scenario could be if this sanction war truly escalates? Okay. I think regarding the first one, it is inclusive on that one, and it's approximately somewhere around SEK 100 million or something. Yeah, just over SEK 100 million is the effect of the change to IFTP. On your second question regarding Russia, I think one should be careful on the assumption how this crisis will develop. I think our exposure to Russia is very much trade finance related towards the two largest state-owned banks, and non-guaranteed exposure to Nordic blue-chip companies, really. Exposures are also in convertible currencies with contracts that are enforceable outside Russia. Today, we can't really see that there is any risk of any loss making that would materialize, whatever happens. We are only there actually to support the Nordic German large corporates that we cater for. I think our worry and why we bring it up is rather the secondary effects that could have on markets and exports overall. In that case, it will closely say that the Baltic countries, the GDP growth going forward, of course, if they suddenly cannot export to Russia and Ukraine, that will probably halt. Recovery. The recovery of the Baltics. Those are more the worries that I've tried to put forward today rather than any of these kinds of exposures, really. Just to follow up on that, have you in any way changed your willingness to take credit exposure in Russia, even if it's to the large two banks? I think we say that it's not business as usual. Of course, we support our corporates all the time. Then we have to find smart ways to do that to make sure that they can continue doing their business. That's the whole purpose of being a bank close to your clients. You have to be there in good times and bad times. We just have to find ways in doing it, and it's not really business as usual. We are open for business, yes. Thank you. Your next question comes from the line of Alvaro Serrano. Please ask your question. Thanks for taking my question. A couple of questions, apologize if you've touched on this already this morning, but I had some technical troubles. In terms of the cost base, you're obviously making very good progress in Q1, and the run rate seems to be well below the cap that you've established. Is there anything we should anticipate in the rest of the year that will put you closer to the cap, or is this a sustainable run rate of costs? The second question is around merchant banking. The fees were very strong in Q1. In previous years, seasonality has been quarter-on-quarter down. It's actually up this time, and I just wonder if you can give us any color on how sustainable that is. You mentioned that there could be some confidence being dented because of the Ukraine situation. I think you were referring more to the Baltics. If you can give us some color into what your thoughts are into the rest of the year, medium term of that. Is it particularly good, or there's been large deals or some color on that? Thank you. First of all, I think we're aware that we are at the moment well below the cap. On the other hand, Q1 is always seasonality, a slow quarter to start with. We are not expected to change the target. Of course, we hope to come in below 22.5. On the other hand, it gives us room to maneuver. We have some investments to do. We're still investing in IT, et cetera. We would just manage that. We have no new forecast on that one. When it comes to fees, I think we were quite explicit also in Q4, saying that we do see much higher activity from corporates. Sentiment is better. It's large corporates, it's mid corporates. Of course, activity in capital markets, M&A, corporate finance, even equities have had a higher turnover. That, of course, supports Q2 is usually quite a good quarter also for merchant banking, while Q3 is always a weak one. We can just hope that the sentiment from Q1 will continue. I think Magnus said today at the press conference that he sees confidence that the activity continues to be high. We hope that will continue. I think you're right. We are rather seeing that the Baltic recovery might slow down if we have more problems in Russia and Ukraine. Of course, on a larger scale, that might also affect Europe and Nordic as a worry, I think. That might be to come to too much conclusions at the moment. Okay. Thank you very much. Your next question comes from the line of Haakon Furu. Please ask your question. Yeah. Hi, it's Haakon Furu at DNB. Two quick questions from me. Firstly, on the back of the cost development, is there any part of the group that you would like to particularly highlight in terms of further potential to improve operational leverage? Or is it more steady state going forward? Secondly, on the competitive environment, several of your peers have been, in recent months, alluding to an intensified competitive pressure, especially among large corporate lending in Sweden. Are you seeing this as well? Thanks. I think I just commented on the cost, actually, saying that it's always low in the beginning of the year. We will manage that we are seeking to coming in below 22.5. That's what we have communicated. We will not change that. Again, it gives us room for maneuver, which we have wanted all the time. I think also when the dynamics in the bank is when we start to do the focusing on cost and efficiency, we can also see, of course, in the dynamics that the bank today works differently and maybe slightly better than we hoped for. When it comes to the competitive landscape, it's been there for a while. It depends on what you look at. I think, again, merchant banking, like you said, you could see there's spots of very fierce competition here and there, and it's been the same for quite a while. Of course, it's a very competitive environment. We see a few weak banks that are back on the arena. On the other hand, you have to have a broad spectrum of really good products now to penetrate the clients because the products are much more abundant today. You have to make sure that you can really offer the whole spectrum of really good products. I think we can. I think margins are fairly stable. You could see that the competitive landscape is more pockets or spots of more fears. Actually, the margins are stable. Excellent. Thank you. Your next question comes from the line of Nick Davey. Please ask your question. Yes. Good afternoon, everyone. Nick Davey from UBS. Three questions if I can, please. The first one on your ROE target and the comments you made, Annika, on no revolutionary business plans here and sticking to the plan that you laid out at the beginning of last year. At the time when you aspired to 15% ROE, it was on, I guess, the expectation of a 15% target core Tier 1. What kind of regulatory scenario would you need to have to rethink the business plan, have to redouble efforts on costs to reach a 15% core Tier 1? Have you thought about how you would respond if the target were to move up to 16 or 17 or anything worse than that? Just give us an idea, please, of what kind of preparations you're making for the regulatory announcements to come in the next few months. The second question, third would be on net interest income. Firstly, thanks for clarifying some of the trends on the customer net interest margin. If you could maybe just make a few comments on the non-customer margins. There's been a bit of a tick down in the yields you get on your interest-bearing securities. Just wanted to get a sense of whether or not you felt that was a risk in coming quarters with long rates in Sweden on the decline. Just wanted to get a sense if there's any more reinvestment risk on the liquidity portfolio side. Secondarily, on the net stable funding ratio, just trying to get a sense of whether or not you feel there's any intensifying pressure there after some comments from your head of the central bank around NSFR and potentially the threshold in Sweden coming in higher than 100%. Just noticing some of the work you've done on the fund transfer pricing model, I guess, incentivizes deposit gathering, and you have been obviously active in the long-term issuance. Just if you could give us a flavor as to whether or not you're any more intensely focused on that metric than you were in the past. Thanks. Okay, Nick. I can start with the first one, and I'll leave over to Jan Erik to comment a bit more on the capital issues. Return on equity. Yes, I know. A year ago, everybody felt that 15% was very high, and now we've moved a little bit ahead of plan, actually. I think it's too early to revise the plan. We will see now what the final expression comes out with. I think at the moment, we will stick to the plan and say that we still have an ambition to reach 15%, despite that we probably will need to tie more capital than 13%. It might take a little bit longer time, the ambitions are high here, and we will have to wait until late summer, I think, to see if we need to revise it or not. We still want to keep the target of 15%. Nick, on the non-customer NII margins, I think we talked about what we've done on the funding side. The fact that we've brought up the funding a bit in Q1 will have some falling off in Q2 and Q3, which will help. In this quarter, you saw also how we adjusted some of the IFTPs between treasury and the divisions. We did that to harmonize the behavioral maturities rather than contractual maturities to incentivize the divisions to be steered more directly into the new NSFR and LCR definitions that have been forthcoming. We don't expect the Swedish finish of the measure itself, and we don't expect a different definition than the Basel definition either. As you know, there was a consultation paper sent out on the NSFR definition in January. still out there. I expect by the end of this year it'll be finalized. I think that latest definition meant that we were brought closer to full compliance on the NSFR. We still have a gap to fill. We believe that during the course of business plan over the next two, three years, we will be able to do so, without material effects to the or pressure on the ability to fulfill the financial targets. Very clear. Thank you. Your next question comes from the line of Jeff Dawes. Please ask your question. Hi, it's Jeff Dawes here from SocGen. I've got two areas of focus actually. Similar questions on both. Two areas which are probably quite important for fulfilling your overall business plan. First of all is SMEs. Second of all is the German corporate banking relationships. I think in both of those areas, it's probably fair to say that's where a lot of the incremental business and incremental new customers have come on board. I wanted to ask about both of those. First of all, how you get in those incremental customers to come on. I think in particular, you highlight some of the new German corporate banking relationships. Second of all, what is the incremental profitability or new business return on equity that you're getting from those relationships? Third of all, really, what kind of revenue growth can you expect in those two areas going forward in order to get your business plan? A few questions on those two areas, please. Thank you. Okay. I can answer that. Also saying that, don't forget that we have also increased this 400 large corporates, of which half of them in the Nordics already. It's not only mid corporates in Sweden and Mittelstand, it's actually a lot of large corporates also in the Nordic arena that has come in the last couple of years. I think, the starting point is usually a loan or maybe a payment on cash management or something that you win, and then you have to start to cross-sell. I think what we have seen definitely in Germany, what has been a really good thing to do is to work also with the whole international network. A lot of these large Mittelstands, for example, they are only in Germany, and then they need a lot of help, for example, in Asia. We can see that quite a few of these, and they are more traditionally organized, the Swedish large corporates who are maybe 25 years ago with separate treasury centers needing a lot of support out in the network. It's been quite successful and quite easy to cross-sell on quite a few of these Mittelstand companies. But while we still can see as an average, we have too few product clusters on these ones. We are working really hard in making sure that we can sell more. On a Swedish large corporate that we've had for 100 years in this bank, we have on average, close to eight product clusters. And on many of these ones, we only have less than two. The starting point is to get it to three, and then to four or five, et cetera. You have a really long-term profitable client of the bank. When it comes to the mid corporate segment and the traditional large corporates, it's really about offering the whole of the Nordic and also all the ancillary business. I think for SEB being so strong on capital markets, and I highlighted today at the press conference we've been working actually in the dark for quite a few years now, for example, establishing green bonds, where we've had an international, really good perception, but it hasn't really worked very well in the Nordics. The first one out last year was actually Gothenburg's municipality, and now we had SCA and Skanska coming out. That's also a new product that we can see a lot of interest, for example, also in Germany on capital markets side. We have recruited a new team also on capital markets in Germany. I hope we will see more of that. Those are a few things that we do. In terms of profitability or maybe to phrase it another way, is it fair to say that the initial starting relationship ROE is quite low for these, and that you need the cross-sell to bring the ROE gradually into the double-digit and upper double-digit levels or upper teens levels? That's probably a neat way to describe it. Of course, if you enter with a relationship loan, it's definitely under order. It depends on what kind of starting product you have. From the other hand, we have at least 15% return on ambition on the German part as well. The clients should, of course, accordingly be up on that more than double-digit level as well. Great. That's clear. Thank you very much. Thank you. Your next question comes from the line of Ricardo Rivera. Please ask your question. Good afternoon to everybody. I have a couple of questions. First of all, on the regulatory side. Aside the countercyclical buffer, what is still not clear from a regulatory standpoint regarding just the capital? Is corporate risk weights, what else? The second question I have is on corporate risk weights, I see that over the past 15 months, since December 2012, corporate risk weights are down by three percentage points. Now is well below 40%. In the meantime, we saw the Riksbank cutting rates. We're talking about deflation in Sweden. What is driving down the corporate risk weights? If I assume that the German operations and the Baltics operations have a corporate risk weight that is above the consolidated one of less than 38%, is it possible to have an idea of the corporate risk weight of Swedish operations? Thanks. Okay. What is not clear on the regulatory front? Well, quite a lot. I think if I generalize a bit and don't go into too much detail, I think the first thing is to get the Swedish regulator to, hopefully now in May, come out with their consultative paper on the Swedish implementation of CRD IV. The main components there are, just as you say, the countercyclical buffer, the size of that, how is it going to work, when is it going to be turned on. The other question I think that's out there is, are they or are they not going to use a similar model to what has been used in the U.K.? Will they use a Pillar 2 add-on, which is perhaps going to be made part of Pillar 1 and to hit the common equity Pillar 1 ratios in a similar fashion as in the U.K. If so, what part of Pillar 2? We have said earlier, we think things like mortgage risk weights probably should be included. They are a targeted medicine to deal with some of the issues that Sweden is facing around household indebtedness and that sort of thing. There may be other component parts of Pillar 2 that they may want to include as well. Those, I think, are the main components in the near future. Behind that, I think you can see a development in continental Europe where risk weights and the individually rating-based risk weighting models are questioned. A move, just as you say, towards standardized risk weights overall. It's happening simultaneously as CRD IV is being implemented. I think there's a first stage in the near future about Pillar 2 and countercyclical buffers, and there's potentially a later stage, which is risk weight harmonization. That's going to be later, it's going to be much more difficult, and it's going to take time. I think those are the main two blocks really of what's going on. On the corporate risk weights and why they are coming down, I think it's just a fact of quality. It reflects that we bring new clients on with excellent asset quality. That's the bulk of the answer to that. Ricardo, when you compare to nine quarters ago, and we had a risk weight on corporates of about 50%, that was before we had the model approval to go to advanced IRB on the corporate side. The development which took us from 51 to around 40, mid-40s, was due to model approval. After which we have been working very diligently on things like securing risk mitigation, collateral, and of course, as Jan Erik said, doing business with the most stable investment banking or rated sort of investment-grade counterparties in our market. The growth has been on the highest quality assets in a way, and that therefore has reduced the average risk weight. Okay, if I can get back one second to the previous answer. If I understand correctly, you stated that you're taking on board better clients or clients of better quality. My understanding is that the flow is strong enough to move the risk weight of the overall stock. My question is, what is the risk weight of these better clients, if they can move the risk weight on the overall stock, reducing it by kind of 10% in 12 months? Well, I think as we say, it's several effects. I do think that the large component is quality names coming into the book with obviously low risk classes. It also asserts as the fact that the organization is learning to be more capital efficient and to bring in securities and collateral into the bank. Okay. Several facts at the same time. It isn't one effect. Okay. Credit risk mitigation and better quality in general. Yes. Okay. Your next question comes from the line of Sophie Petersen. Please ask your question. Hi, here is Sophie Petersen from JP Morgan. I just had a couple of quite quick questions. One question is around the global transaction banking division in merchant banking. I noticed that the NII was up 40% quarter-on-quarter. Should we expect this to be the new run rate, or does it include any one-off? Similarly, on the other and eliminations, I realize that you have changed the transfer pricing. NII was in the first quarter, SEK 34 million, compared to kind of a run rate around SEK 250 million-SEK 300 million over the past eight quarters before. I was wondering with the transfer pricing, is this SEK 34 million kind of a new run rate or will it bounce back to the SEK 250 million-SEK 300 million mark? Lastly, could you just talk about the Pillar 2 requirements that you expect? You mentioned that potentially the countercyclical buffer and higher mortgage risk rates, what other potential requirements might there be in the Pillar 2 requirement, and how big do you think the Pillar 2 buffer that you need to hold will be? Thank you. Hi, Sophie. If I start on the Pillar 2 and we'll take the other question on IFTP and the volume effect. On Pillar 2, I think all we know is that we suspect, is probably the word. The Swedish regulator is being influenced by the thinking of the U.K. regulator. We suspect that one scenario is that they add a charge for what is now in Pillar 2. One of those things is mortgage risk weights. What else they might be considering in Pillar 2, we'll just have to see. We haven't given disclosure on what is in our Pillar 2 numbers or what component parts that make it up. We won't do that now either. We'll let the regulators start with their communication, and then we will relate to that. What about, does it include any stress buffers, the Pillar 2 requirement, or is it purely just mortgage risk rates and then the countercyclical buffer, or are there any other kind of buffers that we should take into consideration? As I say, once the regulator has said what they want to see and what they want to do, we will relate to that. We will have to deal with it in that order. This is soon forthcoming. As far as we know, they will say what they will want to do in May. Really, up to this point, they have said very little. We have nothing to relate to. Okay, thanks. Okay, regarding your NII question, it is true that transaction banking has benefited from the Internal Funds Transfer Pricing change that we did because the behavior in maturities are different than the contractual ones on the short-term money that we are seeing in that business. A large part of the explanation to why they are increasing then has to do with the change of IFTPs. They also have had higher volumes. For example, Annika said that the assets under custody for the first time exceeded SEK 6 trillion, of course, that has an impact in the way we are doing more business throughput through the GTS area transaction banking now than we did before. On the other eliminations, you have, of course, the negative part of that. When the treasury central function pays more, of course they will have less NII left to deal with. It's not only driven by the IFTPs in other eliminations. There's also 3 other factors, Jan Erik has mentioned a few. One is that we have pre-funded maturities in Q2 and Q3. That has a cost. We have increased the liquidity reserves by SEK 100 billion. That has a cost. Short-term rates came down, and likely to continue to come down if the central bank lowers the rates. I would say that the pre-funding should disappear because we will have maturities that will correct that situation. The short-term rates are likely to be lower than they were in the first quarter. The liquidity reserve is, we'll see when we get to the end of the next quarter where we are on that one. Some of the effects are more permanent and some others are less permanent. Great. That was very helpful. Thank you. Your next question comes from the line of Ronit Ghose. Please ask your question. Hi, good afternoon. It's Ronit from Citi. I had two questions. One is a question about productivity and cost, and one is a factual question on the balance sheet. The first question is, when I look at the staff numbers, if I look at just continuing operations, you had a further reduction, albeit a small one. Year-on-year, you're down about 300, 320 odd people. If I look at previous years, you seem to have had a faster rate of decline. Just wondering if we're looking at continuing operations, whether it's the business lines or the business support, are you seeing a sort of shallowing out of further product headcount reduction gains that you can foresee in the next year or two? Is it now really more about trying to get non-staff costs down, or is there more you can still do on the staff headcount numbers? If so, are there any particular business areas that stand out in that front? The second question, just a factual one, looking at the balance sheet numbers. There's a big jump in the financial assets at fair value, and I know that can be volatile, but just wondering, is this all derivatives, or is there anything else going on? It goes from SEK 776 billion to SEK 824 billion, SEK 825 billion. Similarly, the jump in deposits from corporate clients up about SEK 50 billion or 10% quarter-over-quarter. Is that just seasonality like previously you've seen in Q1 last year? Or is there anything else going on there, please? Hi. I can take the first one and say that we have no targets on FTEs. We only have the cost ceiling. I think it will probably continue a bit, but it's not a target in itself. We have no plans for reduction on FTEs. It's more like we outsource and when people leave or quit or retire, we might not Replace them, et cetera. At the same time, we have trainee programs, we have junior programs. We bring in a lot of people at the bank at the same time. IT has been recruiting a bit. There's some ups and downs. Nevertheless, I will probably foresee that we will slowly but steadily, of course, be fewer in total because we manage it carefully. There is no target on FTEs. It becomes what it becomes. The most important thing is the cost target. Regarding your second question on the development of the fair value assets. There's a split in the fact book on page 14 that showed that the derivatives play a part in that, the major part to do with the increase has to do with our increased holdings of bonds and so on, which is one way where we place our liquidity, of course. It has more to do with the fact that we are holding higher liquidity resources now than we did before, and that we have seen a little bit more of the trading activity or activity in the trading floor as well. The corporate deposits? The corporate deposits are increasing because you may remember that we actively took measures to try to reduce it due to the fact that we sort of wanted to limit the exposure at year-end and so on. What we see now is the return of the interest from, in particular, U.S. investors that are placing that with us, short-term money and so on. It's more to see as part of almost like a CD/CP way of funding ourselves and so on. Asset managers in the U.S. Okay, thanks. Your next question comes from the line of Matthew Clark. Please ask your question. Hi, good afternoon. I just wanted to check what your dividend accrual practice was within the 15.7% Basel III Tier 1 ratio. Are you accruing at the prior year rates divided by four, or on an assumed payout ratio? What assumptions have you made? Thanks. Hi. No, that has actually changed. We have to get approval from excuse me. We have to get an approval from the Swedish regulator today to include profits into the quarterly reports. The auditors need to certify it as well. Another change is that from now on, we deduct the same payout ratio, whereas in the past, we deduct the same dividend per share. That's no indication of future practices, but it's just looking back at the past year-end. Just to clarify, the 15.7%, that does include the first quarter profits retained earnings? Yes. It does? It does. It also deducts a payout ratio, which is 59%, based on what it was last year. Great. That's very clear. Thanks very much. Your next question comes from the line of Jacob Kruse. Please ask your question. Hi, it's Jacob from Autonomous. Just two questions. Firstly, I was wondering if you could comment at all on the AQR or the stress test. Did you see any potential changes to your NPLs that you would have to have under the asset quality review? Secondly, if I look at your rankings in the investment banking space, syndicated lending, M&A, et cetera, you're typically number two or three in the Nordic region. Is that the position you are comfortable with, or do you think that you're lacking scale in some of the non-Swedish Nordic countries? Thank you. I think if I perhaps start on the AQR, I think it's much too early to say anything about what we will see as an outcome of that, other than that generally we feel comfortable with our asset quality, and I think that will be reflected in the AQR outcome as well. Once that whole exercise is finalized, we'll be happy to share the findings with that. That's too early today. I think it carries on what service you look at, because, of course, we follow carefully the Prospera that we found very valid on being the most liked bank to do business with and the most recommended bank. There we are number one, a clear number one when it comes to being the relationship bank as a corporate bank. When it comes to individual, like foreign exchange, we are clear number one. When it comes to capital markets, when it comes to issuance of bonds in krona, we're number one. When it comes to EUR, we might be number two. When it comes to corporate bonds, it depends on if you include municipalities or not municipalities, et cetera. I think I would dare to say that we are top-notch on most of these. Of course, we have a clear ambition of staying number one. When it comes to size-wise, we could never compete on that because there is a Nordic bank who is already size-wise, but much more universal bank than a corporate bank. Of course, we try hard make sure that we should be pinpointed on number one on all these measures. Sometimes it can be hard, but of being the largest one. I don't think that it's a problem not being biggest. It's really being on the top-notch where you offer. There we have a clear ambition of being number one in the offerings that we have. I'm just looking at the data you gave in the fact book on investment banking ranks. I guess. It can depend on exactly if there is a specific large deal that have come through, if there is something else that has just recently been done and things like that. It's not always that we could be top league on everything, but I think it's also about the perceived position and when it comes to soft issues, who do you perceive as being the corporate bank, and who do you do business with? Of course, from quarter to quarter, there can be international banks that made a huge deal in Sweden between a U.S. corporate that has bought something domestically that we might not have been involved with, and things like that. You don't feel like- I don't find the size a problem. I would rather say that we have a very clear focus on attaining a number one position when it comes to investment banking, corporate banking, foreign exchange, you name it, in this region. You think that footprint is solid enough also in Norway, Denmark, and Finland? Yes, I think we've seen that, I think here the size is an issue in the way that we only focus on the largest corporates. Of course, it depends on how many you author. For foreign exchange, for example, we only trade with the largest corporates. You can still have a I think we're number 2 in Norway, and that probably is difficult to achieve a number 1 position because the breadth is not big enough. I think going deeper, in Norway, for example, or Denmark, whatever, then you start to need a branch network, and then you start to go into mid corporates, and that is not where we are. We want to continuously working with much more of the large corporate merchant banking approach we have in the Nordics. I don't know, in five or 10 years, if we're done with that, if that would render any other discussions. As far as it is now and for the coming years, we have a lot to do. From that perspective, we might end as number 2, but then it might be a reason of being number 2 in a league table in Norway, for example. Okay. Thank you. Thank you. Your next question comes from the line of Chintan Joshi. Please ask your question. Hi, good afternoon. I've got three quick ones. First one on funding and others in the NII line. Obviously, the weakness was because of that. It tends to pick up in Q2 again. How should we think about this line for the coming quarters? That's the first one. Second one is on mortgage margins. At Q4, you said that we should expect a couple of basis points a quarter kind of improvement to 2014. Is that still the case? The third question is if I look at your Tier 1 ratio and the common equity Tier 1 ratio, there's a difference of about 1.9%. How should we think about this going forward? Do you think given that Sweden wants a lot of high-quality capital, that it may not actually ask for the 1.5% minimum, or does this go down to 1.5% over time? Thank you. I can comment. I'll leave the balance sheet questions to Jan Erik. I comment on the mortgages. It used to be one basis point a month. I think we're saying now it's between one and two a quarter. Of course, we're starting to see it slowing down, but still continuously, and I think Mats Torstendahl and all around SEB was quite confident today that he thinks that that will continue. I think after the summer, when we know that the risk ratings will change on the mortgages, of course, the whole pricing will change. If that would render the possibility to take even more margins, I don't know. At the moment, you can calculate one to two basis points a quarter rather than one a month. Perhaps if I take the capital question. I think you're right, Chintan, that the Swedish authorities certainly are keen on high-quality capital. Again, I'll refrain from speculating on what they will say now when they come out in May. It's now literally two to three weeks before they will say something, I think. Let's wait for that. Do you expect them to say anything on AT1 at all in this? Because the U.K. has been reasonably silent on the topic. I was just wondering if Sweden will say something in the May paper or just leave it hanging. I wish I knew, Chintan. I'm hoping they will say something. Finally, the funding and others line in the NII line item? Chintan, I think I'll leave the modeling to you. What we can see is that so far we've been able to offset lower short-term rates by increased margins on customer lending, and that the NIM has been stable over the last nine, 10, 11 quarters, more or less. We think therefore, that if we continue to have more customers and therefore increased lending from that, we can continue to grow the overall NII. Whether that comes through in customer or non-customer-driven income is something you will have to think about. We believe that we can continue to show good development on the NII overall, and we think we are able to reprice funding costs, et cetera, and increase capital requirements on the lending side. Rates cannot really go much, much lower from where they are today because they are so close to zero everywhere we look. We'll see from there. Okay, thank you. Your last question comes from the line of Adrian Cighi. Please ask your question. Good afternoon. This is Adrian Cighi from RBC. Thank you for taking my question. One quick follow-up question on capital. In the quarter, three of the SEK 10 billion in the risk exposure decrease came from process changes. Can you provide any additional color on what these are? Do you expect any further changes or further declines in risk-weighted assets from such process changes? Thank you. That, Adrian, has to do with the fact that we are Once you get an approval, assume that would give you a sort of SEK 10 billion relief, you're not going to get SEK 10 billion immediately because you need to roll it out into the organization as well. That takes time. It has to do with the fact that we are using our in our existing approvals or continuing to roll them out into different parts of the organization, which creates some efficiencies, you can see part of that on that line. Thank you. There are no further questions registered. Please continue. Thank you. Thank you for all your good questions. We therefore hope that the result came through as we are very transparent. It shows the stability of SEB as such. We'll be in London next week and hope to see many of you there. With that, please have a very nice weekend. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.