Earnings Call: Q2 2013

Jul 15, 2013

Thank you for standing by, and welcome to the SEB Second Quarter 2013 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. I would now like to hand the conference over to your speaker today, Annika Falkingren, CEO of SEB. Please go ahead. Welcome to our results presentation for the Q2 of 20 13. The first half of the year has been solid and shows that our investments in our dual customer base are having positive effects. In addition, customer activity has increased in the spring and early summer, both in comparison to the Q1 and also in comparison to the first half year of 2012. So the result is best described, I think, a little bit better across the board. As a result, our operating profit for the first half year is SEK 8,500,000,000 or 13% higher than in the same period of last year. On page 2, there are 3 things I'd like to highlight in today's report. Merchant Banking has had strong second quarter and increased operating profit by 35% from the previous quarter. We are growing with existing new customers in the Nordics and Germany through our service offering. And secondly, we continue to increase our corporate franchise also in retail banking Sweden continue to attract new customers in the private segment. And finally, we maintain our strong asset quality and continue to build capital. Moving on to the financial results on slide 3. We today report a 2nd quarter operating profit of SEK4.8 billion, 29% higher than the previous quarter and 23% higher than the same period last year. Operating income in the Q2 increased 11% to SEK 10,600,000,000. It includes a one off positive effect of SEK 201,000,000 from the repurchase of our Tier 2 subordinated debt. Otherwise, it's a very clean quarter. We've found a more effective way of working and our costs are stable in pace with our stated cost cap of coming in below SEK 22 point 5,000,000,000 for the full year 2013. Credit losses continue at a low level, almost SEK300 1,000,000 or 9 basis points in the quarter. Our corporate customers continue to have strong balance sheet And on the private side, we do not see any signs of worsening. I'll now go through some of the lines on the P and L starting with the net interest income on page 4. Net interest income increased 5% during the first half of the year. Customer driven income is the main driver behind this increase. Lending volumes have increased 6% and deposit volumes 3% compared to the first half of twenty twelve. Deposit margins are lower due to the decreasing short term rates, which as of the end of June were almost 1 percentage point lower than a year ago. Higher lending margins partially compensate for this. Our financing costs have successively decreased and during the year we have replaced more expensive funding, which has a positive effect on our net interest income. We have also lower financing costs than in the Q1 when we raised funds to refinance debt, which matured in the second quarter. During the first half of the year, we have issued SEK 58,000,000,000 versus SEK 41,000,000,000 maturities, including also our first issuance in the U. S. Market. On page 5, net commission income unusually weak in the Q1 due to the low customer activity has increased during the second quarter. On Page 6, you see that this increase is due to higher customer activity. Some seasonal effects in the Q2 related to the dividend period and card fees, but even a higher pace in the corporate debt market where we continue execution of our business initiative. We are a stronger bank today with a broader customer base. The customers do more transactions with us and that is also a vast event now coming in on the income line. On slide 7, we see that net financial income from our divisions continues to show the same stability we have seen during the last years. Our business is driven by customer flows, which this quarter contributed with SEK 1,200,000,000 on our top line. This is at the same level as in previous years and very stable. In treasury, we have liquidity portfolio that is mark to market on a daily basis. This shows some fluctuations, especially in a quarter like this one with concerns in Japan and also rising long term interest rate. Turning now to operating leverage on slide 8. As we have said before, we have more customers, we have an increased breadth in customer relations together with cost control have marked improvement in our profitability. The Q1 of this year was somewhat weak and income slightly down. The Q2 was much better, which convinces me that the increased customer business drives stable growth over time. Then looking at the divisions on Page 9, Merchant Banking had a very good quarter and increased operating profit to €2,200,000,000 in the quarter. The result for the first half is then more or less unchanged versus the first half of last year. Retail Banking continues to attract more customers both on the private and corporate segments and has a good momentum and has continued also worked with efficiency, which is also apparent in retail banking's costincome ratio 0.49 in the quarter. Half year operating income increased to 27%. Wealth Management has much improved result this half year and increased operating profit 40%. Higher average assets under management and performance fees together with an 8% decrease in costs explain the increase. Life's operating income had a negative effect in the Q2 due to the increase in the long interest rates, which impacted the traditional portfolios. Premium income was up 13%. In the Baltic division, we saw an increase in lending volumes in local currencies, 5% in Estonia, 5% in Latvia, but down 1% in Lithuania. But the operating profit for the first half of the year decreased, mainly driven by increased pressures on deposit margins. Credit losses were $176,000,000 for the 1st 6 months, which is equivalent to a stable credit loss level of approximately 35 basis points. We are clear about our growth initiatives and I want to take you through some parts of Merchant Banking's growth plan as well as Retail Banking's development as we promised after Q1. But firstly, I'd like to show you SEB's growing customer franchise on Slide 10. We continue to invest to grow our customer franchise. The previous 3 years business plans focused on attracting new customers and our new plan will continue on that path, we also focus on increasing our business with our new existing customers. And I'm going to go through this more in detail. Merchant banking has taken in around 50 new large corporate institutional customers in the Nordics and Germany this year. We are the corporate bank in Sweden regardless of our customer size. Retail banking has attracted 2,700 SMEs just during this quarter and almost 6,000 during the 1st 6 months of the year. In the same manner, we are increasing the number of full service customers in the Swedish private segment, 5,900 customers in the 2nd quarter and 9,700 so far this year. We also see a very positive development in private banking with 5.50 new customers and SEK 16,000,000,000 of assets under management year to date. Turning then to margin banking franchise growth on Slide 11. On the left hand side, you can see how the almost 300 new customers we have taken in during the last 3 years have contributed to Merchant Banking's income growth. The increased contribution to Merchant Banking's income and future potential is closely related to the product penetration on the right hand side of the slide. We have said many times before that custom profitability correlates with a number of product clusters a customer uses. A new customer normally starts with 1, 2 or maybe 3 products increasing to at least 5 plus after 4 to 5 years. The Swedish large corporates have an average of 7 product clusters. On the right hand side, we can see that the customers we added in 20 10 had reached 4 product clusters by 2012. The work on attracting new customers continues and as the first half of this year, merchant banking had added another 52 customers to its roster. On Page 12, you see our business in Germany. Exactly 3 years ago, we announced the sale of our retail bank in Germany. At the time, we also said that we wanted to grow the merchant banking business and decrease the size of the support functions back office to match our new ambition. We knew also that this was a challenging goal. We set the financial targets for the remaining business. The cost income ratio would have to decrease to 0.6% and the return on capital would have to come up to at least 10%. We see today that we have delivered on those targets. Costs have decreased after successful efficiency project and the operating profit has increased from €100,000,000 to €140,000,000 with Merchant Banking's share increasing. Continuing with our customer business in Germany on page 13. Since 2010, we have attracted 155 new German customers in line with our plan. We offer the whole palette of services and products such as foreign exchange, cash management, trade finance, investment advice to name a few. We have seen a good development in the business, which is evident in some of the transactions we have closed during the last year, as shown on the slide. Going forward, we will continue to attract customers already identified in 2010, while at the same time growing the business with our existing customers. Our profitability in the German business is also to be in line with merchant banking's overall profitability targets today. And looking at the snapshot of our strong balance sheet on slide 14, you can see that we are moving in the right direction in all dimensions. NPLs are decreasing. The loss ratio is stable at 8 basis points. We have some 25% of the balance sheet in liquidity reserves and we're continuing to build capital. Before I finish on page 15, let me say a few words on the key financial measurements. Our common equity Tier 1 ratio is now 14 point 2% under Basel III fully implemented. We have also improved our return on equity, which was 12.5% in the first half of the year. So we are moving in the right direction towards our target. The conclusion on Page 16. The first half of the year was boosted by a strong quarter, but this doesn't mean that we can rest at all on our laurels. This is just the second out of 12 quarters on our new 3 year business plan. We have a very clear direction and we will continue to deliver on this plan. SEB is and will continue to be customers' long term financial partner. And with that, I'd be happy to ask the operator to open up for questions. Thank Your first question comes from the line of Omar Keenan. Please go ahead. Hi, good afternoon. Thanks very much for taking the questions. Just two questions, if I may. Just firstly on net interest income. The funding and other NII contributed €157,000,000 in the quarter, which you discussed is due to cheaper funding cost. But could you potentially give us more color on whether there's any other moving parts? And secondly, if there's any flow through effect into the Q3 that we should be thinking about as Q2 looks to be a strong quarter for Funding and Other? And then just a second question. If I assume the dividend that's currently in consensus and I see fully loaded Basel III common equity Tier 1 getting to 14.7% at the end of the year. Is there any sense of timing as to when we could potentially hear more around sort of managing ourselves to your 13% targets and what the combination of payout set would mean? Okay. Thanks. Hi, Omer, Iann Eirke. On the NII question on Funding and Other, you're right in that we're seeing better funding cost flowing through. Now there's some positive effects in the lending category under our NII because it as you've seen is falling back a little bit as a result of lower interest rates. But in funding and other, the most of that everything else being equal, you I think the everything else being equal, you should see a continuation of that positive trend. It's in a way the same question as asking where interest rates are going to go. But as long as they are low as they are now and the spreads are where they are, we should see that continue. I can also comment on your question regarding building up capital. I mean, we've been very clear that we have a target of 13%. We can still see that there are a lot of regulations surfing around. We have in Sweden, for example, the risk weighted mortgages, where the finance inspection have had put in a floor of 15% in Pillar 2 that they want to move to Pillar 1. That will have a small effect on us, but still so. So I think we will need to work with this during this year. We will see if we can have any clarification going forward. But the ambition is to have 13%. That's what we have told the market. But I guess it will take some time to kind of work with it. Okay. That's great. Thank you very much. Your next question comes from the line of Jeff Dorris. Please go ahead. Hi. Good afternoon, everyone. Jeff Dawes here from SocGen. Two questions for myself. First of all, on the funding cost that you just spoke about. Can you give us an idea of how you're going to balance covered versus senior bond issuance going forward? I noticed that the bulk of the refinancing need is on covered bonds. I just want to see if you want to tweak that mix given all the regulations surrounding bail in debt etcetera. 2nd of all on interest rates and the long rate outlook, you mentioned in the Life business that there's a negative gearing to higher on your revenue line this quarter. Can you just talk a bit more broadly about the business or exposure to the long rates increasing both in the Life Insurance business and more widely across the business and whether are there any hedges in there against the revenue loss in the life business? Those are the two questions. Thank you very much. Hi, Jeff. Well, on the funding cost, I think the mix on covered in senior, we've taken the view all along that since 2,008, 2009 really that we've been fairly opportunistic and we wanted to have a good mix. We've never put our bets on only covered or only senior. We wanted to maintain a good to go is far from clear. I think the Swedish authorities have a view which is shared by other Europeans I suppose in that bail in tool is fine as long as it's institution specific. If it tends to be a system wide problem going on somewhere then you'll have contagion effects through the bail in instruments. So I think we'll see where Swedish legislation goes on that before we start to factor that in too much. Yes. Okay. And then just on your question, hi, this is Ofer. On your question regarding the sensitivity to long term higher interest rates, of course, that it can be either a static answer to that or a more dynamic. And the more static one is of course that we are not really running with any large delta one risks in the group that would be materially impacted by this with the what you saw right now possible exception of what we had right now in the Danish business. But that's also due to certain technical factors in terms of the discount rate not moving in tandem with the asset values in the way that it has been structured since the long term rates have been so low that we have had, for example, some floors to the discount rates and so on that we are using. Otherwise, you shouldn't expect to see a material impact on the earnings side if we get long term rates higher. A more dynamic answer is of course that it depends on why it's increasing since if it's because the business is doing better because the economy is going at a higher gear then that's good for us and we should sort of see higher activity levels and get more earnings and other income lines as such. And then equally, we actually have a little bit of a hedge in terms of the pension situation because when the long term rates get higher, the discount rates will be higher and that help our pension situation where you may remember that we had to take around €8,000,000,000 or so at year end in terms of booking it towards equity. All of that is of course unrealized. And if we get higher long term rates that will actually help the bank. So you could say that the biggest possible positive factor would be on the OCI which would impact equity. And just to while I remember on the life side it's unrealized, so we didn't take any losses as such really. If the values come back long term rates or equity market values, we will get all of that money come back again. Great. That's really clear. Thank you. So no major gearing to any steepening of the yield curve on the trading or revenue lines? No. Perfect. Thank you. Your next question comes from the line of Nick Davey. Please go ahead. Yes. Good afternoon, everyone. Nick Davey from UBS. Two questions and a follow-up if I can please. The follow-up on capital. There's some reference there to the mortgage risk weight discussion in Sweden and the 50 basis points that you've now started disclosing in this quarter's reports as far as the need for a Pillar 2 requirement. It seems pretty clear that Swedish FSA want that Pillar 2 requirement to be the target the target 13% Basel III core Tier 1. Would this materially change your views about what kind of capital level you need to run with? Whether that should we should start thinking about 13.5% as the new go to number? The second question please on funding. There's some reference in your materials today about a core GAAP, which is a ratio we've not heard about before. So please can you just elaborate a little bit about how you measure that? Because clearly, we're all groping around a bit for an elegant number to measure the banks on. The NSFR, clearly, you've had your issues with in the past. So just if you have a better idea, please give us some color on that one please. Thirdly and finally, euroization of Latvia. If you could maybe just give us some any kind of business impact that that might have come the beginning of next year just thinking about holding your liquidity in euros not lapse, any kind of P and L impact that we should get ready for? Thank you. Hi, Nick. I can start with the quarter of 13%. No, this is no surprise to us. And I think the debate in Sweden is also that the Central Bank has been out already saying that 15% is on the loan side. So we don't even know this started 1st June, if it might be even harsher. The floor might be increased a bit further. It has we have ample of capital to do that. There's no change. So the core Tier 1 of 13% is still there. I think more it's a matter of when and how. But I think we did quite firm that to the extent it is what the long term target for SMB and that's what we should also look for. And then I guess it's much more of a timing issue to see when and what it's a good time to react to it. But it hasn't changed the target at all. Hi Nick, Jan Erik here. In terms of the funding and the core gap, this is something that we thought we'd say a few words on since the Riksbank has been asking the banks to talk a little bit more about the NSFR measure. I think we just want to a couple of things with this disclosure. We just want to make the point that conceptually, we're not against something like an MSFR or long term stable mesh. We think that makes sense. And just to put some something in there to back that statement up, the core GAAP is something that we've been doing since the 1990s and it's reported monthly or quarterly to the management team, to the board committees and to the board. So it's something that we follow very closely. And conceptually NSFR and core GAAP are the same thing. You weigh assets and liabilities based on stability and you perform a relationship within stable funding and stable or and illiquid assets. And the main difference is that calibration really. In core GAAP, we assume that long term also funding is a little bit more stable than what NSFR does. We expect outflows of corporate deposits to be lower than NSFR. And we have as you have heard us say in previous meetings, we have long series of evidence, actual history backing that up. We have seen corporate deposits be much more stable than NSFR measure assumes. So we don't like NSFR much for that reason. Another difference is that we think deposits from financial institutions to be much more sticky than the NSFR measure does. These are a few examples of the difference between the two measures. And we think obviously our measure is more suited to our own history and to our own book than the general NSFR measure does. And we are quite opposed to the introduction of NSFR as something which is a done deal. It's far from it. It's internationally very much debated and it's a few years down the road. So I think we will, as I say again, not to argue against it conceptually, but as always, the devil is in the detail. In terms of euro and Latvia, Latvia is now being welcomed into the euro community, then that is going to be positive for us. We've alluded to this before. We have been saying that when this happens, we can start to use the deposit base in Latvia in a better way in the funding scheme of the bank. And that's been behind what Martin Johansen, when he managed the Baltics back in the day, what he called the home banking concept. That was much about building a holistic relationship with the customers, including the deposit base, even though it was based in lots at the time and couldn't be used for anything really other than buying bonds locally. But now when the switch comes, it fits into the funding base in a much better way. And any kind of guidance at all about how we should think about the financial impact of that, please? I think we'll have to come back to that, Nick. We'll see we'll pick it off when it happens next year and we will guide you through that in coming quarters when we get closer to that. Okay. Clear. And if I could ask one final follow-up question on the capital side, just to be absolutely clear. So the 13% is obviously being reiterated here. I mean, are you happy running with, let's say, a 50 basis points buffer over what now seems to be the regulatory target? I mean, you said already actually the 50 bps is probably the minimum you need to hold for the mortgage risk weights 12 as a core equity requirement. It seems like 12.5 is the bare minimum that you'll need from a regulatory perspective and you're happy to run with just a 50 bps buffer above that. Is that fair? Well, again, I don't think that makes, I guess, any that's not new or different to what we've talked about before. I mean, you can never run at 12.0 in any case. So I think a little bit of a buffer is always needed. We've tried to actually support the notion that this is pillar 1 requirement. It might well be and then it becomes more transparent and clear. Very clear. Okay. Thank you. Your next question comes from the line of Chintan Joshi. Please ask your question. Hi, good afternoon. Two questions for me, please. I see in your fact book disclosures that you've got about $32,500,000,000 of senior unsecured coming up for kind of refinancing over the next year or so. Just wanted to check how much of this is kind of cheap pre crisis levels and how much of it is the more expensive bid that you did between late 2008 and early 2010. It's kind of a bigger number than you had in the last 6 quarters. So might have some implication for NII as we go through the next 4 quarters. And then the second question was Slide 11 in your presentation is quite interesting. It shows that you've got new customers that are now 7% of total kind of customer income. But if I check kind of your rolling 4 quarter revenue, even excluding markets, I don't really get a sense that revenues have increased by anywhere close to that number. So clearly, this is still potential to grow in the future, but we're not yet seeing that in the revenue line at least in Merchant Banking. So what's going on there? How should we read that slide and the effect of that going into future revenue? Thanks. Hi, Chintan. On your first question on the fact book and the funding we have maturing and so on, I think we have we haven't really given any guidance to how much is falling through, which was raised as expensive old debt and what is coming through as less expensive debt that needs to be refinanced. What we have said is that we have been in a situation where we for the last years have seen substantially lower funding costs in our senior as well as in our covered funding costs, where spreads are today much lower than they were a year ago, a year and a half ago and so on. So it means that we also get the benefit on the relatively newly issued senior or long term debt that gets new refinanced now. So it's not as important to see exactly whether we have any large numbers of volumes coming through which is all debt as such. We have a trend which is that we can replace maturing debt at cheaper cost and that the credit markets have seen our credit profile improve over a substantial period of time. And that's also why we highlight our strong balance sheet on that. So I won't give you any guidance to how much that would impact our NII. But of course, as we have said in the report, it helps and supports the funding in other part of the group. And not only that, but also the divisions parts to get cheaper marginal cost of funding. And you can see that, for example, in merchant banking now in this quarter. On your second comment on the page 11, where we show how much income we generate on these new clients, one should first of all remember that 2,009 which is the starting point was a relatively strong year in terms of income in Merchant Banking because we had at the beginning of the year some very high profit in our markets business and so on. So that's why we have been in a situation where we due to the fact that we have attracted new clients have seen a relatively stable income merchant banking since 2019. I mean, you should read it as hadn't we done that, of course, we would have seen the lower income base in merchant banking. And anything else equally would have been 7% lower than what it is right now hadn't we attracted these clients. So it's been important for us to grow the base, the number of customers as well as then using more and more products with these clients. Then what Magnus Carlsen, our Head of the Merchant Division said in Stockholm today this morning was of course that we may not fully realize the potential of all of the clients we brought in. And therefore, to talk about the normalized income scenario for emerging is a little bit difficult since we are continuing to attract new clients. And we also see that once there is a little bit more activity, we have 15%, 20% more clients that are doing that activity and therefore that helps the income on a relatively broad basis. So you can one way then to look at it is that it compensates for what we saw as otherwise would have been probably falling income in merchant. It compensates for this very low loan demand we have had these last few years where the balance sheet of the corporates are so strong that it may not need more capital than or more funding than just for the working capital situation. They haven't used that for any acquisitions and they haven't used that for any CapEx. And in more normal terms, you would expect companies to also venture into those activities and that would support the lending part of it. And another part is, of course, that the idea is that we will get you probably lead with some lending and some other products and then you get more and more products that are funding and capital light into the equation, which is why we will get into the net fee and commission income line, the trading income line rather than seeing that on the net interest income side. So those are some of the answers to why you may not fully recognize that in terms of the overall merchant development the last few years. Understood. Thank you. Your next question comes from the line of Ronit Gaffi. Please ask your question. Hi. I had a question regarding costs, particularly the background to costs, which are quite good in the quarter. Headcount reductions over the last year have been quite significant. I think your group numbers are down about 5%. I just wondered if you could give us any forward guidance as to whether you expect this trend of headcount reduction to continue, A, and B, if the kind of dispersion of the headcount reduction, about 8% in merchant bank, 6% in retail bank, that kind of dispersion continues? Or do we move into a different phase now where instead of a lot of the headcount reduction being sort of shifting from the business areas into the groups into those sort of business support functions, it's going to be a new way of cutting costs? And also on the sort of related point on the other expenses, you've over the last year, year and a half seen significant reductions in areas such as data costs. And going forward, are there specific areas where you can see Identify today quite material headcount sorry, non headcount reduction driven expense savings? Thanks. Hi, Ron. I think actually that we don't really focus on number of FTEs anymore from that kind of it ends up depending on the different cost and what we're doing. So it's a kind of constant pressure on efficiency. We do a lot of outsourcing internally. That of course means that number of STs, for example, in the Baltics have increased somewhat because we have the operational sensors there. So I think it differs a bit, but I guess the easy answer is to say, yes, we're going to be fewer in the future. I definitely think so. On the other hand, I guess it has stabilized a bit. But I think again, we don't really have a target for a number of FTEs. But of course, offshoring is something we have done much more lately and that of course is also in the figures. Maybe instead of thinking about the question as not as numbers, maybe just in broad themes. I mean, how far through the offshoring, I mean, have you done most of the offshoring? I'm just wondering from here on, what are the areas where you can go to save expenses on or at least give us positive operating leverage on? No, but I think there is more to do on the offshoring. We just did, for example, the HR system that has been in Sweden for many, many years. And that was quite a big thing that was done and that worked very well. I think the challenge is for everyone in Sweden now that they have to speak English when they ask for a help center. So there are I mean things are moving in the right direction. It takes a little bit of time because there are language issues. But there is definitely more to do. The stock functions have probably have more to do, but we're looking at it HR, more HR, finance has more to do, risk side, it's more to do IT, also audit and operations. I mean, there are many areas that we'll continue to look on offshoring. So I think it's more like we have the cost targets everywhere and then it's up to everyone to kind of solve it the best possible way in working with it. But I guess the number of SEs will slowly but steadily continue to go down. Great. Thanks. If I could just have one quick follow-up question on Germany. I know there's some seasonal factors in there, but the there's still quite a sharp jump quarter on quarter in income. And I know there's been a sort of program in terms of improving the client franchise, new clients, etcetera. But are there any one offs or funnies in that Q2 number? I'm just wondering if that's a straight number? The seasonal issue in Germany in Q2, as we mentioned before is partly we have a securities finance operation also in Germany. And again the dividend season was in Q2. So you see a little bit of the seasonality also in Germany. Great. Thanks. Your next question comes from the line of Riccardo Rovere. Please ask your question. Good afternoon to everybody. Just one question on regulation again. Is there do you think there are any chances that after what happened in Danske and after what the Swedish FSA has decided on and is deciding on the risk weighted mortgages, do you see any possibility that the corporate risk rates could be tack holes in the future? And could you be able to give us the Basel III leverage ratio for the group? Thank you. Yes. Hi. Well, I think the corporate risk weighted base is one that is more alive in Denmark than it is where we are. At some point, I think regulators across the board are going to get through to corporates as well. We have nothing to worry about in that sense. We have been conservative all along and I think we are fine on that basis. I think it's pretty far down the road though before they will get to that. They've got enough to worry about for the time being. In terms of the Basel leverage ratio, we're about 3.8 where we stand now. I think the leverage on that is probably not very high up the agenda in Sweden either. The Swedish regulator is much more in tune with the concept of a risk weighted balance sheet rather than a nominal one. And even though I think at the end of the day they will introduce a leverage ratio obviously and I don't think that it will deviate much from the Basel definition. That remains to be seen. And if I just can follow-up on this. Is leverage ratio a matter of discussion with rating agencies when you meet them? Yes. But more as a matter of normal discussion. I think it's not a particular pressure point in those discussions, but it's been for some time, I think. Ricardo, I think when we had commented up on earlier, we have had the slides on that, but when we've had to look at our capital situation, we have been looking at things like leverage ratios and Basel I numbers and the S and P RAC ratio and the Basel 2 with and without floors and then the Basel 3 numbers. And so it's been a relatively holistic discussion that we all the time have had, not only with the rating agencies, but also we try to present that to the markets. We're not dependent upon only one single measure, feeling that we get limited by that one. Okay. Thank you, Ulf. Thanks. Your next question comes from the line of Christopher Roskist. Please ask your question. Hi. This is Christopher from Barclays. Just two questions, please. You've mentioned a few things today on the call regarding the seasonality of the fee income. And I just wanted to drill down a little bit into the merchant backing fee income, which I mean was significantly up quarter on quarter, but more moderately even still quite strongly year on year. So I wonder just because in the email this morning you also alluded to it was quite a lot of seasonality in there. A lot. So I just wonder if you could give a little bit more color on that in the merchant bank. And also comparing it to the previous quarter, which was much weaker. So is part of the business that you've seen come in in this quarter sort of transactions that you had visibility of in the previous quarter, but never came to fruition and therefore sort of this is more of a catch up on top of that seasonality and that you expect a much lower growth rate going forward? The second question is just on capital. The contribution to your core Tier 1 ratio that you saw from the dividend from the insurance business. If you could just give sort of an indication of if you think that the amount of capital that you now have in the insurance business is the right level, if there's sort of any metric that you're using to ensure that relative to regulatory requirements that would be very helpful. Thank you. Okay. And second comment on Merchant Banking. And I think on Merchant Banking, yes, they had a strong quarter, but all areas of Merchant Banking wasn't particularly strong. We had a weaker quarter for markets. Foreign exchange did not outperform. Global Transaction Services had a tough quarter because interest rates are so low. They are very challenged on deposit margins. So I think overall one could say that merchant is not moving on all cylinders and that's why we probably feel stronger comfortable that merchant banking can continue to perform. I think we were all a little bit unhappy with the Q1 because there was nothing wrong with it with more or less very slow customer activity. And there's been a lot of deals or a lot of these there have been some leases that have materialized during Q2. Many of them have been worked through in Q1, but also in Q4 and Q3 last year. There are some deals that have been going on for a very long time. And at last, the customers decided to execute. And of course, they have more deals in pipeline. If they will materialize in Q3 or Q4, it's hard to see. But on other hand, maybe markets would catch up a bit more or and even cash management might do a little bit better. So I think all in all, we feel comfortable that Multipay can continue to perform. There might be other areas that were not so strong this quarter that could probably perform a little bit better. On the other hand, having said that, Q3 is always a rather weak quarter with seasonality for us because activity is usually down during the summer months. So with that said, I think that's the only caution we have that the overall activity can be slowed during the summer. And then on the capitalization level of the And then on the capitalization level of the life company, yes, we have as we talked about in Q1 with upstream dividends from the life company into the parent in Q2. You can see that actually for the connoisseur on page 41 in the fact book under the embedded value table, there's a line there that says dividend paid to the parent company during the year is €3,575,000,000 as per 30th June. And you can see it in the effects of that in the capital base tables as well. I think the capitalization level in the life company is obviously right at the moment. It's fine with the regulator. And it's the fact that we've upstreamed a little bit more than before has to do with amongst other things that the Solvency II discussion has been prolonged. And I think for a while, we wanted to maintain a little bit more capital locally in the subsidiary rather than upstreaming in anticipation of Solvency II peaking in earlier. Now that's going to take a little bit longer and they can generate their own capital base as they go. Thank you. But so is there sort of an outcome with regards to the Solvency II discussion or in the debt regulatory framework that will allow you to even more capital from insurance to the bank? No, I don't think I think you should see this as a little bit higher than it normally is, but it's a normal practice that we upstream every year. This is just a little bit more to catch up for the fact that Solvency II is pushed out in time. And just finally, so that EUR 16,800,000,000 that you now have, is that driven by sort of the Life business that eventually is runoff or a sustainable or a long term number regardless of the business mix between Unit Link and Life sorry Unit Link and Traditional? Not regardless of. But as long as the mix is similar to what it is today that level should be about right. Obviously, if traditional business if that portion would increase the capital requirement would too because it requires more capital than the unit linked business. But with the current mix that I think will broadly stay then I think it's about right there. Okay. Thanks very much. It's all clear. Your next question comes from the line of Sophie Pettersen. Please ask your question. Yeah. Hi. Here is Sophie Pettenes from JPMorgan. I had one follow-up question on the corporate or merchant banking business. Could you maybe just discuss a little bit how you see the pipeline in the second half? And then my second question was around the lending margins. If I have a look in your fact book on Page 11, it actually looks like your loans to the public, the margins were down from 3.06 to 3.04 in the second quarter. But I think on the press conference and also earlier in this call, you mentioned that the lending margins are up. So I was just wondering if you could talk a little bit about margins at the Republic. And lastly, I was wondering if you could comment on the countercyclical buffer in Sweden and if you think one will be enforced? If so, at what level? And will it be covered by core Equity Tier 1 or additional Tier 1 or Tier 2? Thank you. I think I can start with the pipeline saying that's a difficult question. But I think I mean there is definitely a pipeline if that pipeline will materialize or not. I mean, we debated this last summer and it actually didn't materialize. We had a very, very strong Q2 also last year, but we had a slow autumn. But having said that, I think one important thing is that we seem to sometimes forget is the base of SEB is much bigger today than it used to be. So if you look back 3 years, even though the pipeline might not materialize as much, we have many more clients that is doing something with us. And that's sometimes I think potential suggest that the base of SEB is much bigger today. So even though the pipeline might not materialize, there's a lot of business to be done anyway. But the pipeline is fairly good and we hope that we will see more deals. Magnus Carlsen at the press conference this morning sounded pretty comfortable, I dare say, when he was commenting on that. My view on the countercyclical buffers domestically in Sweden, we have quite an open fight in Sweden between the finance inspection and the Central Bank on who is going to be responsible and deciding on the counter cyclical buffers. Where the Central Bank wants to have more saying regarding this, while all banks but one have agreed on the bankers' association to say that we actually believe that the finance inspections, the supervision should decide on that. So we will see what happens and that discussion continues. I don't know, Jounerik, you look like you want to say something too. Maybe just to add to that. There are different ways of thinking about how to calculate the current cyclical buffer. But as you know, one way that has been suggested is the rolling averages. And I think if we remember peak years in 2,007 and 2,008 and that sort of year, the following years have been much slower. So I think if they were to be implemented now, they would be that on the back of very strong years in the past. And if they have been in motion today, they would be rolling off rather than rolling off. Okay. And Sofia, on your second question regarding the lending margins, I think it's more of an optical question in the graph as such. And the best way to describe it would be to say it's stable. And I would refer you for example to Page 11 in the Factbook where we have the net interest margin analysis. And if one deducts the difference between the or the average deposit rate that we have, which was 128,000,000 and then from the average loan to the public rate loans at 304, you can see that it's basically the same difference between those 2 as it was in the last quarter. So overall, net interest margins are stable for us. So it's stable on the deposit side and it's stable on the lending side. And as we have said earlier, there is some positive effects on the mortgage lending in Sweden and where we have improved our margins. Of course, that means that we can see some margin pressures in other areas like large corporate lending and so on, which is natural given the impact also on the corporate bond markets and so on. So but the role to describe it probably would be to say it's very stable. Okay. Thank you very much. But just one follow-up question on the contrary cyclical buffer. Do you think it will be covered by core Equity Tier 1 or will it be covered by additional Tier 1? And if it is core Equity Tier 1, is your 13% minimum voluntary Equity Tier 1 still holding? Well, 13% is still holding, Sofia. I think it we factored in to the best of our knowledge as much as we can see of this. I think we'll just have to kind of cyclical buffer, as Annika said, it's quite unclear how it's going to be implemented, who is going to calculate it, the exact definition of it. But as I said, we've factored in that it could well be applied, but it would be rolling off as a requirement rather than hitting us harder and harder. And that thought has been baked into the 13% requirement as well. Okay. Thank you. Your next question comes from the line of Johan Ekblom. Please ask your question. Thank you. Maybe if we can just come back to NSSR and I think your message has been clear that you're quite critical of that as a measure. But at the same time, you talked about how you've studied how sticky your corporate deposits are in your financial institutions deposit. If the bail in proposal we had comes through, wouldn't that potentially significantly alter the stickiness of those deposits? And would that dramatically change how you manage your liquidity in any way? Well, it could. I'm not denying that. I think it's something that we will have to follow very closely going forward. And I think you're just I think you're looking at the possibility of corporates behaving differently with their liquidity in a situation where they may be in a different place in the priority order than they were before. And that would perhaps affect how we see that stickiness behave. Absolutely, I agree with that. But I do think that there is we're far from clear on how the bailing tool is going to be applied. And I think the Swedish versions of these things are far from clear at the moment. And I do think that with the bilateral discussion we've got with the regulator, we understand that they too see the vector stickiness that we can demonstrate. And I think the difference between the measures, as it's suggested now, and the history we've got are so far apart that it's just unrealistic even with the sort of changes that may and we have to say may be introduced through the Vale in tool. Okay. Thank you very much. Your next question comes from the line of Alvaro Serrano. Please ask your question. Hi, everyone. Most of my questions have been answered, but just wanted to follow-up on something you touched this morning on the mortgage market. I think most of your competitors were lowering offering their offered rates during May. And I just wanted to hear your views on if you've seen the market dynamics change in any way during the month of June? And what do you think the impact of those price changes could have on the market? I know it's not strictly something that you're doing given you're coming from a different perspective, but just wanted to hear your thoughts on the mortgage market at this point. Thank you. Hi, Alvaro. I think we're still in early days. And with that, I mean that we have so far seen it more as competition in terms of the published rates than actual competition in terms of the rates that we conclude the deals at. And if there were to be any impact on the closing of any lending rate and so on then that of course would be something that we would see 3, 6 months from now because not everyone is borrowing their money immediately if they're buying a new house. So there could be some refinancing, but they're rolling over that could be changed between the banks and so on. But it seems that it's more in terms of media, the way we publish things and so on. And Nordea has been very clear in there saying that it doesn't impact the actual rates they are lending to customers. It's only a thing they do to get more attention from the customers. If you look at the statistics coming out in terms of lending, you can see that our market share and the new lending is trending down a little bit and Swedbank is trending up a little bit. And so but we don't see any dramatic shifts right now in terms of levels of lending or in terms of volumes of lending as such. It may be early days, but I guess it's basically something that we just need to watch and see. It doesn't impact the way we're doing our business currently anyway. Okay. Thank you. That was all. Thanks. Your next question comes from the line of Hakan Fuhrer. Please ask your question. Yeah. Hi, everyone. This is Hakan Fuhrer from DNB. Just a follow-up on the operating leverage in Merchant Banking. If we were to assume that activity levels stay at the sea at the levels we've seen in Q2, should we then expect the number of employees to start increasing? Or are you still operating well within your capacity levels? Thank you. I think what you saw now is that we seem to manage the cost at the same time to lift the revenues. And I guess that's the whole trick. But of course, there might be minor things. But I think the whole thing is that the cost line won't move above 22.5%. It will even be less than 22.5%. That's the whole thing. Then it can differ a bit between the divisions, but it's the total. Okay. Thank you. Your next question comes from the line of Ronny Raine. Please ask your question. Good afternoon. Last question from my end. On the in the Factbook Page 42, looking at the surplus value accounting, where you had a negative €1,200,000,000 this quarter. And one of the explanations you gave is that this relates due to the internal sales commissions on the new distribution agreement with retail. I just wonder whether you can give me any background on this. Thank you. Well, we've just wanted to change the distribution agreement a bit between life and retail and to encourage the new sales in the retail bank through the Bancshares channel if you want. So that's really behind that change. And was there any impact on the P and L of the retail division as a result of this change this agreement? No. This is well, there hopefully will be going forward, but this is surplus value. So it's as you know, that's the discounting of future cash flows around and what's happened through the P and L. Okay. So the thought obviously is that there's a market cap change in retail even though it's invisible on the accounts. Okay. Cool. Thank you. Your next question comes from the line of Christophe Berent. Please ask your question. Yes. Thank you. I think it's 1 year it's gone now since you've got your Air B advanced model approved. And in your Pillar 3 report, you're very helpful with your LGDs. But if you could just give more some more numbers on the PDs that would be very helpful. So first, if you have your average PD on your corporate portfolio. And when I look at the fact book Page 22, you all will also show how the risk weights have declined during the last year from around 45% down to 40%. Is that driven by development in PDs? And in that case, do you have a continuous rollover on years? Or do you use a fixed number for the period, for instance, in the early 1990s when you had the banking and The and we won't have any PD numbers in the report that you can find and how that's been and how they've been trending. What I can tell you is that the PD, if you look at our total book, it's actually stable to trending a little bit lower. And when we disclose also, for example, in the fact book on corporate lending, the average risk weight or rather the average risk grade that we use in terms of our risk classification and that's on Page 33 in the fact book, You can see that it's very much straight line at an average of probably around 6.5 or something like that on the risk class. It means that the risk class and you have the table to the right hand of that where we convert that into Moody's and S and P's ratios to show you roughly where we are. And you could say that the average risk clause in our book is somewhere BBB, which is fair for a large corporate bank as such. With that, the PD is relatively stable as well and we are not doing any funny tricks on the PD to change that. And the only thing you can see is that in terms of the migration on the PD, it's probably a little bit positive rather than a little bit negative, but not very much so. And this line is the best you will get to getting an interim answer to the PD right now. And we may have more disclosure in the Pillar 3 report when we have that again. But it's I would say it's stable. And yes, we include things that happened in the 90s. Would you include that with a fixed number? So for instance, 10% of your PD would anyhow be accounted for by the early 1990s? Or would that be watered out for every good new year you have? I think you're getting close to my competence level in terms of how we model things. I have to get back to you on that one. I actually don't know what sort of weight we give to that. Sorry. Okay. Okay. Thank you. Your next question comes from the line of Claire Kane. Please ask your question. Hello. I've just got one follow-up please on the leverage ratio that you quoted 3.8%. In the denominator, are you just using total assets on the balance sheet? Or are you inflating that or the numerous Basel III inflation numbers? And if you are, could you tell us what that number is or roughly what it is as a ratio of your nominal balance sheet please? Hi, Claire. We are indeed including the off balance sheet items that should be included according to the Basel III calculation as such. And I don't have numbers in front of me to exactly what numbers we have included in there. And I'm not so sure just like we have done on the Basel III estimate that we are not giving any detailed information on every little part of that. But yes, we are calculating that according to what Basel III states or stipulates as the way to do it in terms of using total assets. And then with some adjustments and including then also the off balance sheet items as further volume enhancer. Okay, great. Thank you. Your next question comes from the line of Pawel Wyszynski. Please ask your question. Yes, hello. So Pawel Wyszynski here from Nordea. A quick question on the Basel III ratio. In Q1, you did not give us an updated number of the lower risk weights on SME and chain CVA treatments. The 14.2% number that you give us now, does this include this? And if so, how much was it? Pavel, yes, it includes that. And what we said at Q1 was that we would come back to you in Q2 and have a more comprehensive view on the Basel III framework and how we read all the details into that. It's of course a little bit of moving material. It's not only that we have including in this number our best understanding of the CVA and the SME discount and so on. But there may be other parts that have been moving in the way that Treasury and our people on the public affairs side translate and read and interpret what's being written and so on. So the 14.2% includes all of the best knowledge of the bank in terms of how we should read the papers and do the calculations. And what we would be filing and is filing to the FSA because we continue to report to them every quarter what numbers we have. So all of that is included. Okay. Perfect. Thank you. Your final question comes from the line of Riccardo Rovere. Please ask your question. Yes. Thank you for taking my question. I just wanted to follow-up on the capital again. During the call, you stated that 13% remains unchanged. The risk weighted mortgage is pillar 1, pillar 2 doesn't make any difference. The 13%, you also stated that somehow although it's still ongoing, somehow it includes your idea of the countercyclical buffer. You also stated that the leverage ratio is 3.8%. That is not a matter of discussion with the regulator and with the rating agencies, not let's say nothing particular. You stated that corporate risk weight is not a matter of discussion. It's something that is more something more to do with Denmark rather than Sweden. So my question is what is preventing you from guiding given the market a better guidance, how can you return your capital now rather than waiting for another 3, 6, 9 months? Considering that today, so 6 months before the closing of this year, the Basel III core capital is already 120 basis points ahead of your targets that you are reiterating today? I think what's stopping us is that what we've been saying during the call here is the way we see things today and it's our best estimate of or best interpretation, I suppose, one can say on the discussion with the regulator. Now our interpretation may be all right or it may be partially wrong. We'll see. And I think it's important just to see the regulator come out with all their final thoughts on this in writing before we act on it. I think that's wise management to do it in that way. I think the second prerequisite that we would like to take is to make sure that the political acceptance is there to act on this sort of thing as well. And I think we see that one thing will lead to another. The first thing will lead to the second, so to speak. Once it's written down in the wall, we can act on things like this. So I think that's how we see it Ricardo. I think it's going to be the way we interpret it. I understand. It's perfect. I understand. Thank you very much. Okay. And I think that was the final question if I understood things correctly. And therefore, we would like to close the deal. And I think maybe then the finishing thought for you in terms of the operating leverage, where we had lots of discussion, is that I think as we started the press conference in Stockholm and as we basically started the telephone conference as well, we have seen more activity and with a broader base of customers coming from not the least the fact that we have invested in increasing the customer base of the bank, it means that the operating leverage of the bank is higher than before. But also because we last quarter had so many questions about the merchant banking performance, we are not now at the maximum capacity, of course, of what the merchant can deliver. And therefore, we are seeing a sort of discussion, which could be normalized, what's normalized merchant. But I think what we take with us this time is that merchant can deliver according to the growth plan that we presented 6 months ago, where we said that they would increase their revenues 50%. And they are trending according to that line. And with that final thought, I would like to leave you and say have a great summer from SEB.