Thank you for standing by. Welcome to the first quarter 2013 results conference call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need press star one on your telephone. I would now like to hand the conference over to your first speaker today. Please go ahead, Ulf.
Thank you, Lisa. I would just like to extend a warm welcome from Annika, Jan Erik Back, and myself on the first conference call for the year in terms of the results of 2013. Annika will give the presentation. We will go with the Q&A. It seems like everything is very quite clear out there. We have had relatively few questions so far. Maybe this will be a relatively swift conference call as well. Annika, please go ahead.
Thank you very much. Sorry for being a couple of minutes late. Today, we are reporting an operating profit of SEK 3.7 billion. We are reporting a stable result in a quarter that is characterized by continued caution among large corporate and customers, given, I guess, the subdued macro environment. Clearly, recovery is taking time. On slide two, there are three important highlights. That we continue to attract the new customers, both large corporates and SMEs, as well as private customers. We are increasing efficiency. The engine is becoming more fuel efficient. We do maintain a strong balance sheet. On page three, you see the operating profit of SEK 3.7 billion, up 2% from the same quarter last year. On the other hand, operating profit is down 7% from Q4, excluding the one-off effects. Then again, Q4 for us is seasonally always a strong quarter.
Total income is stable from Q1 last year. Costs are 3% lower and below our cost cap of SEK 22.5 billion for this year. Page four, starting with the NII. This line increased by 7% from last year. The improvement comes from increased volume. Lending rose by SEK 39 billion and deposits by SEK 138. Our financing cost has fallen. We do have replaced expensive funding with cheaper funding during the year, which has also had a positive effect on NII. We have a strong name on the international credit markets. During the first quarter we have issued SEK 30 billion of new funding, more than replacing the actually only SEK 3 billion that matured. That is nearly half of all maturities for the whole year. On slide five, you see the lending margins. They are increasing while deposit margins are under pressure from falling short-term rates.
We also had two less trading days or working days in this quarter, which is worth approximately SEK 100 million on the NII. Adjusting for the days, the net interest margin is stable at 100 basis points, which means that increased lending margins compensate the short-term rates falling. On the net fee and commission on slide six, it is down by 1% compared to last year, driven by the strong krona. On an FX adjusted basis, net fee and commission income is up 2%. As expected, however, net fee and commission income is down compared to previous quarter. Again, fourth quarter is seasonally always a strong quarter. For example, we earn the majority of the year's so-called performance fees in the fourth quarter, and that was SEK 177 million compared to the SEK 72 million that we gained this quarter.
On page seven, you see this year we've had unusually low demand for investment related advisory services within large corporates. Last quarter we saw a number of large debt and M&A transactions that we didn't have this quarter, and income is therefore down by SEK 350 million from the fourth quarter. That is, of course, the main reason for Merchant Banking delivering a lower result this quarter. On NFI, slide eight, within the divisions demonstrate the same stability that we've seen over the past few years, actually. Our customer business is flow driven and resulted in SEK 1.1 billion of income this quarter, in line with previous quarters. Within treasury, we have an liquidity portfolio that is marked to market every day, and that gives rise to certain fluctuations in the result.
This quarter valuations decreased by some SEK 100 million, while in the same quarter last year, they were actually positive SEK 182 million. On slide nine, you see more customers, deeper customer relationships, and a focus on cost control has led to improved operating leverage, and we continue to develop and broaden our franchise with new customers and are increasing cross-selling. We're also continuing to attract new customers. Merchant Banking have acquired 30 new large corporate institution customers in the first quarter of the year, of which 13 in Germany. Here in Sweden, we have strengthened our position as a broad corporate bank. In this quarter alone, we have attracted 3,400 new corporate customers. Similarly, we are increasing the number of full service private customers in Sweden by some 4,100 during the last three months.
The first quarter started slower and income is down somewhat, but I am convinced that our growing customer franchise will create stable growth over time and feel comfortable with that. Turning to the division from page 10, performance is mixed this quarter given the macro environment. As mentioned earlier, Merchant Banking was affected by the low activity levels among their clients and the fact that many corporates are defensive. The start of the year has characterized by subdued activity levels and operating profit fell 11% from the same quarter last year. It is mainly commission income that has fallen, especially when compared to the strong fourth quarter. However, we continue to attract customers in the Nordic countries. Retail Banking reports increased customer business and a better result, up 24%. The number of corporate and private customers continue to rise and lending volume growth is strong.
Corporate lending increased by 9% on an annual basis. Wealth Management increased its result by 41% as average assets under management was higher than previous year, and performance fees were good for it being a first quarter, SEK 72 million compared to SEK 10 million last year, and costs were also down. The Life division result was down somewhat compared to 2012, but up from the previous quarter, and premium income was up 14%. In the Baltics, lending volumes were up slightly in local currency, but the results fell largely because of continued pressure on deposit margin. Credit losses were SEK 98 million, corresponding to a credit loss level of 39 basis points. Today on page 11, SEB is a stronger bank. We have increased our resilience and flexibility during the last three years. We have built capital during this, moving from a quarter one ratio of 11.7% to 15.3%.
If we add the Life dividend due now in Q2, the Common Equity Tier 1 Basel III was 13.8%. Our liquidity reserves have increased from 10% to 25% of the balance sheet, and more customers have deposited SEK 170 billion more with us, which is important in the new Basel III world. NPLs have more than halved, down to SEK 12.5 billion, the balance sheet is very strong and resilient. A closer look at the asset quality on page 12, you can see that credit quality continues to be strong with credit losses of SEK 256 million in the quarter or seven basis points. Non-performing loans continue to decrease, down 10% this quarter and 29% compared to last year. This is the 13th quarter in a row that NPL is declining.
Generally, our corporate customers have strong balance sheets and equally on the private side, we don't see any sign of worsening credit either. To the left in this slide, you can see how the credit portfolio has developed. From this, it is clear that we continue to be a corporate bank, with two-thirds of the portfolio coming from corporate loans. You can also see how even the growth has been. Excluding exchange rates effects, lending in the bank has grown by 6% on average the last 10 years. Our funding strategy is conservative as is displayed on slide 13. During the last years, we have clearly issued more than the matured funding in order to extend duration of debt securities and leverage the fact that we are an improving credit with funding excess at competitive spreads.
Just like last year, we started the year with issuing some benchmark long-term debt. We have raised SEK 30 billion in long-term funding, of which 60% through covered bonds. SEK 30 billion is half of all the maturing debt for the whole year, SEK 60 billion, and only SEK 3 billion mature in the first quarter. Of course, short-term negative for NII just like last year. In Q2, over SEK 50 billion will mature and then barely nothing for the rest of the year. The last slide, page 14. As we communicated our last quarterly results, we have raised our long-term ambition. With more than two-thirds income coming from the corporate business we are and will be the leading corporate bank in the Nordics. Going forward, we will continue to develop our retail business in Sweden and the Baltics to be the very best bank.
We will maintain our resilience through a strong balance sheet. The first quarter, the first of 12 in our new business plan, was very stable in a subdued macroeconomic environment. I feel confident that SEB has a strategy that works also in the current climate. Now I would like to open up for questions and ask the operator to give us the first question. Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star one and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from Omar Keenan from Nomura. Please go ahead.
Good afternoon. Thanks very much for taking the questions. My first question is firstly thinking about how you see the divisions developing over the rest of the year. Clearly Retail is continuing to do very well. Could you just give us an outlook of how you see corporate activity panning out over the next couple of quarters? I guess the more subdued activity levels that we've seen in the corporates. Do you think that's something that's likely to carry on towards the end of the year? I guess if that continues, do you think you could pull other levers divisionally such as Thinking perhaps, again, about costs, you said that you're already running below the SEK 22.5 billion cost cap run rate. That was just the first question.
Secondly, on capital and the core Tier 1 ratio, already increasing to 13.8%, already at this stage establishing a buffer above the 13% target, really. At what point do you think you can perhaps offer a little bit more discussion as to what can be paid out above the 13% target? What do you think is your checklist of things to happen for the rest of the year before you can do that? Okay, thanks.
Is it on? Yeah. Okay. I can answer. I think also Magnus Carlsson, Head of Merchant Banking, also got that question on the press conference earlier this morning. I think, I dare say that the pipeline of business looks fairly good. I think also that we did feel that the first quarter was slower than we anticipated. I would say unusually weak start of the year. We do think that the activity will pick up a bit. Of course, it's very hard to say how much and what pace, but the pipeline looks pretty good. When it comes also to corporates issuing their own bonds, they also had a very slow start of the year, I would say. We were the leading on 54% of all the issuance. Of course, that was quite a lot, it was quite a little issuance.
We also believe that will pick up, there will be another part also of gaining more commission going forward. I dare say, of course, it depends a little bit more on the macro. I think quite a few of the large corporates have been a little bit taken aback by the very weak macro climate that came out. I still think that there's business to be made. I'm fairly optimistic on that that will come. I'm not sure that Q2 could probably remedy all of Q1 start, for the whole year, I think we still have a positive view. Costs below SEK 22.5, that is what we want to communicate at the moment. We work hard with that we will continue to work with that.
We also have a lot of new clients in SEB, both on the SME side on the large corporate side. We have not seen yet so much success on building more business. Share of wallet or getting more business on already existing clients is something also we look positively on for the rest of the year. When it comes to the target of Core Tier 1 ratio of 13%, we think that your question is a bit too early. We will revert with that question. We need to see quite a few things. In Sweden, there are discussions about risk weights on mortgages. There are also discussions regarding risk weights on corporates, which I think probably is more far-fetched, there is also maybe relief on the LCR. Basel Committee has come out with relief for European banks, not in Sweden yet.
There are a few things that are outstanding that we would like to have clarification about. Also, of course, having a good market sentiment before we address that one. We will have to revert regarding that question.
Okay, thank you very much.
You're welcome.
Your next question comes from Nicholas Davey from UBS. Please go ahead.
Good afternoon, everyone. Nicholas Davey from UBS. Two questions, please. The first is around loan-to-deposit ratios. You're at now 126%, if we exclude repos. I seem to remember about a year ago, you used to talk about 140% or so being more or less where you were comfortable. Clearly you haven't got the loan demand to get there. I suppose my question is, at what point do you make a strategic decision on how you price your deposits? Clearly you made a strategic decision on how you price your mortgages for the last two years, and you've had some decent success there. At what point do you say we're going to drive the way the market prices deposits? Clearly you're in the most advantageous position of your peer group as far as not necessarily needing the deposit funding.
In this rate environment, at what point would you reconsider how you price savings? The second question, please. I see from this quarter now, as you guided at Q4, you've pushed out more equity to your various business divisions. If you could perhaps just talk us through a little bit how the heads of those divisions are now incentivized on, to what extent they're incentivized on ROE on this new business equity, and whether we could see or if there's any discussion internally about any kind of repricing or improved revenue efforts to try and price against this new business equity. Thank you.
Hi, Nick. Jan Erik here. I thought I'd address your first topic there on loan-to-deposit ratio, which is, as you say, 126 this time. We have for many quarters been around 140, sometimes a little bit below, sometimes a little bit above. The pricing of deposits certainly is one of the issues that one may want to reflect on. Another one is, of course, the loan demand, which in our view is going to pick up. It's more a question of when. I think the other aspect of it, of course, is the LCR definitions that Annika touched on just on an earlier question. We still expect the Swedish regulator to grant us more credit for the corporate deposits that we do bring in. We don't get the same treatment as is there under the current or new Basel definition.
Once we get that, we will get more benefits from that, and it will help our LCR. That's the rationale for keeping the deposit level up to a large extent.
On your second question regarding business equity, of course, this is challenging for the divisions because the regulator says 10% in Sweden. On the other hand, we kept 1% because we're keeping 13%, we kept 1% centrally. Initially, this looks like return on equity in the divisions is going down. I think this will lead to an enhanced focus on profitability, and I think it's good. I think Merchant Banking is the division that is badly hit by this, but the reason is that it's exactly what the regulator wants, and that's why they are hit by this. I think you will see that Merchant Banking will work hard now in getting the return up. I think this temporarily start from that, but I think that will hopefully support the bank as such.
We don't have specific targets, but of course we have internal targets for where we want the divisions, but not officially. We think this will be challenging enough for Merchant Banking to see that they are having a low return at the moment. We are quite confident they will work hard to get that one up.
If I may add, remember we last year talked about how we were pushing out not only the more capital allocation to align with the Basel III framework, but also work on the funding side and the cost for carrying liquidity as part of the liquidity reserve and so on, and how we have changed the internal fund transfer pricing system to align for that and to make sure that the full cost of the new regulatory landscape is carried by divisions rather than centrally, so that we don't get the situation where the divisions are having a good return on equity, and then on the total list will disappear because of central cost and so on. This is of course part of it.
The whole idea behind that is that it would change the behavior and the pricing on the business side so that the cost of doing a transaction is fully understood by the people making the decision on the pricing side. That's why we're doing this.
That's very clear. If I could ask one quick follow-up question. Some of your peers with more or less similar business models have commented that the loosening of the LCR at a European level might add about 20 percentage points to their liquidity coverage ratio. Can you comment if that's a similar kind of magnitude for you? If that does happen, I guess more importantly, how does that, in practice, change your behavior as far as what you then do with your corporate deposits? How much value you associate to them internally?
Well, as I said, Nick, I think it has already changed our behavior in a way that we fly a little bit low on the Swedish definition. As you've seen, we published 111% on LCR this quarter. Once we do get relief on corporate deposits, which we can show for a long time going back, has consistently increased in our bank. In times of crisis, money flows into the bank rather than flowing out. That deposit base is very sticky based on the very strong relationships we've got with that customer segment. I think we've already adapted our behavior to attributing more value than we get credit for in the current definition, and we're waiting for it to change.
Okay, clear. Thank you.
Your next question comes from Geff Dowes from SG London. Please go ahead.
Yeah, hi. Good afternoon, everyone. Jeff D'Orazio here from SocGen. I have two questions from myself. First of all, on Merchant Banking, you've obviously spoken quite a bit about the new customers that have come on board. If I look at the revenue run rate, it's quite exceptionally low, though. It's the lowest we've seen for quite a few years, even in more difficult economic circumstances. Why aren't those new customers turning up with any revenues on board? Second question is on mortgage margins. You've previously guided that you get a benefit of about a basis point a month on mortgage margin uplift. Is that still the case going forward? Some of your competitors have been more aggressive in their market share targets for 2013, potentially more pricing pressure there. Those are the two questions. Thank you.
I can answer your last question first saying, yes, that is the case. I think we've also moved from 73 to 76 basis points, but you can see it's still one basis point a month on the mortgages. We haven't really seen anything changing there. We could also see that we did grow with 9% on mortgages. We still have a good offer, and we're quite picky with the clients we take on board. We are the only bank that have forced amortization, and also you cannot borrow more than five times your income in your household. We're quite strict. What the Central Bank has output now, we have applied in the bank for some years back actually. When it comes to your first question regarding revenues, corporate.
I think it's fair to say, yes, we are a little bit frustrated, of course, we cannot really see it. That's the truth. On the other hand, we only want to work with the clients that we have picked because we feel very comfortable with them, and they have been surprisingly quiet the first quarter. I think, again, we don't want to move up to the risk curve. We don't want to do business that we decided not to do. We just have to stay focused and hope that when these clients want to move, they will move with us. We worked really hard being close to them. I still think that the proof is in the eating, and we will continue to work hard. There have been a very few deals in the first quarter where we happened not to participate.
That's a bit unfortunate, but that happens sometimes for different reasons. We will just have to follow this carefully. I agree with you, it's a little bit disappointing that we haven't seen more.
Yeah. I guess when you talk about catching up in the rest of the year, the number that we tend to look for is a SEK 4 billion run rate every quarter in Merchant Banking. Do you think you can make up that lost ground in 2013?
It's challenging, I think, with the weak start. On the other hand, we've been through it. We worked very hard with Merchant Banking management, I think it depends a lot about the macro climate. If we see some more signals about slight more activity, I think it's doable. Of course, we cannot do so much about if the macro will continue to be extremely subdued. I think the view is still out.
To add, there is also, of course, some headwinds because two-thirds of all lending in Merchant Banking, and even more than that, is in foreign currencies, and the strong Swedish krona means that the value of that in terms of Net Interest Income is, of course, much less now than when the krona was much weaker. That is, of course, good on the other side because that's the quality remains very firm in that business. There are some rounds and swing abouts here in terms of how we see the progression. The krona has been strong. It's not good for the lending development as such, and it, of course, has reduced the volatility on the FX.
Nevertheless, having 350 or so more customers now than we had three years ago, we have to believe we have picked the right customers and that they will become more productive when the markets come back. The macro hasn't been our friend for some time.
That's very clear. Thank you. Very detailed answer.
Your next question comes from Riccardo Rovere from Mediobanca. Please go ahead.
Good afternoon to everybody. I have two questions from my side. The first one is on capital. When I look at your Basel II core capital, it's in the region of SEK 90 billion, more or less, out of roughly 15% of risk-weighted assets. If I take this number, this SEK 90 billion, and divide by the amount of the total assets of the group, almost SEK 2.6 trillion, and add to that the off-balance sheet contingent liabilities and commitments, then I would add an additional, let's say SEK 530 billion, basically, I end up with admittedly brutally, I admit it, leverage ratio below 3%. My point is, I know that these are rough calculations, are the regulators looking at the leverage ratio first? Is the leverage ratio having a role in guiding, in driving your capital return strategy?
My last question is, you stated that the start of the year in corporate has been weak. Is there any reason why this should suddenly change? Thank you.
On the capital question or rather the leverage question, I think the Swedish regulators and Riksbank have never put leverage high up their list of issues they have focused on. I think it's looming on the horizon. There are things in the European regulatory package which will put leverage more in focus over the next few years. Yes, we do look at it. I think when we use the U.S. rules, we come out about four in leverage, we feel comfortable with that. Certainly, we do keep an eye on it, we don't see it as a restriction for us.
Okay.
Regarding the activity level. I think things have changed rapidly before, it's very hard, I think, sometimes to be extremely bearish just because the first quarter out of 12 quarters in the business plan started off slightly slower than we hoped. I think, again, things have changed before. Of course, I don't know more than anybody else. I think on the other hand, Swedish corporates, they still have a rather strong currency. They are well-funded. They are well-capitalized. They have maybe an opportunity that is quite interesting to do things. I think it's a little bit about confidence also. Let us see.
Okay. Thank you. Thanks.
Your next question comes from Jacob Kruse from Autonomous Research. Please go ahead.
Hi. Jacob from Autonomous. Just two questions. Firstly, on the risk weight, Swedbank had today some benefit from this SME rebate that was prescribed by CRD4. I was just wondering if you could comment either on the size of your SME portfolio or any potential benefit you might get there and also on the CVAs. Secondly, on your Merchant Banking business, could you say something about how many of your clients, the new clients where you've been able to now get the cash management business or make these clients into more full service clients? Thank you.
Hi, Jacob. On the risk weight, we saw the relief on SMEs as well. I think the sum of larger number you saw in our competitor bank means that it's just reflective of their anatomy. I think they have more of that sort of small SME client, where the lending volume has to be below one and a half billion, sorry, one and a half million. It's anatomy rather than anything else. On the CVAs, we've seen those changes as well, I don't think you should expect anything huge to come out of that. We took the effect of the CVAs against our equity at last year-end, we don't see very large variations at all over P&L during this year, we'll post effects through the P&L towards the end of the year, I suppose, if we find anything material.
It is also so that we are waiting for the Finansinspektionen now to put a floor or a ceiling, how you look upon it, on mortgages. That one would go in the other direction. That would decrease capital. There might be some relief on the SME side, which of course, would beneficial also for us, but maybe not the same side. I think it's good probably to see all of the changes at one time and make a net of it. I guess we need to see that before we do something, there are a lot of talks in Sweden now whether when and how they will raise the ceiling or the floor for risk rating for mortgages, depending on how you look at it.
When it comes to clients, I think we just got a prize the other week as the best cash management bank of the Nordics. Again, I think that's the fifth year in a row. I think we have a very good product regarding cash management to sell to our clients. It takes a long time. All the clients that we have, the 300 that we've brought in so far, and the 30 that we've taken in so far this year, we want, of course, to have the cash management mandate with. It takes some time sometimes to change bank. It takes sometimes the time if you go to the European cash pool or the Nordic or the Swedish, et cetera. We're working on that, but everyone is targeted.
I guess on most of these clients that we are approaching and work hard with, we get the cash management sooner or later, it takes a bit of time, I don't have the exact figure in front of me.
Okay. Thank you.
Your next question comes from Sofie Peterzens from JP Morgan. Please go ahead.
Hi. Here is Sofie Peterzens from JP Morgan. I had a couple of questions. My first question is a bit technical. In your presentation on slide 11, the Basel III Equity Tier 1 is 13.8%, but in your report on page five, it's 13.4%. Just wondering if you could confirm which Basel III Equity Tier 1 we should look at. My second question is around buybacks. Given that your Basel III Equity Tier 1 is over 13%, do you have an update on when you might buy back some of your shares? Thirdly, I just wanted to ask about the LCR ratio. I guess it was 111% end of this quarter compared to 154% six months ago. How much has the reduction in LCR helped your NII during the past six months? Thanks very much.
Hi, Sofie. Basel III number is 13.4 in the report, that's the audited official report, so to speak. What we're saying with the 13.8 is that in Q2, we will upstream dividends from our Life business, which will mean everything else equal, that number comes up to 13.8. I think you should focus on the 13.8 because that money is coming. I'll take the last question, which is the LCR, hand the buyback question over to Annika. LCR at 111%, I think we commented earlier, it's really reflective of the fact that we do think that we should be given more credit than we are at the moment. The Swedish definition is treating corporate deposits quite harshly with high runoff factors. In fact, we can show a long history that it's very sticky money, and it should really be treated better.
We anticipate such changes, as has also come through in the Basel definition, the new definition for 2013, and we're waiting for the Swedish regulator to adapt. Of course, to an extent, that might have helped NII, but really, if anything, LCR is hurting NII with the big funding programs you've got to have and the large liquidity portfolios we have to hold at the low yields. I don't really see that as a big benefit.
My question was more because two years ago when you built up your liquidity portfolio, you were saying that given that you had quite weak NII growth in the second half of 2011, one of the key drivers was that you had to build up your liquidity portfolio. Now, given that your LCR was very strong in the third quarter of last year, it's still strong, but it has come down quite significantly. I was just wondering how much of the NII improvement that we have seen in the past six months has actually come from releasing your LCR.
I don't think there's much money in that, Sofie, because LCR is a very short-term measure, and it's a 30-day liquidity measure, it's more sensitive to short-term fluctuations. Structurally, we don't impact the NII earnings level much through that measure with short-term fluctuations between, say, 110 and 125 or 130.
Just to add to that, when we, for example, receive a lot of corporate deposits, we have to, of course, assume that most of that run out within a month. That reduces LCR. The more corporate deposits we receive, the more the LCR is negatively affected unless we use all of that money to run the central bank and deposit that. Of course, that's negative for us in terms of the LCR. It doesn't necessarily need to be, let's say, LCR management as such. It can be also just the fact that we are receiving a different structure on the deposit side.
Okay. Thank you very much.
Regarding the buyback, we said earlier today that we will revert regarding that. That's a bit premature to weigh that question yet. We are, of course, seeing that we are overshooting the target at the moment.
Great. Thank you very much.
Your next question comes from Ronny Rehn from KBW. Please go ahead.
Yeah. Good afternoon. Thanks for the call. Three questions I have. First, on the pre-funding impact on your treasury NII. Maybe you have mentioned the number earlier. Just want to get a feeling how much was the headwind you had in the first quarter and how much you expect this to rebound in the second quarter.
The second question is on the risk weight debate. Can you just quickly give us an update from your perspective, where we stand on where the mortgage ceilings might go and what might be changed exactly in the corporate risk weight space? Lastly, a bit more big picture question. There was a lot of noise obviously around the Cyprus situation, the people pulling money out of this tax haven, and they're looking for alternatives, and Latvia came up as one of the targets. We've seen non-resident deposits growing strongly. What's your perspective there? Do you see a lot of money coming in? What are the impacts like, I don't know, property prices, what people do with the money in the country? Thank you.
Well, on the pre-funding impact, we haven't quantified the P&L effect of that. What we did say earlier today is that, if we've got some SEK 60 billion maturing this year, we've seen half of that being refinanced in the first quarter, and we'll do a bit more in the other half in Q2, and then it'll be fairly slow during the rest of the year.
Not a huge impact. Risk weights, mortgages, 15% is being discussed. As you know, in Sweden, it's been a round of hearing the market out and the different market participants, and I think it's clear that there are stakeholders who want to see higher risk weight than 15%. I haven't heard it firsthand, but I think it's quite clear that the Riksbank might have wanted higher levels than that.
Higher, is higher like 5% higher, or is higher double from your point of view?
Well, higher.
Higher.
They haven't quantified.
Okay
As far as I know. Again, to reiterate what we said earlier, we are a relatively smaller player in that market, so we'll be relatively less hit by a higher.
Okay
Well, corporate risk weights, that may or may not come. I think, again, it's not something that's very high up the list, and it'll be much more difficult to do. It's taken a long time. It's been very tricky to get to something on mortgages-
I would say, yes, corporate will be harder still. That's further away. Maybe last question on Cyprus, that's sort of money-
Yes, on Cyprus, I think we can see that our banks have not received anything of this. I guess that's probably more to Russian banks.
Okay, thank you.
Your next question comes from Lars Holm from Danske Bank. Please go ahead.
Yeah, hi. Also two questions from my side. Kind of into the same topic that we have discussed already on the risk weights for Swedish mortgages. I can see you have made some comments on it on page 31 in your report. My question is more, could this requirement in Pillar 2, could this potentially be add-on to the 12% Common Equity Tier 1 requirement that you are going to meet in 2015? That was my first question.
Yeah. Hi, Lars. I think the risk weights for mortgages, yeah, it's certainly today being discussed as a Pillar 2 requirement. We don't rule out the possibility that it might be, at the end of the day, a Pillar 1 requirement. That's not where we are today in the discussion, but one shouldn't rule it out. Again, it's important in that context to remember that we are the smaller stakeholder in that, or the smaller retail bank in that context, and our expected effect with 15% risk weight is about 40 basis points.
Yeah. If that was going to be the case, I assume you would have to increase your own target of 13%, right?
Not necessarily. I think this is many component parts of this number. As Annika said earlier, let's now have a look at what the whole regulatory package will mean and what the Swedish adaptation of that will finally be. I think when we put the 13% capital target out there, we obviously knew about this debate, that is nothing new. That's been baked in.
Okay. My final question. Could you remind me how much do you expect in risk-weighted asset relief during 2013 from further portfolios being moved to IRB?
Well, we haven't given any exact numbers, we've indicated something like SEK 20 billion.
SEK 20 billion? Okay.
That may not be this year. That could be spread out over a bit of a longer time.
Okay. Thank you.
Your next question comes from Fridtjof Berents from Arctic Securities. Please go ahead.
Thank you. Just moving back to a little of the big picture on capital. When you see proposals on regulatory changes for how, for instance, you measure risk weights on SMEs and so on, do you take a reality check versus how we view this in your ICAP modeling, or can we see potentially an increasing distance between the level of risk weights you are presenting for regulatory purposes and how risk is reflected at different segments in the ICAP?
Hi, Fridtjof. I think as you're correctly stating, the question about capital is so much bigger than just a certain or a specific number. We had the discussion about the accrued leverage. You have the U.S. leverage ratio, the Basel I, II, III, and whatever that you can calculate. We have our ICAP model. There are different measures on the same thing, which is really the loss-absorbing capacity of the bank and what is required. ICAP take a very different approach to that, looking not so much about the risk weight, but rather looking at what losses could be produced in a stress situation and how that would eat up capital and earnings potentially. The ICAP process is very different from the ratio discussions we have under Pillar 1, and therefore it's difficult to say that one substitutes the other.
I think we will have to run with both of them, and knowing that the Pillar 1 tends to be more of a normal operations measurement and the ICAP is on the stress level and the worst-case scenario, what could happen from that point of view. Therefore, I don't think there's a direct translation. We monitor all of that, of course, from the bank's point of view to have a holistic view on capital. Therefore, we don't bet on any particular number as such, but if we had to choose, we would use the Common Equity Tier 1 according to Basel III, because that's the future way of looking at capital, and we're always trying to project the future from that point of view.
Okay.
Remember, we have our own economic capital model that we've been running since 1998 as well. We are all learning and developing our way of looking at capital.
Yeah. I see. Okay. Thank you.