Earnings Call: Q4 2012

Jan 31, 2013

Thank you for standing by. Welcome to the annual account 2012 results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I would now like to hand the conference over to your speaker today, Ulf Grunnesjö. Please go ahead, sir. Thank you. Welcome to this conference call on the annual accounts for SEB 2012. We will start with a brief introduction and go through the results as well as the new financial targets. After that, we will go into the Q&A session. With me in the room, we have Annika Falkengren, the CEO of the bank, and Jan Erik Back, CFO. Please, Annika. Thank you. Welcome to the presentation. We presented a robust result today driven by an increased number of customers and a strong underlying business. We also presented our new three-year plan, including new financial targets. Page two. During the last three years, we have delivered on a clear and ambitious plan. A plan that was set to strengthen our profile as a truly corporate-oriented bank. Three years ago, we set out to exploit the window of opportunity in the Nordics as international competitors exited the market. Today, we have built a platform for growth in the Nordics and Germany, while at the same time strengthening our banking operations in Sweden. Three years ago, we wanted to achieve a marked increase in customer satisfaction by better meeting our customers' needs. Today, we see large improvements in perceived customer satisfaction overall. This growth and these improvements were to come without cost increasing. Sorry. The cost caps were introduced proven to be a method that really worked well for us. For the past three years, we've been building buffers to ensure compliance with new regulations, and today we are there. One of the highest capital levels in Europe, large liquidity buffers, and even a better credit rating. Page three. Today, SEB is a much stronger bank. We have increased our resilience and flexibility. We have built capital moving from Core Tier 1 ratio 11.7 to 16.1. Our liquidity reserves have increased from 10% to 25% of the balance sheet. More customers have deposited more money with us, on average SEK 100 billion more, which is important in the new Basel III world. Non-performing loans have more than halved to SEK 13.8 billion. We also focused our growth to our progress and strength. We have added almost 300 large corporate customers to the customer base in the Nordics and Germany, and at the same time increased our already strong standing among customers even further. These customers, for the first time, rank us as the number one corporate bank in the Nordics according to Prospera's last survey. In Sweden, 31,500 new SMEs have become cash management customers. We have also improved customer satisfaction considerably. In the savings area we have attracted more than SEK 100 billion in net new money, and our private banking business remains top ranked. Page four. A little over a week ago, we reported the effects from buybacks, covered bonds with high coupon rates, and communicating the write-off costs of our new IT infrastructure instead of gradually amortizing these costs over time. We also explained the effects of the lower Swedish corporate tax rate, as well as our accelerating reporting of IAS 19. One of the reasons of that communication was to make today's presentation focused on the underlying business. From here on, I will exclude the one-off items from figures in the presentation. Doing so on slide five, it shows the good earnings development in the group as a whole. In Q4, operating profit in the underlying business is up 30% versus the same quarter last year. Looking at the P&L more in detail on page six, you see that operating profit for 2012 increased by 3% versus 2011, while pre-provision profit was up actually 15%. Operating income exceeded SEK 10 billion in the quarter, and for the full year it grew by 4%. Operating expenses for the whole year came under the SEK 23 billion cost cap, including redundancies of SEK 430 million and the higher IAS 19 pension cost of SEK 225. With a closer on the income lines on slide seven, you see that NII is up 4% in 2012 compared to 2011, driven mainly by increased customer volumes. On average, lending volumes increased by 7% and the average deposits increased by 10%. The margins have been more or less unchanged. The deposit margins are under pressure from the lower short-term rates, but this is important, they have been offset by higher lending margins. NII from lending is up 6% sequentially. Financing costs are lower at the beginning of 2012. The covered bonds we bought back will contribute to SEK 200 million NII in this year and also 2014. Net commission income is 4% lower in 2012, partly mirroring the stock market development. The average assets under management were 3% lower than in 2011, and the lower turnover had a negative effect on equity sales and trading as well. Corporate have been more cautious in the current business environment, and this has impacted activity in mergers, acquisitions, and equity listings. Nevertheless, we have real stability in fees generated by payments, advisory and also loans. Especially in the fourth quarter, they are up 13% from last quarter and 10% from the Q4 in 2011. Turning to costs on slide eight. We have worked hard to establish a strong cost culture in the bank, as well as steering a model that puts efficiency very high up on the agenda. You can see on the slide how our costs have developed during the past years. We set the cap for SEK 23 billion. We did not include the increased pension costs in this figure. The top graph shows that excluding pension costs are SEK 22.7 billion in 2012 on a comparable basis, despite the cost for redundancies amounting to SEK 413. Our commitment to cost control is firm. The new cap for 2013 and 2014 will be less than SEK 22.5 billion. This cap will now include the pension cost, as can be seen in the lower graph. This means that our costs will be SEK 1 billion lower in 2013 than they were in 2011. As you see on slide nine, more customer and broader customer relations together with cost control has increased our operating leverage. The profit level in an average quarter 2012 is 20% higher than two years ago. The comfort we take in consideration of that trend means we can reach out our near-term return target of 13% without capital actions. More on that in a minute. Turning to the then well spoken about dividends on page 10. The board's proposal is that the dividend will be increased to SEK 2.75 per share, which corresponds to 52% of earnings per share and a dividend yield of over 4%. This reflects good future earnings ability as well as a strong capital position, which already today meets the 2015 regulatory requirements. We have also changed the dividend policy. More about that coming up. Leaving 2012 and looking forward, we are raising our long-term ambitions for the coming three years. With more than two-thirds of our operating income generating through corporate activity we are, and we also will be the leading bank for corporate and institutional customers in the Nordic arena. We will continue to develop our universal banks in Sweden and the Baltics to become the best banks in these geographies. With our new business plan, it's also natural to define our financial targets, which we do on slide 12, and these are from now on, that the dividend will be 40% or more of earnings per share. That the Common Equity Tier 1 capital ratio according to Basel III will be 13%. And that the return on equity will be competitive with our peers. The goal is to close the profitability gap between us and our competitors. This means that we over time aspire to reach a return on equity of 15%. As you can see on the next slide, what's important now is to improve the profitability and as a first step, reach a more competitive level. We are and will get to the 13% by increasing our customer business and working more efficiently. As we mentioned earlier, we will continue the trend of improving operating leverage to further increase the bottom line. Importantly, we don't base our ambition on a blue sky scenario or higher interest rates, and we don't factor in capital management actions. To get a higher level, a level of 15%, we also need to address the capital level to our new target of 13% Common Equity Tier 1. Turning to slide 14, we'd like to show you a back of the envelope calculation on how to reach the 13% return. If you look at today's operating profit of SEK 15 billion, that yields a return on equity of 11%. Given continued capital generation and a dividend payout of 40%+, to reach a return on equity of 13% in three years, we need to improve operating profit to SEK 20 billion. This means that we need another SEK 5 billion more in operating profit. We can reach this through growth in our customer business and with continued cost control. A large share of this growth will come from merchant banking and retail banking, and smaller shares from our wealth management lies in both the businesses. You can see approximately on the size on the boxes. The revenue growth reflects our customer business with a clear center of gravity towards the large, medium, and small size corporate customers as well as institutions. Looking at these actions in a bit more detail on slide 15. Within merchant banking, we would need to increase in operating income by approximately 15% by 2016. By using the platforms we have now established in the Nordics and also in Germany the last couple of years, we will continue to deepen relationships with our existing customers, while at the same time attracting some new ones. We will invest more to facilitate companies financing through the capital market. We're already number one in the Swedish corporate bond market with a market share of close to 30%. We will also help our customers to a greater extent with the international expansion. Focus in the merchant bank is more on profitability than volume growth per se. Within retail banking, we are going to continue to attract full service customers on both the private and corporate segments. We're going to look after both the companies and the entrepreneurs needs. You may recall that 1 out of 4 new startup joins SEB, 25%. In the major cities, we have 1 out of 3 new startup is an SEB client, equivalent to a market share of 33%. We continue to develop mobile banking applications. In 2012, we had more than 30 million logins from mobile devices. In 2012 compared to very few, just two years ago. All in all, we would need to increase operating income within retail banking by approximately 20% by 2015. In 2012, income was up 9%. In our wealth management and life insurance businesses we would need to increase operating income by some 5%, improving the efficiency of our fund offerings and continuing to grow our leading private banking business. In the Baltics we will continue to increase efficiency and would need to increase operating income by approximately 15%. Putting our capital situation in relation to the regulatory so-called Swedish finish on slide 16, you can see that we are already compliant with the 12% required in 2015, Basel III full implemented. That means generated capital from today can be used to grow the business or repatriated to shareholders through dividends or of course many other different means. Putting it all together on slide 17. What we are aiming for in the short term is to reach 13% return on 15% capital ratio. Operating income would increase at an average growth rate of 5% while risk-weighted assets would grow around 2%-3% on average. Through increased share of wallet and product penetration, profitability will increase. Long term though, we aim for the 15% on 13% capital ratio. To get there, we need to address excess capital over time. An important part of that is the new ROBE steering model on slide 18. During 2012, we told you that we had changed the steering model to ensure pricing reflects risk and capital requirements fully. Last year, we did see that lending margins came up and we could offset the pressure from short-term rates. We are continuing to allocate more capital to the divisions. There will be another SEK 21 billion allocated this year in line with the new regulatory requirements, equivalent to 12%. We are clearly focusing on profitability in our governance model, of course, in combination with increased capital satisfaction. To sum up my presentation before questions, on slide 19, as the Nordic region's leading corporate bank we want to have the most satisfied clients. The foundation of our business is built on deep and long-term customer relations. It is this spirit that we take the next step for SEB. Through increased efficiency in our operations we have the flexibility to invest and achieve higher profitability. We will not compromise on our resilience but do not need to add more. With our financial targets we offer more clarity to our shareholders and the expectations they should have on us. With that, I'd like to open up for questions. If you are on the phone lines and wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel the request you can press the hash key. Once again, that's star and one to ask a question. Your first question today comes from Andreas Håkanson. Please ask your question. Yes. Hi, it's Andreas from Exane BNP Paribas. Two questions, rather follow-ups from the meeting in Stockholm. You talk about other means of distributing capital. We had one of the banks yesterday is asking for a buyback mandate. Could you tell us your view on buybacks compared to a dividend policy? Second one is just a technicality. Could you tell us what should we consider to be the normalized tax rate for 2013 and 2014 and so on? Thank you. Effective tax rate will be 20%. I think Andreas to answer the question, I think we were quite open about that also last year, that dividend is not the only way to repatriate capital. We also have a share buyback mandate and we will always ask for that at the AGM as we have the last couple of years and we will continue to do that. That will be continuously so. Okay, thanks. Thank you. Your next question comes from Omar Keenan. Please ask your question Good afternoon. Thanks very much for taking the questions. It seems pretty clear that, I guess, the way you're framing it is that because you want to grow, then you'll move yourselves towards or keep your payout ratio consistent with a 13% common equity target. My question was, I was just wondering that in getting to the SEK 20 billion operating profits, I think you made the comment that most of that will come through increases in profitability rather than volume growth. Could you perhaps give us a flavor of what kind of outlook for volume growth, given what you currently see you potentially have over the next 12 months, so we can make our own assumptions as to what the payout ratio should be for ourselves? Secondly, thinking about the SEK 21 billion in additional business equity going to the divisions in 2013, is that number what you expect to allocate for growth as well as pushing more capital to the divisions? Thank you very much. Hi, Omar. As Annika commented on slide 17, we look at operating income increasing at an average growth rate of some 5%, and the risk-weighted assets will grow at some 2%-3% on average. That's the sort of growth rate we're talking about. I want to reiterate, like we did this morning in Stockholm, that this business plan for the next two, three years is not really about volume growth or risk-weighted assets growth. It's primarily about benefiting from the investments we've made I think in the three years that have passed, i.e., the investment into the Nordic client base and the German client base, and to deepen the relationships with these clients. Of course, to bring in new ones as well, but to deepen the product penetration with the customers we've got. That is where a lot of the income should come from. That's great. Are you starting to see I guess, should we expect more margin increases to come through in the first six months on the lending side from the bank? Well, let's keep that one open and see how that goes. I think we are quite comfortable that the deposit margin squeeze that has come out of the changes in the interest rates over the past year, we've been able to fully compensate for on the asset side. I think that puts some comfort in the done in the segments where we operate. If the interest rates, perhaps not in the first six months but later on, go up a little bit, that adds comfort to that. That's great. Thank you. Your next question comes from Masih Abdah. Please ask your question. Hi. I have two questions for you. The first one is on capital. I think Annika just said that you don't plan to increase your risk level, but you do think that you have the necessary cushions. Given that, why are you planning to improve your Core Tier 1 to 15% over the next couple of years, even though you think that 13% should be enough? Secondly, I'm just trying to figure out your dividend guidance here. The 40% payout ratio is the minimum, but you're also saying that nominal improvements in dividends is important to you. If I assume that consensus is correct on the EPS development going forward, for your dividend to go up in nominal terms, you need to, and assuming that the SEK 275 proposed 2012 is going to be the one, you have to pay about a 50% payout ratio the next few years to see a positive trend. Which one will be most important at this point, be a positive trend in nominal dividends or that you will be around the 40% payout ratio? Thanks. If I start on the Sorry. Sorry, I just wanted to say that on the first question on the capital discussion, the ladder that we put together, we are just playing with the numbers there on the back of an envelope. I think we are saying that our capital target from an equity tier 1 is 13. What we are saying is that we are trying to separate what can we do in our own right, so to speak, without adjusting the capital base from the effects of the lever when we do. It is just a two-step rocket, and we are saying we can get to 13% in the current environment without adjusting the capital base and leaving it at 15% for equity tier 1. If we pull the lever and bring it down to 13, we get to 15% already. That is what we are trying to say. That is what we try to allude to the back of the envelope, I think, to try to make it easier. I think for the board, it has been important to show growth in dividend. Of course, what level do we start with? I think here it is a starting level. I think also we have experienced that many investors have told us that the old policy of 40% over the cycle has been difficult for you to anticipate how much you will get. We are trying to clarify that by saying that it should be probably 40% or above. If that means that we now start a little bit higher and have a thought higher than 40% for a while, we do not have a problem with that at all. Thank you very much. Your next question comes from Sophie Peterzén. Please ask your question. Yeah. Hi. Thanks very much for taking my question. Here is Sophie from J.P. Morgan. I was just wondering if you maybe could give a little bit more color around the 20% growth in retail and the 15% growth in merchant banking. How will that be split between net interest income fees and trading income? Which of these three lines do you see or where do you see the biggest growth coming from? Secondly, I wanted to ask if the 13% and the 15% ROE ambition assumes normalized losses. Thank you. On your last one, yes, it assumes normalized losses included, you could say. When it comes to splitting the lines, we're not able to do that. I think overall, if you look at SEB, 60% of income is commission-based. We don't count that much on net interest income that many other banks do. We are dependent on having a good activity with our clients. Of course, this is a mixture of different sources. We made one example at the press conference earlier this morning, that is that on a true house bank client, as you call them, a large Swedish corporate, we have 7.7 product cluster on average, which is, of course, a very deep relationship that is very active with us. On the new large corporates that we have taken to the bank just the last two to three years in merchant banking, they have on average two product clusters with the bank. If we can just increase those two product clusters just to five product clusters in the coming three years, that will render a lot of revenue. That's how we looked upon it. We don't split it between the lines. For us, equal line is very important, but we don't really know which lines it will come into. This is trying to give some probability. We have KPIs internally. We have worked through the case. We think there's a big possibility that we will actually have quite a detailed plan how to get there in this environment. We're not calculating on a much better macroeconomic outlook. We are calculating as it looks now. Okay. Thank you very much. What about competition from international players in the merchant banking business? How do you see that evolving over the next three years? I think merchant banking have always experienced competition. As you think that we see the international players present in the Nordics, they've kept the very large corporate relationships as well. I think we have strengthened our regional presence enormously, and I think we have strengthened also our product offering, how we work. We've become much more, I think, close to the clients and being there. I think competition is there, but I think also that we've probably become even more professional during the last couple of years. Great. Thank you very much. Your next question comes from Jacob Kruse. Please go ahead. Hi. Thank you. It's Jacob from Autonomous. Just a couple of questions. Firstly, on the mortgage side you came out with a fairly aggressive offer to the TCO members and to your own clients. Could you just maybe talk about how that compares to the negotiated margins that you would normally offer, and if you're seeing any effect on your market share at the moment from doing that? Secondly, when it comes to the growth again on the retail and mortgage banking side, is this primarily a question of you taking market share away from other banks, or is it more a question of the wallet increasing overall on the corporates? Lastly, if I could just ask if you could disclose your NSFR. Thank you. Hello? I think our mortgage back book today is trading around 73 basis points, and I think the offer that we made through TCO is 90 basis points. Of course, if we would get part of that will be highly profitable. I think it's important to say that when the unions do these things, of course, each of the loans are up to be individually negotiable. We will look into them. It's not like we're just leaving a lot of mortgages. This is a broad thing. I think if we will get part of it will be very good business for the bank. Perhaps I'll take the final question you had on NSFR. We haven't disclosed that, but you will have seen in the Riksbank stability report that we have a number which is non-compliant at the moment. That's the same for the other larger banks here. I think the reason for being below at this point are two really. One is that it's still far away in time. It's ought to be implemented in 2018 or 2019. I think the regulating community is now preoccupied with the LCR definition rather than the NSFR. The changes that are being brought now through the Basel Committee on the LCR is likely, I think to mean that similar changes will be brought to the NSFR definition, therefore we've chosen to fly fairly low on the NSFR ratio at this point. Your question on the retail business and how that can improve and what we're targeting in terms of market share and so on. We don't really have a market share target as such, but during the last three years, we've been able to attract around 30,000 new SME clients and also grow our number of full-service clients on the private individual side. We can see that when we look at the customer satisfaction, it's actually growing very well on the SME side, and we are now clearly number 2 in Sweden on that. It doesn't seem to be a trend that is changing very quickly. We have a momentum from that point of view coming into the 2013 and the new three-year plan. If you put all of that together, the existing business and the new clients we've been able to get. We, in the last year, increased revenues by SEK 1 billion in retail. We reduced the cost, and we grow the operating profit by 39% at the end, just in the year. It's not a hopeless situation to get that up if we just continue to have a momentum. We don't see any big changes in the landscape outside here in Sweden right now that the retail business will change very quickly. It's not that we target market share. We can see on the mortgage side that we actually have been active in areas where there's still a relatively active mortgage market. It's also that our geographic location is more into the cities where we still see growth. We have then also, in terms of the pricing, seen that we haven't been price leader, but we've still been able to increase our margins, and therefore, that's been helpful as we have been getting volumes. Maybe when the mortgage risk weights now are changed to the 15%, which impacts 40 basis points for ourselves into quarter one, there will be some changes to the landscape and the competitive situation and so on. We don't foresee that having a major effect anyway, really. Not right now. Okay. Thank you very much. Your next question comes from Jan Wolter. Please ask your question. Yes. Hi, Jan Wolter here, Deutsche Bank. Just to follow up from the presentation in Stockholm. First on the capital allocation to the business units. Right now, two-thirds of the group capital is allocated out, and I think, Annika, you said another SEK 20 will be allocated during the year. That would mean that 80% of the group equity is out to the business units. Why not push everything out? Why keep SEK 20 billion or so centrally? Because pushing everything out, I guess, would send a very strong signal to the business units that they really need to focus on getting a return on that capital. That's the first question. The second one is just, what can you do in the Baltics? Just note here the returns are sub 10% despite cost of risk quite low, 12 to 12. Is there anything you can do? I do understand the repricing there is very hard, and the client activity is low. Thank you. No, I think it's a starting point, trying to allocate equivalent quarter 12%. You could say the extra buffer centrally to start with, because I think the challenge is making sure not to kill the business, making sure that we have adequate levels. This is a process, of course. Long term when we see that SEK 13 will be the capital that we would need in the bank, and I guess we would know that towards the end of this period, we'll of course allocate it. Initially, we're going now from 10 to 12% to start with, and we're keeping the buffer centrally. That is the only reflection behind that decision. When it comes to the Baltics, I think it is challenging. I guess we have been a little bit slow on addressing the costs in the Baltics, and that's something we're addressing now. We've been very cautious going through really the cost how we look in the Baltics, and we're now putting a lot of work into that. We also, of course, we had hopes that the business would pick up a little bit quicker than it had. Part of it will be focused not on volume in the Baltics, but profitability and also shrinking the cost a bit, and take it from there. Maybe I'll just add to the question on the capital allocation that just to be clear that anything that is above the 13%, we keep first of all, the difference between 12 and 13, as Annika said, essentially. Anything over and above 13% in relation to the new capital target is in that sense for excess capital. Yes. As opposed to be given back to the shareholders if we can't put it to work. Okay. Very clear. Many thanks. Thanks for giving as well a target which does not include higher interest rates or macro recovery. It's always good for investors to see a target you can reach for your own machine. Thank you. Your next question today comes from Claire Kane. Please go ahead. Hi. Good afternoon. I just had a couple of questions, please. I think it's very good you've given a how you plan to increase the return on the risk-weighted assets and how you intend to relever those returns to get to your ROE target. I just wonder, do you expect to move that leverage up on a continuous basis, or do you see it more as a step change later on, maybe one to two years down the line once you get to that 13% ROE by yourselves? Also, I was just wondering on the 13% quarter one target with that 40 basis points buffer included for mortgages, you've around a 60 basis point buffer over the 12% minimum. What are your thoughts on if that is enough and what the likelihood is of countercyclical buffers coming in? Thank you. Well, in terms of the operating leverage question, I think we certainly hope to be able to increase it. I think what the point we're trying to make today is that the historical evidence, even though it's only two years long, in being able to do it's giving us some comfort we can continue to do it, at least in the pace that we've been running now for the past couple of years. If we can increase it, all the better, and we can perhaps do a little bit more than we have projected today. In terms of the mortgage risk weight, as the smaller player in the mortgage market, we are less affected by that change. Even though it may cost us potentially 40 basis points, we think we have enough capacity to cater for the regulatory levels of 12% that's coming into 2015. If we were to see any change to that, we're building capital as we go at a rate where we have lots of flexibility. Thank you. Could I maybe have one follow-up just to clarify? Do you foresee that you can kind of pay out more of the equity go in on a kind of ongoing basis so that the leverage risk-weighted assets to assets increases over time? Can we assume in your growth aspirations that the risk weighting of your RWA remains constant, that your base case or do you think there's more model approvals to come through? Well, in terms of the capital repatriation, I think we just need to think about it today in relation to the 13% quarter one target. That is what we think is right at this point in time. Anything over and above, as we said, is to be seen as true overcapitalization. If and when and through which tools we address that which we'd have to come back to, but there's a clear statement there today that that's how we see it. Sorry, Kat, can you repeat the second question? Yes, sorry. Just really, should we assume in your modeling assumptions that the risk weighting of assets is broadly constant from here, or do you assume further model approvals? We do see further modeling approvals. We have the advanced model, application modeling with the regulators since a couple of years back. We've seen some of the larger benefits come out of that during the year. As we said in Q3, you won't see individual approvals come through to the size that we saw in 2012. There is more to come, yes. Okay. Do we have any guidance on that number or? No, we haven't specified any numbers. Okay. Thank you. Your next question today comes from Riccardo Rovere. Please ask your question. Good afternoon to everybody. Is it possible to have an idea of the long idea of plugged into the 2015 target, please? I think this is, of course, an illustration of how you can reach that, then there is a business plan that we have ourselves. To get to the number we are talking about here, we assume that the risk-weighted assets would increase by 2%-3% a year, really. It is, of course, not NII dependent, the plan as such, because the volume growth and the economic growth that we are planning for is not in a blue sky scenario like Annika said. It's in this sort of subdued economic environment where things will be slow, and it will be a muddling through scenario. Since SEB's sort of a key competitive earnings generation has come from the non-NII, we think that we can increase cross-selling, product penetration, and upgrade clients that we already have now, and that we have attracted in the last few years, and therefore do more business with them. It's not volume dependent in terms of balance sheet volume. It's more volume dependent in terms of doing more business and having more transactions and more cash management and more market transactions and more corporate bonds transactions, that type of volume, but not thickness that will drive the balance sheet. Therefore, the risk-weighted asset growth is relatively slow. Okay. If I can follow up on this. Can you please tell us if the model approvals or other credit risk mitigation techniques can balance or eventually totally offset the increase in the mortgage risk weight? They could, when we did our example here, we didn't include any model approval as part of the basis. As we said, it's an example of how we're thinking about this. It's absolutely possible that further model approvals could offset the large part of the mortgage risk weight of the 40 basis points of that. Just to understand, the 1%, 2% risk asset growth does not include any further model approval? Correct. Okay. It just includes the mortgage risk weight increase. Yes. The underlying growth. Yes. The underlying growth is zero? No, the underlying growth is a few %, we said, because the mortgage risk weights aren't included in the calculation because they are not at Pillar 1. They are in Pillar 2 for now. They are not included in the projection. Just to use and then I stop, I promise. The plan is no interest rates rise, basically very little growth, if any. Costs are flat, loan losses are normalized, and the ROE goes up by 30%. Is it? Yes. Okay. All right. Thank you. Thanks. Your next question comes from Lars Holm. Please go ahead, sir. Yeah. Hi, this is Lars Holm from Danske Markets in Copenhagen. Two questions from my side. You said you have assumed normalized loan losses in your back of the envelope calculation. Is that around 15, 20 basis points? Is that assumed already from 2013 on? My second question, can you say anything about your front book funding costs compared to your back book funding costs for hopefully split between senior and covered bond funding? Thank you. We have assumed normalized, meaning that we're talking about 15-20 basis points over the period we are talking about. It's not that we are making a step change in 2013 and moving to 15 or something from having around eight right now. We don't see a doubling in 2013, if that's what you mean. We think over time, when we get to this number at the run rate, one should be conservative and assume that credit losses could be higher than they are today, and therefore, we have said that maybe a 15-20 basis point number makes sense to have as a run rate over there. Your second question on the funding. We haven't given any guidance to what the replacement cost today compared to what we have in the back book is. We have as an example, the buyback we had on the covered bond side where we paid 4% or 5% coupons, instead we could issue at 2% instead. That shows the magnitude of some of the transactions that are out there and that we can replace much cheaper than before. We haven't given a guidance to exactly how it will play out and so on. We have said that we have a positive support of replacement cost over time right now. Okay. Thank you. There are no further questions at this time. Mr. Grunnesjö, please continue. Thank you. Thank you all for your questions and taking an interest in us. We will be in London to give presentations on Monday morning at Cannon Street. Maybe we see some of you there. Take care. Bye. That does conclude our conference for today. Thank you all for participating. You may now disconnect.