Earnings Call: Q3 2012

Oct 25, 2012

Thank you for standing by, and welcome to the SEB Third Quarter 20 12 Results Conference Call. I would now like to hand the conference over to your speaker today, Ulf Grunsche. Please go ahead. Thank you. Welcome to you all to this conference call on our Q3 results. With me in the room is Annika Hallkinggren, CEO of the bank and Jan Erik Bacht, our CFO. Annika will start by giving a presentation that you would find on the Internet already and then we will have Q and A session. Please Anniken. Welcome, everyone. I'm proud that we can report robust operating profit of SEK 3,900,000,000 in this type of challenging environment that we had during Q3. If you turn to slide 2, I'd like to highlight 3 things in this quarter. We record a stable result, as I mentioned, in a market characterized by very low activity levels and also continued caution. We continue to consolidate our position as the corporate bank. Merchant banking continues to attract more customers in both the Nordics and Germany and retail banking has also had many small and medium sized companies. Customer satisfaction among corporate customers has also increased. And thirdly, just like earlier, we are increasing our resilience by strengthening the balance sheet further and improving cost efficiency. Slide 3, operating income was €9,700,000,000 and costs are stable and net credit losses remains low. Net interest income is stable quarter on quarter and is up 8% compared to the same quarter last year. Net commission income is down 7% sequentially and down 9 percent against the same quarter last year, as a result of low customer activity and lower average assets under management. Net financial income is down somewhat from the previous quarter and life insurance income is slightly up. This is one of the best 3rd quarters we've had actually. Looking closer on the NII on slide 4, you see that NII was SEK 4,500,000,000, down 1% or actually over SEK64 1,000,000 from the last quarter, driven by lower NII within trading and also foreign exchange effect due to the strengthening of the krona. Customer driven NII is up some $50,000,000 in the quarter. So far this year, it is actually up $760,000,000 or 7% of the customer driven NII. On page 5, we see a clear positive effect of the repricing on corporate loans as they slowly but steadily mature as part of complying with the emerging regulation. Mortgage margins are slightly up too. Back book has increased with 2 basis points in the quarter to 70. Deposits margins are down, but the net effect is still positive. We continue to improve our average cost of funding just like in the last quarter. Combined with better liquidity management, this improves NII by $30,000,000 Continuing with net fee and commission income on page 6, net commission income decreased to SEK3.2 billion in the quarter. As is common during a summer quarter with lower customer activity, commissions from payments, cards and lending are lower. And despite a strong stock market during the quarter, market turnover has also been lower. Average assets under management is 2 percent lower than the 2nd quarter, which affects income by some $100,000,000 Payment commissions, loan fees, etcetera are seasonally lower as we have the majority of our income from the corporate segment. On slide 7, we show the net financial income, which is down 3% in the quarter as a result of low volatility and lower activity. This quarter, we have also had positive valuation effects on our liquidity portfolio. On the whole, we retain good stability on this income line. Summarizing on slide 8, we continue to improve our operating leverage. We have more customers that do more business with us. At the same time, we are becoming more fuel efficient. Average income per quarter continues to improve and average costs continue to fall, driving higher average operating income. We will clearly come in under our cost cap of 20 $3,000,000,000 for the full year. We will keep working with everyday rationalizations and by also by increasing integration in the bank. Redundancy costs as we take underway are up $79,000,000 this quarter and in total headcount is down from 1100 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es compared to last year. Turning to asset quality on slide 9, Our asset quality continues to be very strong. Net credit provisions decreased from the already low levels to $186,000,000 in the quarter or 6 basis points. So far, we have seen little effect from the economy at large and we monitor the situation carefully. NPLs decreased again in the quarter, down from $1,700,000,000 of which $1,000,000,000 was in the Baltics. We continue to write off losses directly against reserves. And in the Baltics, credit losses were $70,000,000 this time against $108,000,000 in the 2nd quarter. Additional performance on slide 10. We can see that retail life and the Baltics all reported high results, while merchant banking and wealth decreased. The merchant bank experienced larger seasonal effects than actually usual for summer quarter. Operating profit decreased 3% during the 1st 9 months versus the same period last year and actually 20% from Q2 to Q3. TCM was primarily affected by the low FX volatility. Within Global Transaction Services, custody volumes fell by almost $200,000,000 in the quarter as a result of lower asset valuations and a very low interest rate environment. Retail on the other side increased its 9 months result by 57%. Private individuals continue to choose SEB as their banking partner and the number of corporate customers also increased. The result for our card business was also strong. Wealth 9 months results decreased 11%. This is mainly due to lower average asset valuations and no performance fees during Q3. Private Banking on the other hand continues to attract new customers and net new money. Life is still the market leading Swedish unit linked insurance with a market share of almost 20% and increased its result by 9% during the 1st 9 months this year. And finally, the Baltics, where the result increased by 3% year to date. Last year, we had write backs of almost €1,500,000,000 during the same period. So turning to our strategic growth areas on slide 11. Over the last 3 years, we have been clear what we have invested. We have invested in large corporates in the Nordics and Germany, Swedish SMEs and also savings offering to private customers, particularly in Sweden. If we start to look at the merchant banking growth initiatives outside Sweden on page 12, in our Nordic and German large corporate business, we have established a scalable platform that we hopefully will use a lot more in the future. During the Q3, we attracted another 20 2 new large corporate customers, bringing the total to 276 since the growth initiative was launched 3 years ago. The credit portfolio has increased with $8,000,000,000 in the quarter and $130,000,000 in total since the start. The new customers use on average 3 product clusters, often payments and lending. As the relationship develops, more and more services are added. For example, trade finance, foreign exchange, DCM, leasing, card, life insurance and income increases. In Sweden, an average large corporate uses between 7 8 different product clusters, which is actually the highest that Gruner's associates have measured. And of course, we hope that our Nordic new clients also would do that in the future when we penetrate them. In the emerging financial landscape where costs for capital, liquidity and long term funding are increasing more and more, customers go directly to the bond market for financing. We are active in developing corporate debt markets and top the league tables in the Nordics as measured by corporate bond volumes. On the slide, you can see some of the transactions we have taken part of during the last quarter. We are also deploying more analyst resources on the debt side and are even better equipped to provide the market with credit research. So our strategy remains firm. We will leverage our unique business model in all our home markets. This creates more and deeper relationships with our customers. The second growth initiative, Swedish SMEs on slide 13, you see that this initiative continues to yield good you see that this initiative continues to yield good results. This year 6,500 new SMEs have chosen SEB. During the last years, we have increased our market share by around a percentage point each year and we now have a market share of 12.3. Customer satisfaction continues to improve and we have a very positive development as measured by SKI, the largest Swedish customer quality survey, As you can see on the slide, we do not have the most satisfied customers yet, but we are definitely well on our way and the only bank that really improved our position last year. Another important piece in this respect was our recent award when 1,000 small corporates were asked that shows us as the best SME bank in Sweden. On slide 14, our 3rd growth area, long term savings. As the population ages and increasingly needs to take responsibility for its own economic security, this market is growing and with it the need for increased advice around long term savings. Growth in this area is strong. One example is deposits from Swedish households, which have increased by $11,000,000,000 this year and at the yearly rate of 10%. Private banking volumes are up $23,000,000,000 and within life insurance assets have increased by $14,000,000,000 So this is clearly a very interesting initiative. Then moving on to the balance sheet on slide Our balance sheet has continued to strengthen. The core Tier 1 ratio is now 16.5% according to Boston 2.5 and I will come back to capital shortly. We have a liquidity reserve of approximately 25% of our balance sheet and an LCO coverage ratio of 154%. The 100% minimum requirement will be implemented in Sweden already beginning of next year ahead of rest of Europe. Our funding access remains strong. The loan to deposit ratio continues to range between 130% and 140%. Non performing loans have decreased by 27% over the last year and our NPL coverage ratio has increased to 67%. If we look more in detail at our capitalization on slide 16, we see the three factors have supported the higher core Tier one ratio 16.5% this quarter. Half of the improvement comes from the approval of our risk model for shipping by the Swedish FSA that is $19,000,000,000 A quarter comes from capital generated in the bank during the quarter profit and another quarter comes from the strengthening of the Swedish krona that we saw during Q3. Regardless though of how we measure, all capitalization metrics have strengthened over time and that holds whether you measure us using Basel 1, Basel 2, Basel 2.5 or even Basel 3. According to fully implemented Basel 3, including the effects of how our life insurance business would be treated as well as our best interpretation of coming pension accounting rules, the so called IAS 19, our common equity Tier 1 ratio could be around 13.3%. Another area of strength is our funding position as you can see on slide 17. During the last 9 months, we have raised €85,000,000,000 of new long term funding, which is more than the €70,000,000,000 that matures this year. Over the course of the next 12 months, only some $50,000,000,000 will mature. And we continue to have a positive replacement global economic recovery is still slow, but the forceful action by central banks around the world seem to have lowered the risk in the capital markets a bit. Our strategy remains firm as does our focus on customer relationships. Customers do need a strong banking partner in these markets and we will be there for them. Resilience and flexibility remain our guiding principles and we continue to stay in the middle of the channel where we know the waters. We continue to work on becoming even more efficient while we leverage on the scalable platform that we have now built in the Nordics and also in Germany to provide the foundation for future income growth and coming even closer to customers that have entered into SEB. And with that, I would like to open up for questions. And I leave over to you, Ulf. Thank you. And operator, we're then ready to take the first question. Thank you. Our first question comes from the line of Omar Keaynan from Nomura. Please go ahead. Your line is open. Hi, good afternoon. Thanks very much for taking the questions. My first question is just on capital. And I just wanted to ask, I think you indicated in the Q2 that SEK 30,000,000,000 to SEK 40,000,000,000 of RWA improvement further could be expected. And given that you had €19,000,000,000 approval of your model in the Q3, is it fair to say that there's still €14,000,000,000 to €24,000,000,000 improvement in RWA from models and efficiencies to expect? Or has that guidance perhaps changed? And then just secondly, if I fully load everything with mortgage risk weights and that benefit then I do get the 13 point 7% fully loaded core Tier 1 at the end of the year. So even if you account for countercyclical buffers, then your existing capitalization, as you pointed out, looks fine. So how should we think about capital return to the shareholder given last year you paid out 34% dividend payout and you seem to be accruing dividends in capital at the same rates. And it feels like the growth outlook is weakening a little bit as well. So perhaps there weren't that many opportunities as before. So how should we think about the dividend for this year and your capital policy? Okay. Thanks. The first one is the answer is yes on your question. And the second one is that we need to come back to that one and see where this year ends. And also hopefully we will get more clarification from sources regarding mortgages etcetera. So we need to come back to see where that question would come. Okay. Is there anything you foresee in terms of regulation that would perhaps make you more conservative? Because I'm just trying to put together where you think the uncertainty is because even if you see mortgage risk rates in Sweden go to 20%, then I'm still trying to figure out how you're thinking what where could the downside surprise be on capital to make you more conservative, okay? I think so far what we know from Swedish regulators is the firm 12% 2015. And I guess most of the Swedish banks look very healthy at the moment and very well capitalized. It's of course also a question regarding how Sweden might react to this. So I think there are some things that we need to take into account. And of course, don't see how we will address them. But this will definitely be discussed much more during Q4, this year ends and also towards the regulators as well as we're watching. So I can't give you more specifics than that, that we are clearly watching this. And of course, we will have to make sure that also our bank are efficiently managed. Okay. And perhaps just another question on lending and deposit spreads. I guess just thinking about the rates outlook for the Q4, Are you confident that loan repricing can outweigh further deposit margin in the Q4? Hi, Omar. Jon Erik here. Well, it certainly has during this past quarter. And I think it's all again back to the macro development. But so far we've been able to reprice both corporate lending and the mortgage lending in a good way. And as it looks now, we should be able to continue to do that. And at the very low interest rates we've got today, even though there's another cut probably anticipated by the market in December, I don't think that we can't sort of continue on the to lose on the deposit side forever. We're getting to such low levels now that I think there's a bottom to If I may add, remember that we at the beginning of the year allocated more liquidity and funds of B sources as well as more capital to the divisions. And the whole idea with doing that was of course to make sure that they accurately price that what stick the customers as such. And we're starting to see some of that effect now, but it takes time also to implement all these new rules in the organization. So everyone gets fully aware of the impact of new regulation and how that would impact pricing going forward. So from that point of view, we're starting to see an effect of that and hopefully that can continue. Could you give us a flavor of perhaps what the front versus back book spread is? I guess you talked about the higher liquidity and capital costs being pushed to the division starting to have a beneficial effect coming through. Could you give us an idea of what that uplift could be? No, we haven't done that. It's on the mortgage spread side where we've been very transparent exactly on where we are. On the corporate side, we need to be a little bit more careful also given of course the relatively large size of the customers that we are having and the different price in terms of whether you're a retail corpor on the retail corporates and how they get priced and so on. But we don't disclose the corporate front and back book spreads as such really. Okay. Sure. Understood. Thank you. Our next question comes from the line of Masih Yazdi from Credit Suisse. Please go ahead. Your line is open. Hi, good afternoon, everyone. I only have a very detailed question following up on the press conference this morning. It's on your other expenses and you have this line called other operating expenses other operating costs. And you usually have this as a plus that is it reduces other expenses. And this quarter, it's minus of €124,000,000 is a swing factor of SEK280 1,000,000 from the previous quarter. I'm just wondering what you include in this line and how we can expect this to move going forward? Thanks. Hi, Matti, generic. It's really a lot of different bits and pieces and it has to do, I think, with a different a little bit of a different amortization pattern. I was commenting this morning in Stockholm on the fact, and I think I did also in Q2 that we will want to amortize better during the year to have a smoother development during the year, not to have a large Q4 effect the way we had last year or a very low Q3. So there is some of that change pattern going through that line. Okay. Does that mean that there will be no seasonal increase in cost in Q4? The ambition is to bring the seasonality or the variance between the quarters down through that improved amortization pattern, yes. Okay. Thank you very much. Our next question comes from the line of Andreas Haakonsson from BNP Paribas. Please go ahead. Your line is open. Yes. Hi. It's Andreas from Exane here. We asked you a question I'm referring to Annika. We asked you a question in the meeting in Stockholm about your future profitability. And you didn't really want to commit anything it sounded like. But then Swedish media is saying that you agreed to 13% with them. Can I just ask you, I mean, the 13%, if we deliver that today with the current capital base, that means that the profit has to roughly 30% higher than where you are today and we're today at almost no provision? So I guess that would have to come up over time as well. So it feels like it's the capital base that really needs to come down to reach that 13%. So are you more like Nordea talking about the profitability target under a set of circumstances? Do you actually believe you can reach that with the current setup? Thank you. Hi, it's Andreas. I'm sorry about that. It was a reasoning with 1 journalist and it's always it's taken out by piece. I haven't actually said anything different from what I said before. What I actually think I answered in Q2 on this specific question was that if we could assume that the cost of capital is and for that reason, no, but let's say it's around 10% ish or 10%, 11%, of course, the shareholders could anticipate capital percentages above that to stay shareholders. And that is what I did answer that journalists. And of course, our ambition is of course making sure that we also give our shareholders a decent return above cost of capital. What that is exactly, we need to know a bit more about the regulation to optimize the capital also, of course, in SEB. There is no reason why we should hold more capital than we actually think that we can deploy in the bank. But there are still some unknowns that we need to take into account. So therefore, I cannot answer it better than that, but that was the reasoning and I was also a bit surprised to see how that journalist said that I had committed myself to a figure because I haven't. The only figure I have committed myself to is that I think 15 is actually reasonable to reach during this extremely low interest rate and the high capital ratios and the kind of bank for the SCs. That's excellent. Thanks very much. Our next question comes from the line of Sophie Petersons from JPMorgan. Please go ahead. Your line is open. Yeah. Hi. Thanks very much for taking my question. Here is Sophie from JPMorgan. I just had one question around your SME book. You have been quite aggressive in acquiring, winning more business in the SME market. Are you concerned about the credit quality of Facebook given that Sweden growth forecasts are coming down? Also some of the larger companies are reporting slightly weaker numbers that potentially could hurt smaller companies? Or do you expect the credit quality in the SME book to remain stable? And also maybe if you could talk about your view on losses for 2013? Thank you. As we have seen, we have really gained very interesting and prosperous clients, I would say. So we can't really see any signs now that that would be any reason to worry about that should deteriorate. Of course, in very small corporate that we've had for a long time, some of them of course challenged by liquidity because they're also pressured. But overall, we see no signs in any particular sector on the SMEs that wouldn't work very well. So they look fine to us. And also the clients we take on board, of course, we do look at the credit application on how they look. So we feel comfortable with that. The only thing Mark can say about losses, it's so difficult for losses to give forecast on losses. I think we have respect of the losses this year are very, very low. And of course, in the macro environment where we are, but I mean for us to have a small increase in office is still being very, very low. We have 6 basis points at the moment. So of course from that point, I don't at the moment see that we are worried for any particular sectors or clients. And Sophie, we have answered to this question earlier that when you look at the base forecast and even including what the Swedish Central Bank is writing in their financial stability reviews, which it may change given what they will present here in November, December sometime. But still, we said that it's not unreasonable to think that it will be somewhere around 10 basis points. We're now well below the 10 basis points for next year and so on. But we'll see what happens and it's difficult in this environment to know exactly what type of losses will materialize. But we don't as Annika said, we don't really see any pressure in the system on the credit loss side. And we feel very happy for that of course. Do you think it's too ambitious to assume that your losses will remain stable in 2013? Yes. I think it's probably aggressive to think that one would be guiding for 6 basis points in this type of environment, but it doesn't mean that we think it needs necessarily to go higher. It just feels that we are on a small on a low level. So even SEK 100,000,000 loss could be a relatively large impact on the basis points we're talking about here. So it will be a little bit boggling between the quarters. It wants to be a smooth process, but overall we think that the asset quality is good. And we are well provided for, don't forget that we are having an NPL coverage ratio that is increasing in the quarter as well. Okay. And what would you say that a normalized loss level is? And to that we have said, if you tell us what's normal, we will tell you what the normalized loss level would be. But given in this environment where we have so much liquidity being put into the system by central banks, which will keep rates low for a very long period of time. Given that there are so many other pressures going on within the system, normalized doesn't seem to be a good way to comment on things, which is also coming back to the Andreas question, why we don't really particularly feel that we should talk about the normalized return on equity, but rather see what's doable in this type of environment we're living in right now. If you start to put in some ifs and buts then everything is possible. Okay. Thank you very much. Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead. Your line is open. Good afternoon to everybody. I have just a couple of follow ups. From your previous statement from the previous question, am I right in saying that you're basically saying that what we from what you see right now, basically asset quality is going to stay where it is, what we have seen in the Q3 or at least in the 9 months. Is that what you're saying? And secondly, I'm not sure I missed the amount of risk weighted assets decline that you expect in the coming quarters because of internal models. Thank you. Yes. I think we said at the moment that the 9 months loss ratio that you have seen, I mean, of course, we have to be very careful with the environment here. But what we see when we look through the portfolio, when we talk to our clients, we don't see any reason for an alarming figures that will come forward actually. We see rather confident for the portfolio. Despite that, it is challenging environment. So of course, it might be a small loss here or there, but I don't think it's going to distort the figures as we feel today. Okay. Regarding the risk weighted assets and the modeling with the FSA, we said that we had a big decrease during Q2. And we said that we had approximately as much as that coming the coming quarters. And you saw probably now and then you can see how much we're expecting. Yes, yes, yes, okay. And maybe if I can, it's important to understand that the way this works is that when you move into an advanced IRB model, you do so with your whole balance sheet and you bring portfolio after portfolio into your book came through in the spring and the shipping model came through now is almost a coincidence that they come in these exact quarters. There may be a gap of 1 or 2 quarters and then something comes through. So don't expect this to be sort of quarterly portfolios rolling out like Clockworks. It will be could be a couple of quarters in between sometimes. Thank you. And if I may, is there a level of Swedish kronor versus euro versus other currencies where you could be if you would start to be concerned for the export in Sweden? No, I think the view that we take on that is that the kroner has appreciated quite a bit, but it may well appreciate even more than it has done now. And we don't think there will be any interventions made by the Swedish Central Bank until we come significantly under SEK8 against the euro, for example. And we don't think that it's out of line where it is now. We think it's probably where it should be. Okay. Very clear. Thank you. Our next question comes from the line of Claire Kane. Please go ahead announcing your company name. Hi, there. It's Claire Kane from RBC. I just want to ask a couple of questions on the fee and commission line this quarter. I think it's the lowest number since Q1 twenty ten. And I know you mentioned some FX headwinds. But I guess when you look at your chart, there seem to be somewhat of a downward trend in line. And you did say in prior quarters that a lot of this new business you're taking on is at lower margin. I just wonder if you could give us your thoughts on how much you think of this is structural for the business, if whether we should consider a lot of these new customers that you're taking on if it's just to mitigate the lower margin? And how we should look at a run rate for flying going forward? And then my second question really just to touch on capital again. Maybe if you could just give us your thoughts on perhaps whether you think the stance of the regulators become a bit more accommodative in the last quarter. Some of your peers seem to be talking much more about giving back capital. And you seem to have moved into the excess capital camp quite quickly in the coming quarters. So I just wonder whether you think the regulators have been a bit more happy was happy with the Swedish banks' levels of cash at this stage more so than maybe a couple of quarters ago? Thank you. Hi, Claire. It's Ulf. I think one has to look at the fee and commission line by splitting it into these 3 segments that we normally use for the illustrative purposes. The first one being what we normally put to the very left, which is the advisory secondary markets and derivatives. That was stable in this quarter. Actually was relatively stable for being a 3rd quarter. Brokerage wasn't too bad. Then the second part is the custody in mutual funds where we had some seasonality in custody like always because there seems to or there are voting rights and so on in the Q2. But then both assets under management as well as assets under custody came down in the quarter on average, which may be a little bit counterintuitive given the strong finish of the stock market in the Q3. But on average they were lower and we charged the fee on the daily basis. So it's the daily average that makes the sort of that drives the income within that segment. And as Annika said, we basically had no performance fees in that part. So that also put a little bit of a lower end on that particular mid part. Then the 3rd area is the payments cards lending deposits guarantees. We normally would see some seasonality on things like corporate charge cards because we the corporate customers tend to be more using their private cards during the summer when they are on vacation and we would have a stronger Q4 and Q2. And then as well we have a little bit less of lending underwriting and the syndications and a little bit less of guarantees and so on. But nevertheless, we feel that the reason the Q3 was a little bit soft on the Q2 is more that the soft that the Q2 was actually relatively strong. If you put as we tried to do the Q3 in perspective of the Q1, it doesn't actually look too bad. So it's more a factor of the three things that coincided than a general softness in all of these income lines. And unfortunately, that together with the foreign exchange effect put it at a level which was lower than we have seen for some time. But it doesn't necessarily mean we think we actually would need to be more cautious on that income line going forward from where we are today. It just happened to be that the three things happened more or less at the same time in the quarter. So we don't feel worried about this particular subject. On the capital question, I think again if I just quickly reiterate some of what Annika said. We look of course good on any of the capital measures you may want to use anything from raw leverage to the BAL3 fully implemented. And we're at 16.5%. And if you take out the BAL3 fully 3 fully implemented effects and the deficit in the pension trust, we're at 13.3%. And even if you were to assume higher risk weights on mortgages, we are with our starting point of higher risk weights and a relatively smaller book on very nice levels to start with. So that's sort of SEB in that debate. Now the regulator I think what you're hearing from other banks and what we would probably agree with is that the discussion from the regulator previously has been to I think say to the financial sector that hold on to your capital as the crisis develops and as the rule book develops to cater for that crisis. Once the rule book is made clear eventually and we hope that time is here very soon, then the landscape is clear for people to navigate and people can start to optimize their capital basis. And I think the whole sort of political discussion around which levels are possible to maintain or not. It's easier to have once you have a set rule book to relate to. Thank you very much. It's all very clear. Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead. Your line is open. Hi, Jacob. Just two small ones. Firstly, on net stable funding ratios, could you say anything about where you stand there? But also is this the ratio that you currently steer away towards at all or has it fallen out of your focus? And secondly perhaps just on the cost side, just move of seasonality with in Q3 and then versus Q4. That move in other expenses, can we understand that basically as there's €200,000,000 cost or say €150,000,000 cost that should have come or would previously have come in Q4 with your normal seasonality, but that's the level of reduction of seasonality. Is that the way of thinking about it? Thank you. Hi. In terms of the NSFR, I think the fair comment is probably to say it's not at the top of the page. On the top of the page, you find the banking union, you find capital ratios, you find LCR, but NSFRs are something that will be debated later. And from the Swedish regulator, they look at something like 2018, 2019 for that to be implemented. And I expect by that time it will look very different to the definition we see now. We've taken the view that we will move slowly towards compliance on that since I expect the definition to change. I think it's a heavily criticized measure in the 1st place and one shouldn't have too much effort on clients at this point. On the second question on the cost line there, yes, I could agree with your reasoning to an extent, but not only would effects otherwise perhaps have appeared in Q4, but perhaps earlier as well to an extent. I think it's a matter of improving amortization patterns and we will continue to work on that so that we don't have that sort of of Anton Kvaychak from UBS. Please go ahead. Your line is open. Thank you very much for taking the question. Just a brief one on Baltics please. Can you please give us a little bit more color on the Baltic impairments this quarter? It seems that write backs in Estonia have reversed, but Lithuania is performing somewhat better? Correct. Even though I think if you look at all of them, we're basically at very low levels in Estonia and in Lithuania. And Latvia is having a little bit more problems. But that's also true. One way to understand that is that if you look at the structure of the impaired loans we have, we have a little bit more of stickiness in terms of the retail type of NPLs in Latvia than the other two countries And the crisis was a little bit more severe in Latvia compared to the other 2 as well. So it's fair to say that the sort of the Latvian economy is even if it's doing better there are still some more tail risks in terms of having to do work out in Latvia compared to Lithuania and Estonia. That's why you see these numbers. Okay. Thank you very much. Our next question comes from the line of Johan Ekblom from Bank of America. Please go ahead. Your line is open. Thank you. Just a quick question on net interest income. If we look at the performance in the merchant banking and in particular in trading and markets and in GTS, there's quite a sizable move down in the quarter. And I think you commented how low rates were quite painful, particularly in the GTS business. Given what short rates have done, should we expect an even larger move down next quarter? Is there anything you can do to compensate for this? I think we haven't changed our sensitivity levels that we're given for the short term REITs, which is still $1,300,000,000 for 100 bps or somewhere around 3.50 or so for 25 bps on an annualized basis. And when we look at the sensitivity and how it played out in this quarter, we can see that it's sort of made sense to have that. The GTS one is more ascribed to the low level as such because in cash management and GDS when you receive and have some float and you have some deposits as well that has an impact when the rates go lower. On trading capital markets, it's much more difficult to have any prediction of where things will go. They are on a lower level now than they have been for some time, but it doesn't necessarily mean it has to go lower because rates fall since it's more a question about having the turnover on the trading inventory and so on. And whether in particular you have been holding some stocks or bonds and funding that whether you've been using the futures market more to hedge it and being short of those type of bonds as well. So I think the predictability and the visibility on the TCM's net interest income is as always very difficult. And therefore, when we make comments on what we think are the trends, we always said, please take away TCM to begin with because trading doesn't really look at which type of income lines they produce the numbers on. And to us, it makes sense that the comments on terms of NII shouldn't really include the TCM because they have a little bit of a different pattern as such. I understand that. But I mean, if we then just look at the GTS business, the drop we saw Q on Q explains 100% of your interest rate sensitivity. Now I realize there are a lot of moving parts, but was there something else that is temporary that drove that down? I mean, they have a little bit of a different mix. It's they are sensitive within that business not only to the SEK, but also to what's happening in terms of floats on the Euribor side and so on. So I think it's I would describe everything only to the short term rates being lower, but also to business volumes and the level of deposits that we had within that particular segment. And you can see from the totality that we had a little bit lower, deposits within different parts of our deposits within different parts of our business as well. And we have been very clear that we have a sticky corporate side, but then we also have some corporate on the institutional side, which tends to be a little bit more volatile over time. So it's not only interest rate levels, but also volumes that get throughput in that particular part. Thank you. Our next question comes from the line of Pavel Wieczynski from Nordea. Please go ahead. Your line is open. Yes. Hello. This is Pavel from Nordea. Just couple of questions. A question on the number of FTEs. They come down by 2% in the quarter and 6% in retail Sweden. I'm just wondering what we can expect here and how this actually fits into your expansion in the retail area. And a detailed question, I guess, risk weights on retail mortgages are coming down. And just a question, is this in Sweden or is this abroad? I think the Feet is also we bring in a lot of what we call summer internships during summer that is also ends towards the Q3. So it's slightly volatile. So I think it's not specifically retail, but retail is actually down, I think, some ETFs or something during the year, but it's not as dramatic as it looks there. But I think what you see is also on the 1100 less FTEs, of course, big portions, I think close to 700 people is the divestment in Ukraine, but 400 in the bank. But we expect, of course, in the future to be fewer and fewer. We have to work more efficient. And I think in retail, they have been decreasing kind of support and staff functions in retail, not corporate advisors and private advisors, etcetera. So I think the investment in the branch network as such to talk to clients that is definitely intact. Okay. On the risk weighted asset, I think I would rather say I think SAB has been slow there because I felt that we don't have worse mortgages than any other bank. We have people actually sometimes living in the same street next to each other with the same income that we have weighted very differently from other banks. I think now when our mortgage is starting to work, we can clearly see also that of course that we have good risk weighting on our mortgages. So I think you cannot choose models. So I think the model we have now, the advanced model that that will come into place, we need to have the reserve on the contrary on the capital. But before F and B we had reserves in risk ratings and we've also been having reserves on the capital. And now we're trying to move the reserve to the capital part. But I guess the question on the retail mortgage is Sorry, it's only Sweden. It's only Sweden. It's only Sweden. Yes. Okay, okay. Okay. And we have time for one more question now. Thank you. Our last question comes from the line of Ronny Raine from KBW. Please go ahead. Your line is open. Good afternoon. Two questions, I'm partly asked already, I think. First one on the Corporate Center NII. Any guidance you can give us on that would be very helpful for maybe last quarter, but even more so for the years ahead? And secondly, I think Johan asked already on the hedging. Do you do any hedging of the interest rate sensitivity of your deposits? And if so, how? And if not, why not? Hi. On the I'll start with the last question on hedging. We don't do that. On the Can I ask why? Well, one of your competitors seems to do it. And what's the sort of let me Well, let me Ulf is waiting. Yes, I'm leaving. And the reason is, I think it comes back to we acquired our German friends in the early 2000s and so on, There was a lot of modeling going on in the bank in terms of how you model liquidity and how you model the process and so on. And then you basically have to ascribe a duration to those liabilities and then hedge that. We think that it's more clean to say that if you assume that the duration is what it is in terms of what you have on the account and it's very short sighted, then if you want to hedge that, don't call that really just a hedge and ascribe it to being some sort of net risk measure, but use that as a gross number and look at this as taking a position to hedge off the interest rate sensitivity on the liability side. So I think we have a different philosophy. We don't we think if we were to put on SEK 100,000,000,000 as a hedge for our liability side, we would call that a position, not really a hedge. I think that's where we Do you think that's the size of the hedge of your competitor roughly? We don't know what they are doing, because we haven't really taken any interest in looking at that since we have a different philosophy of how we run the bank in terms of risk. Yes, clear. Okay. Back to your NII question on around the corporate sector then. I think the reasoning we had in Q2 was that we've been front loading a lot of the funding in 2,009 2010 and we've continued to be very conservative on that. Now we've reached a point during this year where we don't have to build more buffers. We don't have to have larger liquidity portfolios. We're LCR compliant in total on euros and dollars. And we don't have to more do more. We have less of volumes or lower volumes to refinance in the years going forward. And you see in the fact book, there's a slide showing what the approximate amounts are in covered bonds and CET1%. So I think what we're saying with that is that on these group wide functions, you should see a funding development, which means we're replacing old more expensive funding with cheaper new as we go forward and we don't have to build additional buffers. So that should be a positive effect. So assuming that you don't build any buffers anytime in the future, you just keep the structure as it is, should we look for EUR 200,000,000 EUR 300,000,000 every quarter now? We haven't quantified the amount. I'm saying that directionally, it would be a helpful one. Okay, understood. Thank you so much. Okay. And that was the final question. And thank you all for participating in our conference call. Some of you we hope to see here at Kennen Street later on today for the presentation in our offices. It's 5 p. M. U. K. Time. Thank you. That does conclude our conference for today.