Good afternoon, ladies and gentlemen, and welcome to the SEB Annual Account 2011 Results Conference. At this time, all participants are in listen-only mode until we conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, press star then zero on your telephone. I would now like to hand over to the Chairperson, the CEO and President, Annika Falkengren. Please begin your meeting, and I will be standing by.
Thank you. Welcome to the conference call and our presentation for 2011 results. Last year was the year of market anxiety and high volatility, a year characterized by worsening of growth prospects in large parts of the world and the sovereign debt crisis for many U.S.-owned countries. Interest rates fell sharply, and stock markets were, on average, down by 20%. A number of countries are facing large economic challenges and difficult decisions in regards to their finances. The fact that central banks will continue to provide liquidity to the economy as a support measure has been particularly important. Looking back on 2011 from the bank's perspective, I feel that it's been more crucial than ever for banks to show resilience through a strong balance sheet, as well as remaining close to its customers.
Our strategy is based on deepening the relations to our customers through good financial stability while we grow in areas of strength. The road toward long-term profitability will be built upon long-term customer relationships. Based on this, what did we do last year? Turn to slide two. You will see our three main priorities last year. One, continue building upon our relationship banking model that generates more business with existing customers while also allowing for business with new customers. Two, increase our footprint within the corporate segment in the Nordics and Germany, as well as within the SME segment in Sweden. Three, further strengthen our resilience. Let's start with the first two of these areas, starting on slide three. Firstly, our relationship banking model has ensured that today we have more customers that do more business with us. In one year, we have executed more than one billion transactions effectively.
During the past year, we've gained 90,000 more private customers that regard SEB as their main bank. Lending to private customers has increased by SEK 46 billion, and deposits have increased by SEK 24 billion. We have increased the number of large corporate customers and deepened our relationships with existing ones. Our income has increased by 8% in this segment. The largest company, surveyed by Prospera, shows that SEB maintains the number one position in Sweden on all parameters, and that in the Nordics, for the first time, we are number two. We were named Bank of the Year not just in Sweden, but also in Estonia and Latvia. Looking back, it is clear that our choice of building and running our workout team during those difficult years was the right thing to do.
On the second area on slide four, we continue to deliver our growth initiatives according to plan. The plan included becoming an even more focused corporate bank. In Sweden, this means not just being a bank for the largest companies, but also for the smaller and medium-sized ones. To accomplish this, we have strengthened our competence in retail banking. For instance, when it comes to trade finance and payment, and also created regional, very strong business centers. During last year, we increased the number of SME customers by 11,000 to 120,000. Actually, twice as many companies regard us today as their main bank compared to just 2005. We have a 12% share of Sweden, one million SME customers, with lending amounted to SEK 150 billion. That is 13% of the bank's lending portfolio.
When it comes to our large corporate customers, each of the past quarters has gone through our initiative to grow in the rest of the Nordics and Germany. We have clearly improved our position as a bank for large corporate institutions. In 2010, we gained 202 new customers, of which 114 came in last year. We have increased our lending by SEK 108 billion in this segment during the last two years. Page five, income increased by 3% and cost decreased by 3%, and we are well below our cap of keeping cost at the 2010 level of below SEK 24 billion. Net interest income increased by 6% compared to last year, while net commission income was stable. Net financial income increased by 13%. Life insurance income decreased by 2% as a result of lower stock market valuation and the low interest rate.
On the net credit losses line, we have released provisions worth SEK 780 million in 2011 against credit losses of SEK 1.6 billion in 2010. Now, I will briefly go through some of the lines on the income statement on slide six, starting with the NII. The most important driver of growth is NII and the increase, of course, in volume. Our lending volume increased by 10%, or SEK 111 billion during the year. Deposits increased by 21%, or SEK 150 billion. In particular, corporate-driven, which accounts for two-thirds of the increase. These volumes are evidence of our relationship-driven model, where customers increasingly turn to us for financing and also entrust us with the deposits. Looking at the NII development year on year in more detail on slide seven, we can see that there are quite large differences between 2010 and 2011.
In 2010, the lending and deposit volumes were down. As the short-term rate fell, deposit margins came down, and lending margins were a little bit up. Last year, most of these trends reversed. We had volume growth throughout the year, higher short-term rates supported deposit margins, and while we started the year with margin pressure, margins started to pick up in the latter part of the year. We end the year with slightly better margins, especially on the corporate side. For mortgages, the book is up a couple of basis points. Please bear in mind that the mortgage margins were flat from mid-2009 until the summer of 2011. In funding and others, NII was a clear negative in both 2010 and last year. New regulations require larger liquidity buffers and longer finals in maturities.
We have also reduced bond portfolios with a shift towards higher AAA-rated papers and effects from the divestment of German retail in the beginning of 2011. During Q4, the effects were smaller than earlier in the year, but we have stopped the large negative impact from the three first quarters. On slide eight, you can see the financial impact on our modest ETF holdings. During the last quarter last year, we took SEK 240 million over the NFI line, marked the market impact from spreads widening, including further marks down on the small Greek holdings, and another SEK 226 million over other income, primarily from the Spain or Portuguese sovereign debt. Total effect in 2011 was a total of SEK 969 million from the ETF securities. At year end, we have sovereign bonds of SEK 0.4 billion out of SEK 11.8 billion in book value for the total ETF portfolio.
Turning to cost on slide nine, the banking landscape is changing significantly. The cost of running a bank is increasing, which requires us to become more cost-efficient. We put a cap of SEK 24 billion on our cost in 2011, and in the autumn, we extended this cap to 2014. Now that our results show a cost of SEK 23.1 billion, we're going to aim to keep the cost at or below this level going forward. Moving to the divisional performance on slide ten, all of the divisions report overall better results. Customer-driven pre-provisions up 11% against last year and 5% in the quarter. Merchant banking had a good year last year, operating profit up by 14%, and particularly the last two quarters have been characterized by high customer activity and all areas developed strongly, particularly FX, venture finance, and GTS.
We also see that our corporate customers have been better prepared to meet this downturn with stronger balance sheets. This trend continues to show stability, which of course is based on the customer care orientation. Retail banking also shows higher lending volumes and the better operating results, up by 36%. Both the SME and household sides have improved considerably, and operating profit in the year was up. Wealth management results were flat, mainly driven by the development of the stock market. Private banking has gained 1,300 new customers, and net new money increases by as much as SEK 24 billion last year. Life decreased its results by 8%, and as we know, asset values and lower interest rates impacted the results. We continue to be leaders in the unit-linked insurance in Sweden with a market share of 22%.
Last but not least, the board distribution has shown profits for the sixth quarter in a row, both before and after credit losses. Here, we see that income decreased somewhat during the year. Costs increased more. Asset quality on slide 11, credit losses for the Nordic and German credit portfolio [were below six basis points], and in fact, it's pretty much the average credit cost for the region over the last 10 years. Non-performing loans have decreased quarter by quarter in the Nordics and are now 11% on the Nordic portfolio. The group's non-performing loans continue to decrease, down 25% during the year to SEK 6.2 billion. Looking at the lower part of the slide, we can see that we have, during the last year, grown our credit portfolio in the large corporate, SME, and mortgage lending segment.
These are segments that will continue to be very important to us going forward, and segments that in our bank have had a very high asset quality over the years. Turning over to funding on page 12, we have increased our matched funding further in 2011, and we have, during the last year, been proactive in pre-funding, bringing in more long-term funds than debt maturing. We have continued to do so in 2011, and year- to- date, we have raised SEK 24 billion, which is more than 30% of this year's maturing debt. On this slide, you can also see the good progress in deposits, most especially the growth in corporate deposits. This is a clear testament that, also during the financial crisis, we have been able to attract more deposits despite common belief from regulators that these kinds of deposits are less sticky than retail deposits.
To the left, you can see today how strong the balance sheet is. On page 13, in the light of the bank's strong financial position, the Board of Directors proposes that dividend will be raised by a quarter of a crown to SEK 1.75 per share, up 17%. The increase represents approximately half of the improvement in the result. It also represents a dividend payout ratio of 35% of the yearly profit compared to the Board of Directors' dividend policy of 40% during the business cycles. Now that we leave 2011 behind, on slide 14, I can conclude that SEB is well positioned, operating in a region that we know very well, and that is the most stable region in Europe. Our customers remain active. We're growing our corporate business in both the Nordics and in Germany, and we will now stick to our strategy.
Looking forward on the last page, page 15, the picture is not only rosy. The sovereign debt crisis in Europe requires a long-term solution and a harsh treatment is being prescribed. Here in Sweden, all four large Swedish banks are going to have to adjust to higher capital requirements and an earlier introduction of those regulations than other banks. The cost of running a bank will definitely increase, but there are some bright spots for SEB. Flexibility and resilience will remain guiding principles for us, but our relationship banking model and our strong balance sheet, we are well equipped to support our customers even in this environment. Our customer-driven volumes continue to increase, and we see that businesses in our region continue to show cautious optimism. Some optimists have even returned to the financial markets. I would summarize it as a slight positive trend, but in a very uncertain pace.
With that, I'd like to open up for questions.
Thank you, Madam. If you do have a question at this time, please press star one on your telephone keypad. To cancel your question, please press the hash or pound key. Once again, that's star one to register a question and the hash or pound key to cancel. There will be a short silence while participants register for questions. Our first question comes from the line of Nick Davey from UBS. Please go ahead with your question.
Yes, thank you very much. Good afternoon, everybody. Nick Davey from UBS. Just three quick questions, if I may. The first, please, on net interest income. You referenced in the presentation that the drag you've seen for the last two years from funding, another, is beginning to subside. I wondered if you might be able to talk a little bit about that theme into 2012. Clearly, as you've also said, you've been active in the funding markets in early 2012. You will have observed where spreads are. Could you please make a few comments as to whether or not you think the work you need to do on the funding side will be a material driver to the top line in 2012? Maybe if you could tie into that your thoughts or attitudes towards the LTRO coming in February. The second question would be on ROE.
You haven't given us too much in the way of firm guidance on return on equity targets. Could you please lay out your thoughts or any plans you might have to introduce some sort of more strict returns or profitability targets later on in this year, now that we're getting some more regulatory visibility, at least around capital? The third question would be on right-backs, reversals coming out of the Baltics. You seem somewhat cautious, let's say, on the outlook for more reversals in 2012. Your non-performing loan coverage levels have always been high in the Baltics, around 60%. Is that where you think they need to be, really, for the amount of, let's say, house price or asset price decline that we've seen, or has anything changed particularly in your view of, let's say, losses in the region in Q4? Thank you.
Okay. I think I can start with the last one, again, that was regarding the Baltics. Yes, we are cautious, and I think at the moment we think that the stable level of 60% is to stay around. We also think that with Europe now maybe going through a recession, it looks at least pretty unclear. We think that that will be effective, so it will take a long time. In fact, we see a lot of good signs in the Baltics, but we think we just don't want to be in a rush to do more right-backs at the moment. I guess this is what you will see for a while, but we need to see it getting forward. I can't really give any better guidance than that at the moment. When it comes to the return on equity, that is the ten million dollar question, I guess.
I think in this environment where we are today, where Swedish systemic banks should have a capital between 10% - 12% in the coming years, I think return on equity between 10% -1 3% is probably a reasonable target. I think it's above 13.5%. I think that at the moment we were, let's say, positive it's quite high. That's why we have refrained from really setting a target at this moment. We think we need some more steps forward. We don't really know if we will be allowed also to run ahead on 12%. We will see what happens there. I think 15% at the moment is too high. In joining on this LTRO repo, I think we have debated that a lot. Running a bank in Sweden is also a way of measuring in the middle between the sentiment.
I think we come to the conclusion that we are a strong bank. We have big buffers. We have no problem in funding ourselves. We don't really have any enormous portfolios that we need to fund, put on the side, to find a motivation of what we could do better in the bank if we had more health, thinking in funding things more cheap. I think we learned actually very much what Joachim and Dan did the other week, that it might be used against us. For our customers long-term, we think it's better to refrain from participating, to refrain from being said that we are a rock-solid bank. We never used any taxpayers' money. We have survived on our own. We think that it's valuable for customers going long-term. We have decided not to participate.
Thank you. Jan Back, hi, Nick. On the funding and the funding cost going forward, I think it goes back partly to the question on ROE as well. I think it would be liquidity ratios and funding ratios coming into play under Basel III, and particularly the LTR measure, which is more near-term, where under the Swedish authorities, they need to be fully compliant by 2013. I encourage the client to be compliant as soon as possible. That is going to take a marginal drag, I would say, but some additional drag on NII during 2012. We'll see how much, depending on how spend moves. We are at 95% in the group today, and we are fully compliant in dollars and euro. At least a marginal drag on NII from that.
The more important question, I think, is the development of the NSF ratio and whether that is going to be introduced in its current shape and form. Very few people think it is, I think. Some think it will be implemented at a later point in time. Before we know the exact shape and form of that measure, it's difficult to project further drag on funding. There is one particular characteristic which is problematic for us, and that is, as you know, the credit we get for corporate deposits, which are factored into both these ratios. In the near term, not a very large effect, but longer term, this could become a more material issue. We'll have to come back to that when we know more.
Okay. Thank you. If I could just push my luck, really, and ask one follow-up question. You talked about an ROE range, let's say, of 10% - 13% in the interim whilst capital requirements are in the 10% - 12% range. Looming on the horizon is the prospect of having to take quarter one up from 12%, perhaps to 13%- 14%, depending on the environment. That would obviously have knock-on impacts on that ROE range. Do you think from, let's say, 2015 onwards, an implied ROE range of 9% - 12% or so is the way that the European banking landscape is heading based on new regulation? Do you think in the medium term, at least, that there should be aspirations for ROE to be higher than that range? Thank you.
Maybe if I can start on that question. I think there should certainly be aspirations. We are certainly going to aspire to the higher end of that range. I think the point we're trying to make is that regulation is, in this country, going to be implemented earlier and more harsh than in the rest of Europe, and that's something that we will have to adapt to one way or the other. On top of that, the funding and liquidity measures that you just talked about are going to be implemented earlier as well. I think until there is full clarity on that, we want to stay away from guiding towards higher ROE numbers than what we talked about. Certainly, we should and will aspire to the higher end.
Okay, thank you very much.
Our next question comes from the line of Henrik Christiansson from Citigroup. Please go ahead with your question.
Afternoon, Henrik Christiansson from Citigroup. I have two questions on costs. On your ambition to keep costs flat at SEK 23.1 billion, what sort of growth does this assume, and how sensitive is this ambition to a pick up in activity levels? The second one is a bit more detailed. If I look at your staff costs, there's a SEK 70 million Q2 drop in pension contributions in the fourth quarter. Is this lower number a year-end adjustment to payments throughout the year? If so, does that mean that the fourth-quarter level of contribution is SEK 70 million lower than the normal quarter? The final question, actually, on tax. Your effective tax rate was 17% for the fourth quarter, which is unusually low. Is that related to insurance, or is it something else? Thanks.
I can comment on the first one regarding the cost. I actually think that it's actually regardless of what revenue we would make, you could say, I think to make it simple. I think we probably found a way to suit SEB to bring costs down and then to put a cap. We are also extremely revenue-driven and client-focused in SEB because we don't really have the same ambitions on the cost side. I think actually despite we have quite an ambition on revenue as well, I think we can do it anyway.
Yeah. In relation to the tax cost, yes, it is artificially lower. I think one should look at something more like 23% or 24% going forward. It relates more than anything to the fact that the Baltics are kicking up profits today and that's taxed at a low rate. On the pension question there, we have a run rate, if I go back on staff costs, of a little bit around SEK 260 million and into SEK 494 million. I don't, to be honest, have the answer to exactly why that variation is shown at the end of the year, but I think it has to do with the adjustment of the composition of the staff costs at the end of the year.
Okay. Thank you.
Our next question comes from the line of Johan Ekblom from Bank of America. Please go ahead with your question.
Thank you. Just two questions, if I may. Firstly, you flagged in the report that the changes to pension accounting, it's like they have a SEK 5.3 billion impact on your capital. Is this included in your Basel III guidance, or is this on top of the 1.2% impact that you guided to? Secondly, I guess in terms of the cost guidance, did we expect any further reductions in headcount to be able to keep costs flat, or is this all coming from non-staff expenses?
I can start picking the costs. I think it will naturally mean that we will be fewer staff. We will do it steadily and slowly because otherwise, you lose your focus on all the business that we are undertaking. Net net, we will be fewer staff, of course.
On the pension accounting, the effect that we have been focusing on Basel III rules for 2013 being applied to today's balance sheet, we're saying that the 13.7% for the evaluation moved to 12.5% if we would have to deduct the pension deficit that would have been on top of that. We write in the report that if we look at the deficit today, SEK 7.2 billion gross, and it's SEK 5.3 billion after tax. That number is taken against deficit. We also say in the report that we need to understand the regulatory treatment of such a deficit on the capital base. There is a bit of speculation in that. If one would have to deduct all of it, it would be the SEK 7.2 billion number, pretty close to that anyway, which would knock off about 50 basis points .
Okay. Thank you very much.
Once again, that's star one to raise the question and the hash or pound to cancel. Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead with your question.
Hi, it's Jacob from Autonomous. Just two questions. Firstly, on the pension deficit of $5.3 billion, that I think was already in your Basel III estimates. Just to confirm that that's correct. Also, if you could give a new guidance or the current guidance for your Basel III impact. Secondly, just what are you seeing in the corporate space at the moment in terms of activity levels and pipeline looking into 2012, as well as the discussions that you would have on margins? Are corporates willing to pay in addition to just compensating you for higher funding costs? Can you actually replace at this point? Thank you.
Hi. On the pensions, again, the Basel III effects have been floating. I just went through it. It's from 13.7% to 12.5% if we apply Basel III, as we know it in 2013, to today's balance sheet. On top of that, if, let's say, pension deficits have to be deducted from the capital base, we're talking about, in addition to that, about 100 basis points. I want to make the point that we don't know for certain that that is going to be taken against the capital base, but that's sort of worst case if it's done, that it's time to put an end.
On the second question regarding corporates, I think the large corporates will naturally fund themselves deeper themselves. Of course, there is much more kind of issuance of bonds and capital markets. We are also a market lender. For us, net effect, then we get commission income. They're quite active there, but they are not. They are very cash-rich and they have very strong balance sheets. They are not exactly the best investments. That will be the question mark whether how the market will move this year. If they look like it's more significant, we will see more. When it comes to the [Nissen Standing Group] and the mid-corporate and the SMEs in Sweden, we clearly see demand, and we clearly are seeing that margin towards the end of the year will be increasing.
We have chosen to communicate a lot and talk to ourselves and prepare our clients that repricing will happen when loans are maturing, but we have not been out there actively changing already contexts that are in way. We see a lot of loans now maturing, and the new loans that are taken on margins are improving. I've also seen it in the last quarter of this year, on corporates as well as on mortgages.
The loans that roll, the margin is higher even if you account for the funding costs, I guess, typically being higher today than they were when you originally put those loans in place a couple of years ago.
Yes, they are. Of course, it is challenging in the market time to exactly decide how much of the margin, because, of course, the liquidity cost is already added on. You need something extra. Maybe we've been a bit cautious of adding that extra, but I think now it's been clearly communicated. I think most of the clients are accepting that.
Okay, thank you.
Our next question comes from the line of Chintan Joshi from Nomura London. Please go ahead with your question.
Hi, good afternoon. I've got three questions. The first one is, if I look at your mortgage market share, currently, it's about 16%. What kind of market share aspiration do you have, and when should we expect you to shift your focus more from volumes towards margins? That's the first one. The second is around net interest income. Notice that your liquidity buffers have increased quite materially. Just wanted to check if we should expect some cost impact of that on your NII flowing into next year. Not sure if that liquidity reserves were built towards the end or towards the start of the quarter, and if there are carry effects that will come through in next year. Also, related to funding is, how is your backbook versus frontbook costing developing?
I see that you have a lot more senior and secured funding coming up for refinancing this year relative to last year. Would I be right in thinking that frontbook costs could be lower than backbook costs? Just wanted some guidance around that. Finally, the third question is, if I think in terms of Basel III compliant return on equity or return on risk-weighted assets, how is product profitability on the corporate side relative to retail side currently? Related to that, does that have a bearing on the way you think about the ROE ranges targets going into the future? Thank you.
Okay. I can start off, Chintan, regarding the mortgage market and say that actually we don't steer on volume and market share. It's rather been that SEB has been the kind of the smallest bank of the four large banks in the market. We also have worked with a business plan of seeing how do we ensure that our retail operations get more business and what is a good business to get. Of course, getting the mortgage loan is an important part. I suppose to say that of the new mortgage loans that we receive to the bank, 90% of all clients, we get the whole business. We get the salary accounts, card business, bank business, and savings business. So, 90% of clients coming in is coming in as a whole client.
I think we can all see that, of course, growing three times the market is not possible to continue. We can also now see that the biggest market players are now back into the market, and they were not existent for a while. That was, of course, for us being number four in the market, the possibility, of course, it takes a market share to grow with the clients. Now the biggest players are back again. I think it will slow down. We have also increased margins in the fourth quarter, so we can clearly see the growth itself is going down a little bit. I think a market share of at least 16% of where we are, you can probably improve a bit further. It's fine. We don't really have a target for the market share.
It's really that each individual credit that comes in is a good one, and it's a long-term client of retail.
Hi, Chintan, on the NII question on the liquidity buffer, I was alluding to that earlier, but I think it's really a question on how quickly one moves to full compliance on LCR and NSFR. We have, as you know, come to 95% on LCR, and we'll have, as I said earlier, a bit more burden on that in 2012 if we move to 100%. The more important one is NSFR, and how quickly we move on that. It's far away. The ratio is undefined or not finally defined. I think 2012 shouldn't see so much effect on this, but further on in time, you might see more of NSFR-based related. Maybe I'll take the Basel III product profitability question, and we'll come back to the one on the funding.
I think on that one, it's really quite early to say, but I think it no doubt we, like all banks, will have to run our current product portfolio against all the new constraints that these ratios give for us. We will need to adapt and make our product range more capital and funding efficient. Whether that's going to be built over to the merchant bank or to rebound, I think it's too early to say. The issues around the treatment of corporate deposits is a bit difficult before the merchant bank.
Okay. Hi Chintan , i take the question on the front/backbook funding margins in a way. I think what you're alluding to is that we have SEK 35 billion or so of senior and secured coming up for renewal here during 2012. We also then have SEK 35 billion of covered bonds that are coming up for renewal during the year. Three things I think you should factor in. First of all, that we did take up senior and secured in 2009 after the rights issue, and we paid a pretty expensive price for doing that. Most of what we brought in were sort of three to five-year money, and that is now coming up in 2012 at pretty high spread. You can compare the spreads we've seen in the market nowadays to what we saw after the rights issue in the spring of 2009.
It may not be that that cost in addition is much higher than what we're already paying on our backbook. The second thing is that we still have more than SEK 100 billion left to do on the covered bond pool if we wanted to do that. In case the senior and secured market continues to be on a very expensive side, we can always choose to go much more on the covered bond space and only pay a relatively low spread on that compared to what we would pay on the senior. Thirdly, we, of course, given what's happened in the market so far, will watch out for good opportunities to be opportunistic in terms of our senior funding raising so that we're not going to have to pay overly expensive for getting those funds.
I think you shouldn't worry too much about the front/ backbook margin for those three reasons.
Thank you. Thank you for all those answers. If I could try my luck a little bit, Jan Erik, just for some more clarity on the product profitability issue. Am I right in understanding that because of the challenges on the corporate side, that is where the work needs to be done? Retail, I guess, is okay for the time being?
I think once you look at it this way, there's no evidence whatsoever that corporate deposits are moving out of the bank in terms of in periods of crisis. We went through 2008 in line with increasing corporate deposit volumes. It's quite the opposite to what the regulator has in their modeling or in their formula for LCR and NSFR. That's the point we're making with the regulator and the authorities all the time. Of course, we think that this measure should be built on empirical evidence rather than on a decision from somewhere in that corporate deposits are not sticky. It doesn't reflect reality. That's one way of looking at it. If these measures stay similar to how they are defined today, we will have to work around that, and we will have to adapt and find more regulatory efficient setups for that.
I will have to come back and talk to you about what that looks like.
Thank you very much.
Our next question comes from the line of Matti Jäkel from Credit Suisse. Please go ahead with your question.
Hi. Two questions for you. The first one is on your cover pool. From what I can see on your LTV distribution, you have about 16% of the collateral in the 70 %- 75% LTV bracket. I think that's unchanged from what you presented in Q3. Even though house values are starting to come down in Sweden, when should we suppose to see an effect on that bit? Should that bit disappear from your cover pool if, let's say, house values come down by 5%? What's the lag in that? Meaning, how often do you update your collateral values in your cover pool? That's the first question. The second question is really a clarification on the insurance. Are you saying that the actual discount or the deduction from your core capital will be the SEK 7.2 billion and not the SEK 5.3 billion after tax? Thanks.
Yeah. On the insurance bit, yes, that is what I was saying. I was also saying that we have written in the report that we seek regulatory clarity on the treatment of pension deficits to the capital base. Treatment towards equity, I think, is quite clear. It's the after-tax deductible SEK 5.2 million in our case. That's the balance sheet planned at the end of December. I was saying that the worst case, the hit to the capital base could be SEK 7.2 million. The difference is the deferred tax asset that is between those two numbers. If one has to deduct that from the capital base, then you arrive at the SEK 7.2 million.
I see. On the cover pool, I'll give you a little bit of a technical description of it. There are two ways to measure the cover pool. One is to use the LTVs on a loan-by-loan basis, which is if you have a house and you have three mortgages, you calculate the LTV for each of those loans. The second way to do it is to use the property method where you take all of those three and you include them all. You calculate the weighted LTV on that, and then you put it into the cover pool. Most banks use the latter, where you look at the property value, and we are on the verge of changing that from having it on a loan-by-loan basis today to the property basis. Both are accepted by the rating agencies.
If we were to move to the property method, the LTV above 60%, 65% would only be 5%, for example. The number is overstated in the current way of doing it since it's on a loan-by-loan basis, which means that if you do it like that, you get a little bit of higher LTV. We are about to change that, which is fully accepted by the rating agencies. It will probably happen towards the first quarter as we present the next account. I wouldn't be too worried about what potential effects would be from the effect that house prices may be falling a little bit. We feel very comfortable with the current cover pool we have today.
Thanks, all. That's very clear.
Our next question comes from the line of Andreas Håkansson from Exane. Please go ahead with your question.
Yes, hi. Just one follow-up on, you have SEK 100 billion in mortgages that you can use for covered bonds still. Of course, you haven't done that much covered bond funding in the past for various reasons. Could you tell us, are you having any discussions with the regulator or the central bank or the politicians in Sweden about structural subordination? Some of the banks have been issuing a bit more than you. Do you feel like that's becoming a theme among the regulators in Sweden?
Hi, Andreas. No, I would say that you always have, at least in theory, the question of structural subordination, which primarily would hit those banks that are using their mortgage as the main vehicle for funding, where most of the balance sheet on the asset side are really from the mortgage side as well. Since our total mortgage lending is roughly 15% of our total balance sheet, then our total funding from that, at this point in time, is roughly only 10% of the total balance sheet. No rating agency or the central bank or the FSA has really raised that question to ourselves. I know they are looking at that for the banking community in general, and it is a question that is being debated.
We don't feel that that is something that primarily would hit SEB since most people who would buy our senior unsecured securities would do that based on the asset quality we have on the corporate side, which is the main part of our balance sheet as well. We wouldn't feel that that would be any problem really for ourselves. We feel that we could use the SEK 100 billion or so that we have in the cover pool and which is currently unutilized.
Yeah, that's perfect. Thank you.
We have a follow-up question from the line of Nick Davey. Please go ahead with your question.
Thank you. It's a bit of a follow-up to a follow-up, actually. I just wanted to come back also, please, if I can, to the change from how you calculate LTV from the ultimate borrower basis to an individual loan-by-loan basis. Would that shift introduce any new eligible collateral to your cover pool? I would have thought if you had some borrowers with, for example, an 85% or now a 90% LTV, if you looked at it on a loan-by-loan basis, you might actually have some more eligible collateral. Should we expect any shift in the amount of cover pool eligible collateral or nothing material? Thank you.
In the material I've seen so far, it doesn't really change the size of the cover pool very much. I wouldn't see that as a material change.
Okay, thank you.
Our next question comes from the line of Ronny Rehn from KBW. Please go ahead with your question.
Good afternoon together. Two questions from my side. First, on the cost cutting, I appreciate you want to do this gradually, but should we expect any sort of restructuring charges in the quarters ahead? Secondly, could you give a bit more details on the assumptions to calculate the new pension deficits? What have you done to the liability discount rate and how have the kind of assets moved year on year? Thank you.
I think it's the cost and historical saying that we have not planned for any restructuring results at the moment. We have done that before, but it seems like the cost is coming back anyway. What we have said is if there suddenly would be something that is identified that could be valid to take out costs in a more drastic way, we would take that through the P&L. At the moment, that is not what we really see. We hope that we can squeeze out the cost. If there is some extra cost that is used to do that, in that case, you know, I'm thinking maybe SEK 50 million or SEK 100 million or something a quarter, we separately describe it. It's not what I have in sight now.
Yeah.
On the assumptions, I think we will present that in the annual report, and that is published in a few weeks from now. We just need to put it back into this note that is normally used in the annual report and so on. You can read more about exactly how we arrived at the number we did when that is published, roughly the shift between February and March.
Thank you very much.
We have no further questions at this time, so I'll hand the conference back to you all.
Thank you, Nora, and thank you all for participating in the call. Hope to hear from you.