Earnings Call: Q3 2020

Oct 22, 2020

Thank you very much, and a dear welcome to everyone to SEB's Q3 report. I'm starting on Page 2. As customary, we just comment briefly on the macroeconomic and financial market developments during Q3. And I think in one word, one could say that this is a new type of stabilization that we've seen in the Q3. The equity markets, after a very strong recovery predominantly in Q2, has more or less been stable, although been moving a little bit, but kind of come up to new all time high levels in the U. S. And a healthy recovery in other stock markets and moved around in the quarter around this newly found elevated level. Credit spreads were tightening during most of the quarter but widened at the later end of the quarter in September, but there was still a marginal drift downwards on credit spreads during the quarter, but still marginal. And interest rates were more or less flat in Sweden and marginally down and we've now come into a more stable level around minus 0.5% on the 10 year yield in Germany and just below the 0 line in Sweden. Going to Page number 3, the development of credit exposure in SEB. We continued to see healthy growth on the exposure of the bank to corporates, households, etcetera. The FX adjusted growth rates in the Q3 year on year was 9%, in line with what we've seen lately. And this is, of course, close to 2x what we've seen the market grow on average. Households grew by 6%, but mortgages grew more than household. That means that consumer lending were not growing as fast as mortgages, and this is the exposure that grew with 8%, so it includes all the mortgage promises that we've made. The underlying actually extended mortgage growth was closer to 5% during the quarter. A bit more cautious on commercial real estate. You can also see that both commercial and residential real estate had a tailing off on growth rates in the quarter. However, quite differently on the annual growth rates where we've seen a strong uptick in activity around real residential property. And housing co ops also grew with a healthy 3%, albeit a little bit lower. Going to Page 4, we'll just drill down a slide we've used now for 3 quarters, a little bit more on the corporate exposure to large corporates in particular. And just comparing to year end 2019, one can see that the on balance sheet credit exposure or if one which the drawn actually borrowed money is flat. So even though credit exposure has grown quite significantly, it's not come in the form that the companies actually draw on the money to put them to work, but continues to have this characteristic of having more available financing at their fingertips and also financial flexibility has been increased. This is, of course, important as NII has a different implication depending on where the loans are positioned in the undrawn or in the drawn off balance sheet area. However, the exposure has grown with a full 24% on an undrawn basis, doing that the full exposure for large corporate is up 11%, and these are currency adjusted to be related to the previous Slides 9 in growth rate. So on the margin, a driving force behind the loan exposure growth has been large corporate and financial institutions. Going to the next page. There's been a lot of speculation, dialogue and worry around the state of the SME market. So the medium, small sized and small companies, and of course, this is where a large portion of the government programs have been directed as well as the responsibility for the banks to lend and provide liquidity have been directed. So I thought I'd just give a short update on SMEs. Here, we have a proxy for our market share to see if SMB has performed. And I think we've had a long term 10 year very steady transition up in the market share. This is very much by design, and we have an ambition and aspiration in the bank to come to a 20% market share in the Swedish corporate lending markets. This is a 10 year graph where we've gone from somewhere around 11% up to 17 percent, and we are one of the top 3 banks in Sweden. This year's Business Bank of the Year survey, which is one closely followed customer survey result coming out in Sweden. And SED came out as number 1 for the 2nd year in a row. These are the 2 first years that we have been number 1 in this measure in the last decade and even more than a decade. So quite encouraged that we are performing okay with our clients. The next page, Page 6, is just a short update on some of our strategic initiatives, namely to the left, our open banking and API platform to give some concrete evidence of what's actually happening and what customer value can we provide. And this is really to talk about an ecosystem where we now can combine external capabilities in the in order to provide it, in this example, to particularly SMEs to give them a complete new customer experience of banking with SEB. And this combination that we point to here is, 1st of all, to use an external provider in PE accounting, an ERP provider, which is commonly used by SMEs in order to pay bills, in order to track salaries and also to have their financials in order. That can be combined with CapExITO, which is an online dynamic credit scoring, call it, supply chain financing engine, which is quite innovative. And now most lately during the quarter, we've invested in a startup called Oxede, which is a cloud based smart technology platform for management reporting. So you in real time can get the P and L, a balance sheet, a key statistics of and key metrics of your business presented in a very professional layout and easy to read. And this is done automatically. Together, these 3, we're now integrating it in the bank. So you can have bank services in the ERP systems, and you can get ERP credit scoring and professional account professional reporting reports all done also in the SCB environment. And this is quite exciting as an example of where we are going. To the right, as many of you have heard before, we, in December, I think, 2018 created something called SEBX, which is an organization within the bank at the fringe of the organization trying to explore new technologies and do things to limit the legacy problem that everyone has of an incumbent nature. SEBX first launch is to create a bank within the bank ruthlessly targeted towards solopreneurs, so self employed or very few employed companies who doesn't have a great bank in our opinion today. It's neither private banking or personal banking or corporate banking. It is something in between. And this has now been up and running for a few months, and we've had up to 20 pilot customers. It's working. But before we launch it at a greater scale, we're now taking the second step and inviting another 100 to 200 solopreneurs to join. And hopefully, we have more information around year end or early next year if we think this new initiative has a more important bearing on the future for the bank. Next page, Page 7. I just want to give an update during the quarter. We've made 2 different, what we think, notable areas on sustainability improvements. The first one is that we have institutionalized a large change when it comes to governance of sustainability work in the bank. We found that the last 2, 3 years, this has exploded from just being a few people here and there to being 100, if not 1,000 people interested and actively working with questions relating to a sustainable society and SV in particular, how to create products, financial services and also accounting transparent reporting around these issues. We've said this is of the same importance as credit risk, which is something we are very used to and have everywhere in the bank and hence, inspired by the credit risk governance, created a new group called the Group Executive Sustainability Committee, which I am chairing personally with all business areas represented, including a wide group of people who are dedicated to the sustainability issue. This is important to point out, it's not only about group communication and reporting. That is, of course, important and part of this work. But the ambition is to combine product development, innovative solutions to create a more sustainable society and where the bank can play. Advisory areas, we have hired 40 bankers within Corporate and Investment Banking relating to the energy transition bet, which is one of the major initiatives we have in the bank. And all this, we want to put together with all the other bits and pieces, namely credit risk, sustainability risk, transparent reporting, etcetera, in one senior forum within the bank. To the right, we just have that we thought were notable during the quarter. The first one is, of course, we're very proud to have been participating and structuring the first Swedish government green bond, which came out at €2,000,000,000 equivalent, dollars 20,000,000,000 We were also named the advisor, the financial advisor to Mercedes for their green transition to electrification of the vehicle fleet. And we also did participated in Daimler's first green bond of €1,000,000,000 And we also participated in Volvo Cars' 1st green bond during the quarter, which was a €500,000,000 transaction. We've also changed our sustainability criteria for our passive funds, our index funds in Investment Management and made them having sustainability criteria included, hence being index linked rather than 100% index like in the future. There are many, many thousands of index funds, and we thought this would be our contribution to make all our index funds having some sustainability criteria, and we're talking about SEK 51,000,000,000 in scope. And lastly, we have spoken to but now formally launched and announced our initiative to put some money aside to support entrepreneurs in a green tech venture capital form in order to make this new start up community have an additional source of funding. This is, of course, in an equity like form, and we have hired a new person outside the bank who will run this effort, and it's very much a cut in or a parallel to our existing FinTech venture capital investments. And we would like to do one similar for technology companies and other companies who has a very clear sustainability or environmental type of vision. Going to Page number 8, we could just now move over to the financials. And we classify this quarter as a quarter where we've seen continued stabilization in the financial markets, and we are entering into a new normal. This new normal is definitely characterized by increased uncertainty and clarity about the future. But it's not the same type of what's going on and panic feel that we had in Q1 and the beginning of Q2. This being said, still worried about the future and the second wave and the health concerns they are still looming around. Despite what we would call elevated provisions of just north of SEK 1,000,000,000 this quarter, we came out with a return on equity of 11.7%. We have a strong capital and liquidity position, and we have confirmed in this quarter that the board does not intend to propose a dividend to be paid out for 2019 during the calendar year of 2020. With those, I'll just flick to the next page. And before I hand over to our CFO, Matti Jasty, just do the financial results so far this year. We have continued to see a marginal acceleration of income growth, which is coming in year to date at 2%. Costs are unchanged and under control, and our cost guidance remains for 2021. This means that the profit before credit losses increased by 3% year to date compared to last year. Given the increased expected credit losses, net profit, however, before items affecting comparability is down 19%. And when we do include the SEK 1,000,000,000 sanction fee from the finance inspection in Sweden, operating profit is down 24% compared to last year. Core Equity Tier 1 has increased to 19.4 percent and something Marcio will come back to, it is driven partly by the treatment of the dividend for 2019. Return on equity year to date comes in at 9.7%, the 4 items affecting comparability. And the elevated credit loss level this year has so far been 30 basis points and a marginally improved cost income of 0.46%. I will now hand over to Nassef. Thank you, Johan, and good morning, everyone on the line. So I'm on Slide 11 now and digging a bit into the Q3. As you can see, we've seen income growth of 5% this quarter versus the same quarter last year. And with costs under control, you can see that the pre provision profit growth is 10%. And despite the fact that ECL expected credit losses have more than doubled, we see a marginal improvement of the operating profit versus the same quarter last year. The cost income ratio this quarter is 0.44%. ECL is 19 basis points and return on equity of 11.7%. Moving to net interest income on Page 12. You can see that we year to date have seen 9% NII growth versus the same period last year. This is mainly due to the repo rate hike we had in December 2019, which has improved deposit margins. We also pay a lower resolution fund fee this year, and we've seen solid volume growth over this period. These positive effects have been marginally offset with lower margins. Quarter on quarter, net interest income is up 5%. If you recall, we had some negative temporary effects during Q2 related to elevated levels of liquidity as well as temporary lower margins within our CMPC divisions. Those effects have now been reversed. Worth noting also this quarter is that we have a negative FX effect of about €50,000,000 as the Swedish krona has depreciated and regulatory fees are up €30,000,000 versus the last quarter. Moving to the next page, net fee and commission income on Slide 13. There's a drop of 3% year to date versus last year. This is predominantly due to the lower card fees, but this has been partly offset by higher lending fees this year as well as asset management related fees. Quarter on quarter, fees are down 1%. We see some recovery when it comes to card fees, but they are still depressed and lower clearly lower than a normalized level. We also see an improvement in terms of asset management fees related to the strong equity markets. But at the same time, we have negative effects mainly coming from seasonality with lower activity within Investment Banking and the Markets business. On this slide, you should also note that there's a negative FX effect of €60,000,000 so slightly larger than the negative FX effect you had on net interest income. Moving to the next Slide 14 and net financial income. So despite the very negative development at the start of the year, we see that NFI now year to date is only down 6% versus last year. And after the strong recovery in Q2, we now show a more normalized level of NFI. You can see that the CVADVA effect is a positive SEK200 1,000,000 this quarter. This means that we have recovered about SEK800 1,000,000 of the €1,300,000,000 in reserves we took in Q1 due to the financial markets development. This also means obviously that we have about €500,000,000 in additional reserves that are expected to gradually come back in the next few quarters depending on the market developments. We continue to guide for this line to be at around €1,200,000,000 to €1,400,000,000 excluding CBA, DVA as well as treasury. As you can see in the numbers, this quarter is at the higher end of that interval. Next slide, 15, our favorite slide, operating leverage. It still works during a COVID year. So income is up versus the same period last year. Costs are unchanged on average so far this year, which leads to an increase of the operating profit year to date. Slide 16, looking at provisions. On this slide to the left, you can compare what we've done in terms of provisions in Q3 versus what we did in Q1 and Q2. As you can see this quarter, we are reporting a net expected credit loss level of SEK 1,100,000,000 and that this net number is all coming from the LCN FI division. We've seen underlying losses within LCN FI of around SEK 1,400,000,000, but we've also recovered some of the reserves we have taken on a portfolio level in that division of about SEK 300,000,000 leading to a net level of SEK 1,100,000,000. For CMPC and the Baltics, we haven't seen any real underlying losses this quarter. And the macro model update that our economists did has led to recoveries driven by this model. But being conservative, we have decided to offset these recoveries coming from the model by taking additional model overlays for the businesses within CNBC and the Baltics, leading to a net ECL level of around 0 for those 2 divisions. We continue to guide for an expected credit loss level of around SEK 6,000,000,000 for the full year 2020. On the next slide, the capital development during the quarter. So last quarter, we reported a capital buffer above regulatory requirements of 4 10 basis points. That has now improved to 5 80 basis points. And as you can see, most of this is coming from the fact that we have put back the initially proposed dividend to 2019 on the capital base. At the same time, we are accruing more in terms of dividend for 2020. We are accruing the entire profit achieved so far this year for dividends. I think worth noting here as well is that we've talked a bit about asset quality and risk migration, And now we have another quarter with asset quality improving, leading to risk migration having a positive effect on the capital buffer. This is mainly coming from the fact that the new business we're issuing is of higher quality than the old business and that the low quality asset quality has moved into default, which means that you provision for it and the capital requirements go down. It's important to say that the accounting treatment for the 2019 dividend or the 2020 dividend should not be used as any signaling effect of what the Board intends to do in terms of readjusting the capital base of the bank. We have a buffer of 580 basis points. We have a management's buffer target of 150. And over time, the Board will make sure that, that will be adjusted. On the next slide, a few key ratios. I think the one to highlight here is the growth in customer deposits. It's up SEK 270,000,000,000 year to date. This means that the loan to depot ratio in the bank has come down to 118%, which is probably the lowest level this bank has had in several decades. Now I'm going to talk about bank regulations for a couple of minutes. So on Slide 19, we are showing you some of the regulation that has been introduced in Sweden for the last 8 years and where the Swedish authorities have decided to go further than European countries have done on average. When this has been done, the similar reasoning has been used the same time. It has been about the systemic risk posed at the Swedish economy from the banking sector. It's been the large banking sector relative to the economy, and it's also been arguments related to the wholesale funding dependence of the banks. These arguments have come while the Swedish banking sector, if we compare it to Europe on average, is average size relative to the Swedish GDP. The wholesale funding dependence is, to a large degree, driven by other regulation forcing banks to issue debt and the fact that Swedish banks have continuously shown to be more resilient with in terms of profitability and asset quality than other banks. Now I think if you, 8 years ago, had known that all of this regulation would be introduced in the coming 8 years, the expectations would have been that you would have a significantly negative effect on banks' profitability. But as this slide shows, our profitability has been very stable during this period, albeit, as you can see, it's below the average profitability of Swedish companies. So if bank's shareholders are not paying for this regulation, it obviously means that it is paid by Swedish corporates and households. On the next slide, Slide 20, we show you a concrete example of what excess regulation does in terms of the pricing of financial products. And here we're using a Swedish 3 month mortgage. The average price of a 3 month mortgage in September in Sweden was 160 basis points or 1.6%. Here, we are showing you how much of this price is derived from the excess regulation in Sweden relative to European average in terms of deposit guarantee schemes, resolution fund fee, MREL and capital comments. If Swedish regulation would have been in line with the European average, the price of a Swedish mortgage would have been 1.22% instead. The difference here is the same as SEK 16,000,000,000 of annual costs for Swedish households. Now the authorities here or government is proposing a bank's tax, and the same argument has been is being used as has been used before. The banks are large and risky. And as you can see here, this argument, to the extent that is true has been dealt with, with other regulation that already is in force. So our view is that this argument doesn't hold the tax is unjustified and in the end, it will only have an adverse effect on Swedish households, corporates and obviously, society at large. That was it. Back to you, Johan. Thank you very much for whom I'm participating. We now open up for Q and A. So I don't know, operator, maybe you will arrange the Q and A. So please go ahead. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Magnus Anderson. Your line is open. Yes, good morning. First of all, thanks, Marci, for this refreshing last slide. Finally, Swedish bank standing up against excess regulation. Turning to my questions, starting with NII. First, I would like to know if you could say something about the competitive situation within the household mortgage market in Sweden. We've seen Hambel, Swedbank, LF and now this morning SBA be lowering list prices and also on 3 month mortgages? That's the first one on NII. Secondly, we talked about this SEK 250,000,000 to SEK 300,000,000 negative funding effects in Q2. I just like to know whether we saw everything coming back now in Q3 so that there should be nothing left for Q4. And secondly, if there's anything in this rather strong NII in Q3 that is not sustainable looking into Q4 onwards? Thank you, Magnus, and thank you for the compliment on the last slide. So if you talk about the competitive landscape on mortgages, you know it's been a fierce competition there for quite some time. I don't think that has changed too much. Maybe this year on average has been slightly less competition in the sense that the incumbent banks have been taking a larger share of the new sales. Our view is that when you look at the price adjustments seen right now, it's very much driven by the funding costs of the banks coming down. If you look at those price changes and compare that to our funding costs, you can see that they're pretty much in line with the drop of funding costs. And here, there's always a lag effect. In Q2, we had higher funding costs. We changed prices later on. Now funding costs are coming down and then you change prices when you feel that those developments are more stable. So I think I don't think there's a big change in competition. It's been intense for quite some time. I don't think it's intensifying right now. On the negative effects on NII in Q2, you're right. We talked about SEK 250,000,000 to SEK 300,000,000. If you recall, we said that some of that could be more permanent, which was related to the Baltic business and that we've seen deposit inflows outgrowing loan growth and that excess liquidity has to be placed at the Central Bank. That part has not come back this quarter, and we do believe that it's probably more permanent. So in that sense, there's nothing left for Q4 or later on. I think this NII level we're showing in this quarter is the underlying correct level for what the bank is achieving at this point in time. But obviously, you have this negative FX effect that we had this quarter, and it's difficult to know how that's going to develop going forward. Okay. Thank you. And then just one on costs and your headcount increase that continues. You're now up almost 400 employees year to date. I think some although some of it is due to an exchange of definition in Q1. And it's continued basically since I think the low point in Q3 2018 or so. Where what is this primarily related to AML measures? And where are we going from here in terms of headcount? Yes. I think if you split it up, there are 2 main areas driving up FTEs. The first one and the most important one is the strategic initiatives that we launched back in December 2018. And then more than 50% of the FTE increase is coming related to those initiatives. So it's fully according to plan. Most of the remainder is coming related to AML and KYC work. I think what's important to say is that a large share of this FTE increase is happening in the Baltics, where salaries in general are 60% to 70% below the Swedish average level. So although FTEs are going up, I think you can see that staff cost is not increasing to the same extent. So yes, there is an increase in FTEs. It is largely planned, and it's not leading to that large increase of staff costs for the bank. Thank you. And finally, just have you any estimated impact on the proposed bank tax that you can share with us so we can check our calculation? Yes. If you give me the definition, it's a bit difficult to fully understand. What you need to do as a bank is to track exactly how much of your liability side is related to your Swedish business. And that's where you need to put some effort into. But I think if you look at the bank's tax and you take our market share of the Swedish market, you can assume that we get a proportion of that. And if you do the calculations like that, it will be maybe €1,200,000,000 to €1,400,000,000 And then I'm talking about the 6 basis points going up to SEK 7,000,000,000. So SEK 1,200,000,000 initial and then SEK 1,400,000,000. But we'll see what it's introduced. And obviously, we will do what we can to mitigate effects. And then if it's introduced, we will obviously try to do what we can to offset it. Okay. That's all for me. Thank you very much, guys. Next question comes from the line of Andreas Heikkinen from Danske Bank. Your line is open. Thank you. Good morning, everyone. Also back starting with you, Marcie, and your comments on regulations, I also really agree. But just a follow-up questions. I mean, we know that regulators have been very tough on regulation. And now when you are significantly above those requirements, you're still not allowed to pay a dividend. Well, actually, you're allowed. I mean, it's a recommendation. Why do you think that your board doesn't turn around and tell the FSA, look, this is what we believe is what the capital we need and actually pay out anyway? Let's start there. Hey Andreas, it's Johan here. I think it is hard for anyone outside to know what the board has said or management to have said in the bilateral meetings with regulators. And I can just say that we are not very happy in many aspects of how this development has been, both in the European Bankers Association, there are difference of opinions. And in the Swedish ones, we are pretty much of the same opinion. And that is that this is a pretty far fetched European type of narrative to bluntly say that regardless of who you are, regardless of strong recommendation. Now we also play in a very sensitive political arena where we need to be responsible and take everyone's opinion into account. And the balanced conclusion of this has been to follow the Pan European recommendation for the calendar year for 2020. That's another 2 months and a week and a bit. And then we'll hopefully sit here, which is the plan right now, early in January to do what's appropriate. Yes. That sounds very good. Then two more questions. You write in the beginning of the report that you are discussing AML with the U. S. Authorities. You've been mentioning this on conference calls before, but I don't think you've written it in your quarterly report before. Has anything changed? Are the discussions more intensified? Or why are you mentioning that now? No. As we are having a general policy, if one wish, or modus operandi, and that is that we never normally comment on any information requests from authorities. Given the heightened tension over the last 2 years, this has not been the case. Both banks, including SEB, but also some of the regulators have chosen not to keep to that, call it, historical modus operandi, but commenting on ongoing requests or errands. Last quarter and the quarter before, we got a lot of questions, particularly if we also are in dialogue with the U. S. And rather than just saying it, as we point out on the call, we said we will put it on paper so it is clear to everybody and not dependent on what environment you're in and listening to us. I will just say this that we are in 20 countries, and we have 1 to 5 to 10 authorities in each country, and we are in dialogue with all of them as appropriate. And that's just what we put down. So it's clear as we have gotten the question that it includes also U. S. Authorities. Otherwise, nothing more to add. Okay. That's very good. And last finally, a bit more detail. If I look at the increase in Stage 3 loans in the quarter, it seemed to be very much driven by the mining oil and gas extraction and also on the provisioning of those Phase 3 loans. Could you tell us a little bit, I mean, mining could be a big part of it or maybe it's a very small part of it. We don't really know. But could you give us any hint of how much is oil and then how much of that has been classified as Stage 3 now? Well, if you can start and then I'll see if I choose to fill it. Yes. Mining, as you say, is a very small part. You should see basically all of that being related to oil and then almost all of that within oil is related to offshore. And outside of offshore within oil, it's actually fairly healthy. So it's very much related to offshore. It's by far the segment in this bag and I think in generally in the economy that is struggling the most. So most of that increase in Stage 3 is coming from that. And in this bag, in this quarter, it's may have been one big exposure. But do you want to say how much of that portfolio has now been moving to Stage 3? No, I don't have the numbers. And even if I had, I'm not sure I will tell you. That's okay. Thank you. Our next question is from the line of Nicholas McBib from BNP. Your line is open. Thank you and good morning. So first a question on the corporate loan demand outlook. Could you please update what kind of corporate loan demand you're meeting currently? And yes, any comments about the outlook for corporate loan volume growth over the next few quarters that you see would be interesting to hear? Thanks. Okay. Henrik, I'll take that. I think the first thing I'd like to say is the second derivative of the growth rates of the corporate load demand, which is falling. So if you look at the 9% annual increase, you look at where did that come from, it was predominantly focused around 2, 3 months, let's say, starting April, and we've seen a tailing off. You can also look at the Q3 to sorry, Q2 to Q3 percentage increase. It's much lower than year end to Q3. So there is a little bit of an inflection point right now. As we've seen stabilization, as companies have not no longer shut down production, but rather focusing on restarting production, meeting former pipeline requests, and pipelines are still building in industrial land. This is right now a lesser demand, let's call it, for corona related available funds for a rainy day. And right now, that is shifting slowly into working capital real need in order to get input goods and services that one requires in order to produce for the produce. And right now, there is a little bit of an inflection point. So it's hard to say where this goes. Going back to the financial crisis, which is the last time we had exactly this pattern, albeit different in magnitude and in length, this was then a little bit of a pause that came after the worst worry came out from the financial crisis, I think we are right there now. So even if we stay at these levels now for some months in order to kind of grow into the costume, we will still have a very healthy underlying growth. And there are no indications to us from client satisfaction surveys or activity levels or pipelines that the recent 24 months momentum is different relative to the market. So all those fields still encouraging, but there is some inflection point there between for a rainy day type of demand versus actual money required for one's business. Lastly, I'll just point out that one effect of the corona has been something that we are, if not dependent on, something we work very hard at, and that's large scale M and A deals and ECM deals. Both of those from time to time require significant capital. And this is also a reason why fees and commission has not had if you look at the year on year number from issuance, etcetera, of course, we had a super strong base last year, not least because of the EQT IPO. But still, those have been hampered by increased uncertainty in the wake of corona. Whilst there's been a high activity in TCM loans, of course, but also smaller IPOs, the SME market, midcorp market has been active. But we are, of course, mostly exposed to the large corp markets. Okay. That's interesting. And the follow-up on that, do you see any changing in the large scale M and A pipeline then? No. If you look at the work level and pipeline discussions, they are coming back in the normal sense. So nothing to I'm not worried about it. What would happen if we would have a more as a longer crisis mode, we will go into the defensive type of corporate finance, where you talk about rights issues of defensive nature. That's not happening. So companies are feeling that they do better. And I think you need to acclimatize to that to find the confidence to make strategic moves, and we're not there yet. But I can say that it looks promising that we will come back to some type of new normal also for large scale EcoBoostlands. NANDs. Consolidation as a theme, I think, has picked up, but it's mostly noise in my book. But there's a lot of talk, both in our sector and other sector and not indicating anything is happening here, of course. But there is definitely a more frequent dialogue around companies being bought and sold. Okay. And then a question on cost. If I annualize the cost level in Q3, I end up at around 22.2%. So that's 5% below the 23.2% you're guiding for 20% or for the next year FX adjusted. So just wondering if what's going to drive that increase or do you see like your activities being hampered now in COVID-nineteen and that's the reason why the cost base is depressed and you expect activity pickup? Or how should we think about cost development here into next year? Yes. I'll start and I'll ask Matsy to fill in the blanks. First, it is a little bit we've been it's not by excellent management decisions. Costs are now under where we would have been today should we not have corona. So the travel and entertainment and all those areas are, of course, helping us right now to cost less. There is a big uncertainty. It will come back. I don't know when and how much. And right now, there's very little showing that corporate business travel, which is one of the larger expense lines we have outside salaries, is coming back in the short term. But we are still hopeful that we can get to a more normalized travel schedule next year. Might maybe not come back to 100%. We need to keep that in mind. Then there are several initiatives that are actually being accelerated in the digital transformation due to what's happening as well. So we've just built a very nice studio financed by lesser travel in order to have online video and live broadcastings really in the bank with our customer base. And that is now accelerated also to include digital collaboration teams. And those will drive costs according to plan, but they will be a little bit faster and advanced compared to what we otherwise planned. And then we have the share price. As you know, we do have an effect on the future liability that we incur because of the LTI programs and the share price have been lower and that would go easily without our control bounce back And then that would be taken into account. And then the financial initiatives are, of course, going according to plan. So we know that will come up. Marci, anything else? No, there are no blanks. Okay. And then just a last question on the net expected loan losses. You reiterated guidance of SEK 6,000,000,000 for 2020. So that implies SEK 700,000,000 for Q4. So continued decline in the trend here. And just if you could share your thoughts, if you anticipate this falling trend to continue also into 2021? Or is there any reason we should expect the net expected loan losses to pick up again in 2021, please? What we know today, which is, of course, a little bit of a humble caveat, we do not expect this to come up. So we stand by the 6 as the best guest we have. Of course, it's only 2 months and a bit left. So we have a reasonable degree of confidence that we can deliver on that. There is a big question mark for 2021. And there, we feel fine with what we know today, but we are very worried about the 2nd wave and the government's and national responses to an outbreak, which is more significant than we can see right now. However, we are quite hopeful, one could say, for 2022. So in our thinking, we have had the elevated level of 6, and we hope that when we end 2022, we will come back to a new normal, which is more similar to what we experienced in 2019 and beginning of 2020 when we talked about a little bit higher than the exceptional low losses we've had in recent years. And that kind of is a trajectory, if you see what I mean, from here on to end of 2022. But exactly what pattern it will take, we, of course, need to be very cautious around. Okay, perfect. Thank you. Your next question comes from the line of Sophie Pettersen from JPMorgan. Your line is open. Yes. Hi. Here is Sophie from JPMorgan. So just going back to the U. S. Investigation you flagged in your Q3 report, does this relate to the EUR 85,000,000,000 of non resident deposit flows that you saw in Estonia? Or is it relating to something else within the CB group? So that would be my first question. Hey, Sophie. Nice to talk to you. We don't go into details on the information requests that we get from the authorities. We will comment on them when they're no longer information requests. If there's any findings, in the worst case, accusations or if there's a sanctions process, which significant for the group, that we will always comment. And I can just reiterate, to our knowledge, there is no such things right now. The information request, I won't comment, but I can just say that it is a very you think about a bank like us in any jurisdiction, it's on a very broad area the information requests come generally. And it is AML, it is KYC, it's capital, it's liquidity, it's investor protection. So it is within all these areas that they come. It's nothing we can comment on now with the specific relation to what you mentioned. Okay. There is not similar to the requests, for example, Swedbank has had. So this is purely an information request from the U. S. Authorities? Yes. I don't know how to put it in comparison with Swedbank. I can just confirm that it is information requests from the U. S. But the media was already talking about information requests for SCV about 1.5 years ago. Why did you deny it at that point in time and now you got to acknowledge that there are information requests? We did not deny or confirm the media reports on information requests from the U. S, which is very, very important. And why I say that is you have to understand that some regulators and some information requests are, by law, forbidden for us to comment on. It's the first line. And you are then risking of breaching your regulation, which is very firm that some of these things are not to be commented on. Some are allowed to be commented on. And therefore, we choose not to go into 1 or 2 specific discussion when they are on the information sharing stage as it becomes first. And you can, by deduction, maybe conclude what is what, and that is potentially not legal for us to do. And why we have now said American or U. S. Authorities is because we said it verbally. So we have confirmed, but we always have information sharing with authorities in the U. S. But as it is such an interesting topic, we put it on paper, and we have said it also in the last couple of quarters. Okay. And just in terms of the considering the dividend for 2019, that has nothing to do with this U. S. Investigation? No, no. The canceling has to do just by the recommendations from the EBA, ECB and the finance inspection. Okay. And you briefly mentioned earlier on M and A, you're saying a lot of sectors are talking about M and A. We also see M and A across banks in other jurisdictions. But what's your view on M and A considering that you have so much excess capital? This is a question about how you view an excess capital. And for us, it is, of course, not because something that we control. So hence, it is not a permanent situation where that excess capital necessarily needs to be deployed. We will have to wait for the regulators' appetite for allowing us to decide on our own before we decide on what's the primary. What is true is what Marci said. We have not changed the ambition or the target for the bank, which is 150 basis points of a management buffer approximately. So that's what we have now between the management and the Board to relate to. But given the circumstances, the question is how and when will that kind of adjustment occur. Okay. And then just a final question. When I look at your Stage 3 loans, they increased around 13%, 1%, 3% quarter on quarter. What drove this? And also, almost all of your Nordic peers sold one of their oil big oil exposures. According to the press, STB was the only one not selling that exposure. Why did you not sell that exposure? And why did your Stage 3 loans increase by around 13% quarter on quarter? If I do the exposure and then I'll ask Madsik to complement on Stage 3. The press reported on one specific client that we normally do not comment, so I'll do it generally. When banks find themselves in trouble when it comes to high probability of default, Every bank will have to make a decision. Can you work with the company in order to come out better for yourself, for your shareholders and particularly for your client and your client shareholders? Or do you think it's the right strategy just to exit? And once when banks like SEB make that decision, we often think that we can work together with the client because we think it's better for everybody. So if there was any instance where we would choose to stay in, that would be most likely the reason. Stage 3? Yes. I think we answered this before, Sophie. So it's very much driven by the oil sector and specifically offshore. And as you can see, this increase is not too far off the actual ECL report this quarter. And so you can also see that the coverage ratio for the increase is higher than the back book coverage ratio of the bank, leading to the Stage 3 coverage ratio going up to 48% this quarter compared to 44% Great. Thank you very much. Your next question comes from the line of Robin Rain from Kepler. Your line is open. Yes. Good morning. Thank you. So the first question on capital and if you have any comments on future IRB model reviews and how that might affect the capital going forward? And then secondly, a more general level comment. In 2020, we've seen oil price going down with corona and so on. And I think you guys are more also more willing to build a more like sustainable bank. Is 2020 accelerating sort of the trends that we see that you might exit or decrease your exposure to oil related industries, for example, or where you also see some added quality troubles? So I just want I'm just interested to hear your thoughts on that. Thank you. Okay. Yes, I'll start with the capital question. Future IB reviews, yes, I mean the case is that until year end 2021, all banks need to reapply to use the IRB models we are using. And then they will harmonize how they have interpreted the regulation. Whether this will lead to requirements going up or down or the risk weights derived from the models going up or down, we have to wait and see. So yes, it's an outstanding issue. We haven't sent in our all our applications yet, and we have no feedback from the FSA. So yes, we don't know yet. On the oil related areas, we are, I would say, halfway through a process, which is encompassing the following aspects. 1st, we are classifying the full exposure, the indirect exposure the bank contributes to through its lending operations and with particular focus on energy sector and oil. And we more or less done that. We then have a Paris aligned ambition. So the exposure in the bank over the coming decade or decades should be aligned with the principles that we have signed, including principles for responsible banking. That's also been done. But the question is the how. So what we cannot know is exactly where do the investment come next year from the clients that we do have and how should we behave. But as a general rule, we are working hard now to find not only the ambition and the intention to align the operation with Paris when it comes to oil and energy, but also the how. And we will, of course, stay tuned in because we will, of course, come out with many things on this topic going forward. There are 2 typical ways of doing it. One is by excluding yourself completely, and one is engaging yourself with the companies that you find have a very transformative business strategy, which is credible. And we will have to use both, but the general principle is that we engage because most of the clients that we do have, we definitely like and we think that they are on to something. I'm spending personally quite a lot of time with many of the industries that do have a very negative footprint from their operation. And I'll tell you, they are on to this. So we would like to be part of it and see if we can be a positive catalyst through the financing relationship that we have to accelerate. All right. Thank you very much. That's very helpful. Your next question comes from the line of Richard Stran from Nordea. Your line is open. Yes, good morning. Thanks for taking the call. Most of my questions have been asked already, but I have a short one on the cards development. We see a sequential pickup in Q3. Would you say that's solely driven by household cards? Or is there also some signs of improvements on the corporate side there? I think you could not maybe solely, but definitely mainly driven by the recovery on the private cards. The picture is pretty different. So we've seen many banks in the U. S. And also here in the Nordics report positive momentum on the private cards. We still are below on the private card volumes compared to the same week or month last year. The last data point I have is somewhere around 8%, 9% below. We do see the recovery quite healthy and hence you have a I think it's a 9% increase quarter on quarter, but still depressed levels compared to where we were before. On Corporate Cards, the last data point I have is more than 40% down on volume year on year even here and now. And we are very dependent on industrial companies and exporting companies changing their travel and entertainment because that's the major driver for the corporate card spend is travel and entertainment. So I think the slightly weaker recovery that we have seen in our bank on card fees is that we think very much explained by a higher propensity of corporate cards, which is, of course, not recovering as well as private. And would you could you remind us what the year over year drop on Corporate Cards was in Q2? 40% between 40% and 46%. I don't know. It's Yes. I think the low point in March April was minus 65%, 70%, and now we're back to minus 40% compared to the same period last year. Okay. Thank you. Your next question comes from the line of Ricardo Rovere from Mediobanca. Your line is open. Good morning to everybody. A couple of questions, if I may. The first one is on your dividend aspirations. In general as a general comment, do you think that SCB is somehow benefiting enjoying from the various initiatives, facilities made available by governments, central banks in Sweden and outside Sweden because your profitability is somehow supported by such initiatives, this could be eventually an argument for regulators. This is just a general comment I would love to ask from you. And the second question I have relates to corporate loan growth is not that clear from some of your previous comments. If you think that at some point corporate loan growth in SCB is going to come to a kind of stall or do you think that Sibi can continue growing at least in line with the rest of the country? Ricardo, thank you. First question, if we deem to be supported when it comes to the current profitability from government programs? I would say not really. So we have no such analysis that indicates that anything we are doing right now is thanks to or due to that. It's almost like we are doing what we can and they are doing what they can in order to support the corporates of Nordic, Baltics, Germany and UK where we operate. However, there is one benefit that is implied rather than direct one should be aware of. And that is that the bankruptcies that we saw in September is down more than 30% compared to September last year, which is, of course, a very notable number given what's going on. And here, one explanation must be reasonably be that the government programs are sheltering many of the SMEs and helping them not to be facing liquidity problem and bankruptcies. Hence, there is, of course, a potential for a backlash once and if those programs are stopped for the mass market. I wouldn't say this is relevant for the large corporates, but it could be very relevant for the small- and medium sized corporates. And that implies, of course, a cost of risk that is now better for banks than it otherwise would have been should that support not have been there. And also when I look at what other banks are doing, including ourselves, thanks to the government program, we do not have a lot of reserves coming right now for the domestic local economy. It's mostly in SEB coming from the international export dependent large corps, which is the full amount actually will reserve the SEK 1,100,000,000 this quarter. So there is an implied benefit, of course, coming there. Okay. Thanks. Okay. And on corporate loan growth, if I may? Yes. Sorry. No, I am a bit unclear because it is a little bit unclear. This inflection point means that it could very well be that once the demand for corona related financings disappear or tail off, which we are seeing right now, there might be a period before confidence is reintroduced for real lending investments, M and A and expansions of businesses in our client base actually starts occurring. And I don't see it massively right now. We're still in the kind of mode of getting back rather than looking forward and expanding. When it comes to in line with the broader economy, I have no reason in my mind right now to say anything but that we, of course, expect to grow in line with the general economy and the general market. So I see no reason why this a little bit stronger momentum actually that we've seen relative to the average is maintained. But think about it a little bit more over medium term because a quarter has 60 working days. It is very hard to assess these things on that short time frame. Thanks. Thanks a lot, Johan. Very clear. Thanks. Next question comes from the line of Namita Samtani from Barclays. Your line is open. Good morning and thanks for the questions. I've got 2, please. Could you firstly give us a sense of how front book margins within the corporate book are trending versus the back book? And secondly, are you happy with your mortgage market share in Sweden? Yes. On the corporate book, I think I would say stable. So they are in line. There it doesn't feel right now that there are any pressure downwards, and I don't think we have any tailwind where we could see increased margins. Credit spreads in the market is a decent long term indicator, and that also indicates that we kind of come back to these little lower levels than we saw at the very height of corona where pricing and pricing was improved. So I would say stable. What was the second question, sorry? Mortgage market share. Mortgage market share, yes. We're pretty happy around here. So in SEB, we do not have an explicit market share gain strategy on mortgages. So the relative size, call it, around 15% of the Swedish private market is roughly where we stand, and we try to make it as good with the best offer in a shareholder friendly way. That's kind of where we stand. Not to be mixed up with SMEs, which is also part of CPC, where we do have a market share ambition of increase towards the 20% as we previously spoke about. Thanks very much. Next question comes from the line of Jacob Kruse from Autonomous. Your line is open. Jacob? Are you on mute or should we ask the operator to take the next question, Jacob? Operator, I think we lost Jacob. Our next question comes from the line of Adrian Sighi from Credit Suisse. Your line is open. Hi there. Thank you very much. I have a couple of follow-up questions, please. On NII, can you maybe spell out the contribution from TLTRO this quarter? On cost of risk, did you say that you expect a normalization towards the 2019 levels in 2022 or after that? And then maybe 2 very quick ones on capital. On the timing of IRB harmonizations, can I please clarify that you expect the timing to be communicated by end of 2021? Or is that the deadline for SCB to submit its models for approval? And outside of this, do you have any other headwinds coming into the next quarter or next year rather, sorry, EBA definition of default, CRE floors or any other ones that we could take through? Thank you very much. Yes. Hi, Adrian. On your first question on NII, there's no benefit from TLTRO. We don't participate in that. So there's no benefit in our NII. On ECL, I think Johan's comment was that 2021 will be a middle year. It seems like right now, we'll see how it develops. And then by 2022, we hope that the ECL level will be more normalized. On the IRB models, the deadline to get the models approved is by the end of 2021. Now there are a lot of models that need to be approved from us and other Swedish banks. So whether the Swedish FSA can keep up to that time line, it's difficult to say. I think it's challenging for them to be able to approve all the models by them. In terms of other tailwinds or headwinds, in Q4, we have this software deduction that's going to come that will be marginally positive for us. Beyond that, we've talked a bit about risk migration last couple of quarters. We have expected that to be negative on the risk exposure amount. That hasn't been the case, but we still expect that to be a headwind in the coming quarters depending on market conditions. So that's maybe the only real headwind I can see that we expect. But again, we've been wrong for 3 quarters on that headwind. So we'll see what happens. Thank you very much. Next question comes from the line of Chris Hartley from Redburn. Your line is open. Hi there, guys. Thanks. Just a very quick follow-up on your capital and dividends. Just next year, are you limited to 100% payout ratio at all? And then there anything special you have to do regarding getting permissions to go above that? Just thinking the context of you perhaps taking a slightly firmer stance with the regulators. Thanks. Yes. Thanks. No, we are likely not limited. There is one regulation which says basically that if you do something with your capital base that reduces the capital base, you need approval from the FSA. Well, in theory, everything you do in terms of dividend reduces your capital base. But typically, you don't need approval for that. And whether a payout ratio above 100% can be viewed as reducing the capital base, then there could be some arguments on that. But then I mean, we still have after the calendar year 2020 to have new thoughts about the dividend to 2019. And if the board feels that that is reasonable, then there could be a dividend for that year, which could be less than 100% payout ratio for the profit for 2019. And then you have the profit 2020 where you can also have a lower payout ratio than 100% and still have a large dividend to be able to adjust the capital base after 31 December this year. Yes. Okay. Thanks. So I didn't realize you could potentially redo the 2019 dividend. Yes, that makes sense. Thank you. Yes. You have until the next AGM, so the 3rd March for us to propose a dividend for 2019. Okay, brilliant. Thanks. Next question comes from the line of Jacob Kruse from Autonomous. Hi. Can you hear me this time? Yes. Hey, Jacob. Hi. Sorry, I think I was on two lines. Okay. So I just wanted to two questions. Firstly, on this AML debate that I guess had an impact on the share certainly. You said in Q2 on the conference call something along the lines of we can confirm that there is no ongoing sanctions case against SEB in the U. S. Is that the statement that still stands? So is there some sort of speak no change from where we were in Q2? And just secondly on this topic, is that fair to say what you put in the report is just formalizing what you've been saying for some time in terms of that always being information request or potentially being information requests from regulators to respond to? And then I just wanted to check or ask on the capital side. You just said you can still pay until the 2020 AGM in, I guess, March for the 2019. So given that and given the sort of temporary hold off, what is the point of this cancellation or formalizing the return of the capital in your capital base this quarter, if that's a decision that can still be that still needs to be ultimately decided or if we have the 6 month time line from today that you're talking about? Thank you, Jakob. If I start with the AML, this is it's a very, as you know, sensitive topic, how one express oneself. We always need to take into consideration what is public, what is allowed and what is a fair representation. And if there's anything that has been tricky the last 2 years is to express oneself in a clear and concise manner, genuinely honest and then that it is perceived that way. So when it comes to the sanctions process, this is a distinction between having ongoing dialogue and request for information, traditional investigations. And we would I would say, any given day have 60 ongoing authority relationships, which are on a particular topic. That is the normal course of banking and nothing strange. And every single one of them can theoretically lead to criticism and or a sanctions process. And after that process, a administrative fine or a sanctions fine. Now what we are then saying that we can differentiate between that and something that is of a sanctions process. We broke the long standing history of not commenting, not even on sanction processes until there is a firm decision. Firm decisions are always made public and or commented on once they are done, if they are of any material impact. So now we are saying that as far as we know, we said that in Q2 and I can reiterate that right now, we are not part of a sanctions process. And that is, of course, also semantic. What is a sanctions process? In our book, it is has anyone identified a misdoing or accused the bank for something? Or is there a formal process where we've been asked and accused for anything where we need to defend ourselves or explain what's happened. So I don't know exactly how to better describe it, but this is where we are. Okay. So basically, what was said in Q2 can be reiterated in Q3 essentially? Correct. Great. Thank you. Yes. On your second question, well, yes, we do it's correct that we do have until the next AGM to close the dividend to 2019. And to be honest, we could have treated the dividend to 2019 either way this quarter. We felt that this was the prudent way to do it. And I think the most important thing here is that look at the capital buffer we have, it's 580 basis points even though we've deducted the entire profits for 2020. And we have a management buffer target of around 150 basis points. And then in addition to that, you have the bank's profitability. And that should be your guidance on what kind of dividends you can expect from this bank going forward. And then exactly what the timing of that will be, it depends on several different factors, not least what the different authorities say. Okay. Thank you very much. There are no further questions at this time. Please continue. Thank you very much. We wish you all a good day and hope to see you soon. Bye bye.