Good morning. This is the conference operator. Welcome, and thank you for joining SEB's Q4 2022 Results Conference Call. As a reminder, all participants are listen-only mode. You can register for questions at any time by pressing star and one on your touchtone telephone. At this time, I would like to turn the conference over to Mr. Johan Torgeby, President and CEO. Please go ahead, sir.
Thank you, and good morning, everyone, to the full- year quarter and Q4 quarter presentation of today. Turning to page number two on the PowerPoint presentation that we posted online, we start with just saying a humble thank you to all of our clients. We've just received this the last 12 months customer satisfaction, and it was a very supportive result of SEB. We were top ranked both amongst corporates and financial institutions in the Nordics for the second year running. For the full year, we've had a good performance. Return on equity amounted to 14.7% in the quarter, and it was driven by strong trading activity and of course, a more benign environment as interest rates have been at a higher level than in the past.
This was done on a core equity to one ratio of 19% with a capital buffer of 470 basis points. Our strategy that we launched in January last year is broadly intact, and we have checked all the assumptions, and we think it still holds. However, we've done some minor changes in the short run, which we will get back to, and concluded that we will continue to invest in SEB and have set a new cost target for 2023 in the range of SEK 26.5 billion-SEK 27 billion, assuming constant FX as of 2022. The board of directors has also proposed to the AGM to pay a dividend of SEK 6.75 per share.
Now, as we have switched into quarterly share buyback, continue for now with the annual pace of SEK 5 billion, amounting to SEK 1.25 billion for the next quarter, and then a new decision will be taken. Flipping to page three, we can see the financial year of 2022 in numbers. Masih will come back to these numbers, but I'll just state that underlying results was very strong. However, after the imposed levies and the adjustment for Russia and the tax line, operating a net profit grew by 6% and return on equity marginally fell to 13.8%. This was led to a cost income of 0.39, an expected credit loss level of 7 basis points.
On page four, we look at the credit exposure, the credit portfolio development, and we have seen a 3%-4% adjusted for a reclassification, Q-on-Q growth for corporates FX-adjusted. Continuation of good demand for credit to be provided and also the annual number becomes 5%, mostly now falling because of the base effect as Q4 last year was very strong. We've had somewhat lower volumes in Swedish mortgages and also real estate. Commercial real estate, it looks like it's up 6%, but it's flat underlying. There's been a minor reclassification of some of the corporate exposures that we've had to be put into the real estate category. Now I hand over to Masih.
Thank you, Johan. I'm gonna focus on the quarter, and we're at page six now. If you look at Q4, we've seen income grow by 33% compared to the same quarter last year. That's largely driven by net interest income as well as net financial income, whereas fees and commission are slightly down compared to the last quarter in 2021. As you can see, and as it is true also for the full year, the expected credit losses are higher than last quarter in 2021. Because of the introduction of the tax fee, bank tax, as well as the higher resolution fund fee, the imposed levies have increased as well. Just a couple of comments on the item affecting comparability.
This is an impairment we've done in our Russian business. It's an impairment of the equity that we place at the Russian Central Bank. Because of the dividend restrictions that the Russian Federation has imposed, it will take us many, many decades to be able to transfer this equity to the parent company. Because of this, and because of time value of money, we've decided to be prudent and do an impairment of the equity we have, which is almost the full amount of equity that we have in the Russian subsidiary. This amounts to SEK 1.4 billion. In the quarter, we had a return on equity of 14.7%, a cost income ratio of 0.36. We took 8 basis points of expected credit losses.
If I move to slide seven, and we look at the long-term development of the bank in terms of income expenses and profit before ECL and imposed levies, we can see that since 1990, we've seen an average income growth of 6% and expense growth of 4%, leading to profit growth of 6% before ECL imposed levies. The numbers look fairly similar if you look at the last 10-year period. If you look at the last six years, we've seen slightly higher income growth and slightly lower cost expense growth than we've done in the very long term.
For now at least, it seems like we found a better balance between how we invest in the bank and what type of income growth that could lead to. If I move to slide eight, net interest income up 28% or just over SEK 7 billion in 2022 compared to 2021. You can see that the contribution from the lending side has come down during the quarter compared to the same quarter last year. But we've seen positive development in all divisions. Because of this is mainly driven by the deposit side. If I move to the next slide, you can see a bridge, so we're on slide nine, of the development of NII during 2022. This increase of SEK 7.3 billion, SEK 1.1 billion is coming from increased corporate lending during the year, and SEK 4.1 billion is corporate deposits.
The absolute majority here is deposit margins. Deposit volumes, even though they're up, the contribution from that is fairly small. We have another positive effect of about SEK 600 million from our Fixed Income, Currencies and Commodities business. On Swedish households, we've seen declining mortgage margins that have led to a negative effect of 500 m illion, but that's more than offset by improved deposit margins from Swedish households. The contribution from our Baltic business, if you look at the household side, is about SEK 1 billion year-over-year. The issue or what we want to conclude with this slide is that for this bank, 80% of the net interest income improvement during 2022 is coming from our Corporate and Financial Institutions business. This is pretty natural as that's the dominating part of the business that we run.
If you look at slide 10 and the net fee and commission income development, that grew by 2% during 2022. The main contribution here comes from the cards and payments business, which grew by about 25% during 2022. This is basically a full recovery of the sort of the lower level we had during the pandemic, and now we've seen a full recovery, especially on the corporate card side. We've seen an extra boost on this line due to the high level of inflation. We've also seen a positive development of lending fees as the balance sheet has grown. On the other hand, we've seen a negative development from advisory fees. DCM, equity capital markets and M&A, that type of activity has been lower in 2022.
What I think is positive here is asset management and custody fees, which are largely flat during the year, even though asset values are down quite a bit. The reason it is flat is that we've had large custody inflows by the end of 2021 and early parts of 2022, that has offset the valuation decline during the year. Moving to slide 11 and the development of net financial income, we've seen a 13% growth in 2022 versus 2021. Q4 was especially strong, with a total amount of SEK 3.5 billion. We've seen good underlying development within our fixed income business in the quarter. We continue to see elevated levels of activity within FX and commodities, albeit a bit low, lower than we've seen in Q2 and Q3.
We've also had some positive effects related to XVA as well as positive effects within our treasury business. We've always guided on this line, the guidance is, has been, and it stays that this should be between SEK 1.5 billion and SEK 1.7 billion excluding treasury and XVA. Here we have, for the first time, added what the average has been if you look at the total amount of NFI over the last 16 quarters, we've seen an average of SEK 2 billion with a standard deviation of about SEK 1 billion. We think that the combination of the guidance of SEK 1.5 billion-SEK 1.7 billion excluding treasury and XVA and this historical level we've been at, is the best possible guidance we can give.
If I move to slide 12 and the capital development during the quarter, we've seen an improvement of the buffer of about 60 basis points in Q4. A large part of this is driven by the strong underlying capital generation, which has added 47 basis points net of the dividend that the board has proposed to the AGM. We have a negative effect from the item affecting comparability, the Russian impairment of 16 basis points gross. One should note here that there's also a reduction of the risk exposure amount related to this, the net effect of the Russian impairment is only about 5 basis points. We've seen an improvement of asset quality.
This is mainly due to the fact that the new business that we've written during the quarter has been to corporates, that are high quality and better than the back book average of the bank. We've seen a reduction of the market risk capital requirements during the quarter, although they are still at elevated levels compared to the history. On the right-hand side, you can see that during the course of 2022, the capital buffer above regulatory requirements came down by 120 basis points from 590 basis points to 470 basis points. In the first year of the three-year business plan, we have reduced the capital buffer by about 120 basis points.
We think we're on track of reaching the guidance we've given to be within our target range of 100 to 300 basis points by year-end 2024. If I move to slide 13 and look at the Expected Credit Losses. In the quarter, we took about SEK 500 m illion of Expected Credit Losses. About SEK 190 million of this amount was driven by adjustments to macro scenarios, driven by the IFRS 9 rules and due to lower GDP and consumption estimates going forward. The remaining part is due to a new portfolio overlay for our real estate portfolio of about SEK 300 million. What we've done here is to do a bottom-up screening of the real estate portfolio and look at what could be potential vulnerable clients.
What we've looked at here is, for example, access to market financing, how much of that that is needed to be done in the near term, and the ownership of these companies. For this part of the portfolio, we've assumed that there will be a 10% default rate and that at that point in time, the collateral values will have dropped by 20%. When doing this exercise, this leads to a portfolio overlay of SEK 300 million. This is pretty much the edge what we can do at this point in terms of with being within the accounting rules and being proactive and take reserves for this portfolio. You should obviously put this reserve of about SEK 300 million in connection with the total size of the portfolio of about or over SEK 300 billion.
Overall, you can see that Stage 3 loans in the quarter came down quite a lot and that we today have more reserves than the total amount of Stage 3 loans. The total reserves in the bank is SEK 8.6 billion, of which SEK 2.2 billion are portfolio overlays. Moving to slide 14 and looking at some key ratios. We saw customer deposits grow by about SEK 100 billion during the year. We've seen that liquidity ratios, both the short term, the LCR liquidity coverage ratio, as well as the NSFR, net stable funding ratio, are stable, and that we've gone through the capital buffers before. The leverage ratio, I should add, is stable compared to the end of 2021. With this, I'll go back to Johan, and we'll have an update on the business plan.
Thank you, Masih. Now we turn to page 16 and switch gear a bit. We start with just a quick little key highlights from what we achieved and what we did in 2022, divided by the four pillars of the strategy that we launched last year. First, we have had a modest expansion of our corporate banking business in the Netherlands, Austria, and Switzerland, and this is broadly in line with what we plan to do. Investment management have launched several new investment products, and we are on track both when it comes to the green activity, the sustainability index, and the brown, the carbon exposure index, where we wanna improve the green activity and reduce the exposure to carbon.
On the strategic change, we've launched new functionalities in the app that meets our clients, and we've continued to expand private wealth management and family office division and established an office in south of France in Nice to support Nordic customers that reside there. We've also decided that as a spinoff of SEBx to commercialize Banking-as-a-Service, and we've launched a business area we call SEB Embedded, which is a very exciting new leg to stand on for the future, still early days, where we support and give access to our clients, our industrial and retail clients, to use banking-like services in turn for their clients.
On partnerships, the most noticeable is the private wealth management initiative in Denmark, where we partnered up with Ringkjøbing Landbobank to support private banking customers, making us reach much more customers in Denmark in the future and also focusing on getting more clients into the family office in initiative. We've done six investments in clean tech and green tech entrepreneurs, and this is of course to help early-stage companies to finance new innovations in order to improve the transition to a carbon-free economy. Lastly, we continue to solidify the cooperation with authorities, most noticeably the police, in order for us to work together to combat financial crime.
On efficiency, we've done many small and operationally organic improvements in automation, but most notably, I'd like to highlight the one in sub-custody as we have onboarded about SEK 5,000 billion over the last 18 months. This is of course meant that we have a completely different version of how to handle that volume in the future. We've also set up a financial intelligence unit to help us to combat financial crime, but also using intelligence that we can find in-house. We've improved and launched a new data governance and appointed a new head of data in the bank. Going to page 17, we now have the full year result of all customer surveys that we do.
Broadly speaking, the outcome is such that we are either on top or we are flat, except for one, which is the business bank at the bottom row. This is a very good result for us. We're going to work hard to maintain this position or even improvement, and there are still many things that we can improve. Looking at the particular initiatives that we did last year from the perspective of what did we say on the trends that we want to capitalize on and support our customers in. This is on page 18.
We have a very optimistic and long-term positive view on corporate and investment banking, and we've had a very strong underlying growth for some time. During 2022, not at all planned in January 2022, we saw a sharp shift in activity, particularly within ECM, M&A, DCM corporate finance investment banking, and we had significantly dampened activity due to volatility and lower asset prices and higher risk, a higher risk outlook. Savings and investment, we had a very, very solid starting point with one of the highest savings ratios we've seen. This has also changed quite dramatically, and that is of course that the cost of living has gone up and also the ability to save has gone down therefore.
We are still very positive on savings and investments and corporate investment banking in the long run, but clearly there's been a cyclical headwind in the near term. On technology and sustainability and on non-financial risks, we would say more or less more of the same. We have not changed our either short or long-term view. If anything, cybersecurity has been accentuated around the new technologies that we can do. Sustainability continues to be a top priority, and we met, broadly speaking, all the targets that we set out on the green and the brown. Non-financial risk, the trend continues. That in the past, majority of the risks CROs of banks would identify would be of financial nature.
Today, the majority of risks are non-financial in nature, operating risk, that is really, something that all banks need to relate to because the risk landscape is changing. Next page 19, is more or less just a plain repeat. For the ones, for time stamping the strategy, 2030, we've included it here as well as a reminder. Now I hand over to Masih .
Thanks again, Johan. Looking at page 21 and the cost development and the cost target we've given out today for 2023. As you can see here, for the first time, we are giving out an interval of SEK 26.5 billion and SEK 27 billion in 2023, assuming average FX rates of 2022. The reason we have given out an interval rather than the point estimates, which has been customary for us, is the uncertainty around inflation in general, both when it comes to salary inflation as well as inflation on other areas impacting the bank, such as premises, information services, and energy prices. When it comes to the things that we can do something about ourselves, that means efficiencies, those are a bit clearer.
We'll do more efficiency work during 2023, or we take out more costs related to efficiencies, and this can be achieved through the measures we've taken over the last few years in terms of automation and so forth. We'll invest as much in 2023 as we've done in 2022 on top of the investments we do going into the year. SEK 800 million-SEK 900 million extra in 2023. Here you can see what we are investing in. Just a few examples. In the front, the customer-facing part of the bank, we will continue to develop our remote advisory. We will continue to expand our private wealth management and family office division, and we'll continue with expansion within Austria, Switzerland, and Netherlands. In within sustainability, we'll continue to improve our customer offering as well as our disclosure and reporting.
When it comes to future-proofing the core, cybersecurity is a very important area in the bank as whole, as well as the whole society, and we'll continue to develop our cloud capabilities. On and off-boarding is both a future-proofing, but it's also something that will enable us to become more efficient in the future doing that process much more automatically than historically. Finally, house in order. We've invested a lot within financial crime prevention in the last few years, and we'll continue to increase those investments in 2023. That will also over time lead to efficiencies for the bank. Risk and compliance are areas that we've seen increased investments in for the last decade or so, and those will continue in 2023.
On the next page 22, we've done some minor revisions to the financial aspirations of different divisions of the bank. As a reminder, we do a review of these aspirations every year, depending on how our peers have performed, but as well as taking into account any potential accounting changes or organizational changes. This year, there are two minor changes. So a slightly lower cost income ratio aspiration for the large Corporate and Financial Institutions division, and a slightly higher cost income aspiration for investment management. This is mainly related to organizational change, moving one unit from one of the divisions to the other. On group level, we have a slightly lower aspiration on cost income ratio. Instead of around 0.45, we now aspire to be between 0.4 and 0.45.
This is mainly related to the fact that we've done a reclassification of the resolution fund fee out of the net interest income line to impose levies. Therefore, everything else equal, the bank on a group level needs to have a slightly lower cost income ratio to reach the group aspiration of 15% return on equity. Again, a reminder here, the cost income aspirations, those are not explicit targets. Those are implicit targets, what we think is needed for each part of the bank to achieve what we think is the explicit target, a certain level of return on business equity. Finally, just a reminder of our group financial targets to pay out 50% of the earnings per share adjusted for items affecting comparability every year.
To be within our management target range of 100-300 basis points and to have a return on equity that's competitive with peers and aspire to reach 15% in the long term. I'll stop there and we can open up for Q&A.
Thank you. This is the conference operator. We will now begin the question- and- answer session. The first question is from Magnus Andersson with ABG. Please go ahead.
Yes, good morning. If I start with NII, just if you could give us some flavor around the competitive situation on deposits. For example, I note that your deposits shrink, your household deposits and corporate deposits are shrinking, quarter-on-quarter. It's primarily in the when I look at the retail-oriented deposits there. Also if you on deposits could share with us what share of the Baltic deposits still have zero interest rates. Secondly, on NII, just you're talking about more volatile items in your favor from Q1, really, bridge financings and a strong FIC-related NII in Q3, for example. What's the status there right now? That's on NII.
Secondly, just on capital, last year you gave us a capital repatriation outlook or outlook for buybacks of SEK 5 billion-SEK 10 billion. We know that you have announced SEK 1.25 billion for Q1. My question is just this SEK 5 billion then the annualized level are the best expectations for 2003 or could anything change that? Thank you.
Thank you, Magnus. I think I'll start on the three questions. I ask Masih to fill in on all three. If we start with deposit, I think it's a macro trend, which is quite interesting, that is after many years of QE, we are now going to QT and higher rates. The whole point of what's happening right now is to drain the economic system of liquidity. That is, excuse me. That is, I think, what we are seeing overall in the market right now. This is a deposit that has continuously increased. Liquidity has been very ample. That has, of course, supported real economy. Now with higher interest rates and potentially QT, that will be withdrawn from the system. A few other points.
The cost of living has gone up and the cost of input goods for corporates have gone up. We can clearly see that corporates needs to spend more to produce their services, and that's a working capital squeeze. A corporate only have to access to capital that you need to pay your bills to get the input goods, either you take from your cash or you ask a bank to give you the money through a loan. We can clearly see that lending growth has not really gone up. There has been a little bit less deposits in the bank, hence that has been used for something, but credit exposure has gone up. The number of loans that we have written has increased. This is also a part of, potentially explaining that.
For the retail side, I would say it's the macroeconomic monetary change, and it is of course, spending more on the same basket, for energy, mortgage rates, et cetera, that has also drained it. Predominantly, corporates, for the deposits. Masih, anything on?
I'll just add on the sort of deposit decrease during the quarter. We can track what's happening to deposits, and we can see that we are not losing deposits to competition, especially on the retail side. The outflows we've had during the quarter is driven by increased cost of living so that we can see that customers are using their deposits to a large degree to be able to pay for bills. There is not money going out from SEB to competition on the deposit side.
Just adding on your question about the Baltic business, I can't really say how much is zero interest rates, but if you look at the fact book, you can see how large share of deposits that are in transaction accounts and how large share we have in saving accounts. You can assume that on the part that is in transaction accounts has zero rates, and on saving accounts we're paying something. That's the sort of the best, that's the best guidance you can get there. On the volatile items, we still have a couple of larger bridges on the books, and the contribution from that is fairly small.
I would say if anything during the quarter, maybe net interest income is slightly understated, and this has to do with what happened to the three-month STIBOR during the quarter. In the, if you remember, early parts of the quarter, the three-month STIBOR starts to take in the bank tax and the resolution fund fee that is payable by year-end. There was a very low STIBOR print of the beginning parts of the quarter, and a lot of fixings are made at that point. This is fairly technical, but that it has corrected itself now, but it probably has led to maybe the net financial income line being slightly overstated in the quarter and the net interest income line being slightly understated in the quarter. On the capital side, you're correct.
I mean, we are executing on the mandate we have to do SEK 1.25 billion of share buybacks until the AGM. This is not a guidance for what the pace will be post the AGM. It could be same, it could be lower, it could be higher. The guidance we can give, and this was obviously confirmed by the board yesterday, is that we plan to be within our target range by the end of 2024. Whether that's gonna be reached through continued organic growth, through any potential acquisitionsOr whether that's gonna be due to dividends or share buybacks and what combination of that we can't say at this point, but the plan is still to be within that target range in two years time.
Okay.
Yeah.
Yeah, sorry. Go on.
Can I just add two things? On the deposit side, this is more a reflection, but for many years, as we are pitching to clients how to manage their liquid funds, there's not been an alternative. Also the government bond rates have been very low or negative, and right now this is changing. In SEB, we're offering quite change now in terms of managing short-term liquidity. You've gone from zero to some of our investment products yielding 4%. This is not a net number, but gross number is very good, that you actually now, when the rates have come up, you can start looking at fixed income securities that is clearly yielding more than you would get in just a transaction account.
That's also a potential explanation, and it's a very good thing because we would love the money to be more productively placed.
Thank you. Just to follow up there on deposits, have you also seen amortization going up in the mortgage book? Is that part of the explanation?
Yeah, we've seen that happen. It's a very small increase from low numbers, but that this has been a new trend since September that we have seen more applications for amortizations, and we are approving a larger share of those applications, for every month, really. The increase started in September, and it was higher in December than it was in September.
Okay. Thank you very much.
The next question is from Omar Keenan with Credit Suisse. Please go ahead.
Good morning. Thank you very much for making the time. I just wanted to explore the deposit volume point just a little bit more. I guess if we look at system level trends, deposits were down about 0.3% in November. They were still fairly flattish. I was hoping you could perhaps comment on whether, you know, why SEB's trends look a little bit different from the system, or did something happen in December that's a little bit different? Just related to that, we've seen quite a nice development in terms of the deposit margin, and we're expecting to get another, I guess the market saying 50 basis point rate hike from the Riksbank.
Could you help us perhaps think about the various moving parts on NII going forward in terms of, what benefit from rate sensitivity we can get? What lending volumes look to be doing, and what lending margins look to be doing? Thank you.
Thank you, Omar. I really wouldn't make a big number of the deposit decrease in Q4. If you look at the full year number, we've seen deposit inflows in the bank. We've seen the largest deposit outflows in Q4 is related to corporate business, and this has to do with that over the course of the year in 2022, some of these corporates take up new funding from us for a purpose. Some of the purposes have been to acquire other companies. You can see that when they do the actual payment of that acquisition, they have taken out liquidity from us, they've put it in the bank as deposits, and when they do the actual acquisitions, they use those deposits to do that. That's a big part of the deposit outflow.
As I said before on the retail side, this has to do with. That's a very small proportion of the deposit outflows in the quarter that has to do with the cost of living really. It's really no drama in it. Since we are a predominantly corporate and financial institutions bank, there'll be more volatility in our deposit base than if it would be just a pure retail bank. I wouldn't say that we have a different trend on deposits than what you can see in the overall market. When it comes to deposit margins going forward, it's difficult to say what's gonna happen. It has a lot to do with competition really, and how customers will behave.
The increases in rates that we've seen has been very rapid, so financial actors, both corporates and households, haven't really had time to act, and now we'll see what they will do. What we do know is that we have about SEK 200 billion of equity in the bank. If you just do it very sort of technically, if rates go up by 50 basis points, obviously we don't pay any interest on the equity. The positive effect of that is about SEK 1 billion annualized basis. That's sort of what we can guide on, and the rest is gonna be up to competition and what's gonna happen in the markets. We do see right now or our view is that lending margins, especially on mortgages, are unsustainably low. They are very depressed.
You can argue that some parts of deposits, margins are high or higher than they've been historically. We are in a process of the market really finding a new equilibrium between lending margins and deposit margins. It seems reasonable to believe that to some extent, lending margins should improve from current levels, also given what's happened to credit spreads in the market, at the same time as maybe deposit margins will come down. What the net effect of this will be, it's very difficult to predict. We've had such a fast-moving environment in terms of rates. It's gonna take some time to find this
Equilibrium, it's just difficult to predict where that's gonna be. On lending volume side, there is subdued lending demand. We did see quite a lot of credit demand in Q4 from high quality investment-grade corporates adding on liquidity facilities in Q4. These haven't been drawn yet, obviously, to some degree, these could be drawn. These are not CapEx investments, so these are backup facilities to logically with shorter tenors than capital, CapEx investments would have. We did see quite a lot of that activity in Q4, a sort of a mini pandemic effect, if you can say. As you recall, in the early parts of the pandemic, we did SEK 140 billion of new credit facilities over six weeks. Now we did about SEK 60 billion in Q4, almost half of that amount.
fairly large, and we'll have to wait and see how much of that will be drawn in the coming, months or so.
Okay. Okay, thank you very much. I guess just on the deposit point, I was referring to the household deposits. If I look at the CPC deposits, they were down 2% in the quarter, and it doesn't look like system trends are showing that.
In C&PC, more than 50% of the deposits are from corporates. Less than half of that is households. If you look at the household side, it's a very small decline. When we track the flows and see where the money is going, it's not going to other banks, it's going to pay bills, basically.
Okay. That's great. Thank you very much.
The next question is from Nicolas McBeath with DNB. Please go ahead.
Thank you. First, a question on growth, please, in your balance sheet and your strategy here. The credit portfolio was flat quarter-over-quarter and Masih, as you just commented, your lending demand is currently subdued. Assuming what looks like a plausible scenario for the next couple of years with very limited and possibly even negative loan growth on both the corporate and household side, how would you think about your growth strategy in such environment? Do you find it critical to continue to grow your kind of credit and lending? Do you think you could be content with absence of growth and rather focus on protecting profitability and distribute earnings to shareholders rather than reinvesting into the business?
If I start then, just so we have the same mindset, we don't dictate how much a corporate needs to borrow. That's very much driven by every institution's desire to invest, and right now that is subdued. We have still a recession coming our way. Many large corporates are still very cautious and careful and worried. That is also good for loan demand, namely for the rainy day argument. We have seen these facilities now put in place, but they're not drawn because they are drawn if there's something to happen. The growth strategy for SEB is completely not driven by macro. It's driven by increasing our market share amongst large corporates and financial institution.
It's driven by increasing the number of clients that we service, and that's predominantly outside Sweden, so there's still a little bit of growth in Norway, Denmark, Finland. There's significant opportunities in the long run to grow this bank in Germany, Austria, Switzerland, U.K., et cetera. The other part of the growth strategy is to increase the proportion of any client's business to us. That's a very organic, very powerful, change in how much market share you have on one client. The data points, of course, to a fantastic 2022, and there's no reason to believe that we're not gonna continue, where we've increased market share and gained more clients. On your kind of estimate of what will volumes be, I don't know. It's very much a macro-driven question in my book.
The margins on corporates are more or less a global. There's a market price set in the international financial markets. There's not a lot you can do about it. That has, of course, been a positive. It's supported right now by higher credit spreads than we used to have. That's a very positive thing, that money is becoming more expensive, and therefore, also the credit curve, the difference between credit quality has clearly widened out, even though it's stabilized in this quarter. That margin that we receive is, of course, very much driven if we are efficient, if we have low funding costs, and if we're cost efficient, which I hope to be able to say that we are, and therefore there will be good a good margin development.
Okay, thank you. A second question, please, on your ROE aspiration. Looking at the underlying ROE in Q4, it seems to be pretty close to 15%. I was wondering whether you think it would be a stretch for you to aspire higher, in particular, given your current strong capital position and maybe some further NII tailwinds going into 2023. Do you think you could aim higher with a slimmer equity base? If you could please elaborate what drivers you see impacting your ROE positively and negatively from the current level over the next couple of years.
Okay, I'll start there, Nicolas. The board confirmed our financial targets yesterday, so the ROE aspiration continues to be 15%. I think for us it's about trying to strike a good balance between adding value to the shareholders, so having a return on equity that is sufficiently above the cost of equity, but also making sure that we can grow the business. There's gonna be a balance there. The higher ROE aspirations you set, the more you're gonna potentially limit your growth.
Potentially you could sort of take on too much risk, as a higher ROE aspiration could incentivize you to take on higher margin business and therefore take on higher risk. In the end, I mean, it's gonna be about competition as well. Obviously, if a lot of our peers who've moved to other ROE targets, that's something we would have to reflect upon and take into account when we set our own targets. Here now, this is the aspiration we have. If we can get help from the interest rate environment being different than what we've been used to, that's obviously great, and hopefully we can grow our business at this higher return on equity level for the coming years.
Perfect. Final question, please, on commissions for 2023. Given where stock markets are currently and the activity pipeline you see for 2023 at this point, how do you view the commission outlook for this year? Do you expect to grow net commissions in 2023 versus last year?
It's gonna be very dependent on what happens to asset values and balance sheet growth when it comes to lending fees, for example. Compared to 2022, what we don't have going into 2023 is a further recovery in the cards business. We've seen a full recovery there, so that's behind us. At the same time, the advisory related fees are clearly lower in 2022 than 2021. If asset values stabilize, it's possible that that business could pick up, so that's a potential. On asset management, I mean, it's gonna depend a lot on what happens to the stock market and asset prices in general. I should just note that we are a bit more geared towards fixed income than equities compared to many peers.
You should also look at what happens to fixed income prices to try to sort of track or understand what's gonna happen to our assets on management and asset on the custody business and the development there. It's very difficult to say what the fee income line will do in 2023 as it's, again, very macro dependent.
Okay, perfect. Thank you.
The next question is from Maria Semikhatova with Citibank. Please go ahead. Ms. Semikhatova, your line is open.
Hi, yes. Thank you. First on on the capital outlook, maybe near term. Hello. I have two questions. First on on capital trajectory. Maybe near term, we used to see a higher market risk risk-weighted assets in the 1st quarter, if you expect similar analysis this time around. Maybe, kind of over the, over the year horizon, if you have the impact of IRB model overhaul.
Yep. I'll take that, Maria. You're right. I mean, typically market risk REA comes down in Q4, it goes up slightly in Q1. This time around, it's more unlikely that's gonna happen as the market risk REA is already elevated in Q4 compared to historical levels. Hopefully that won't happen. Hopefully that could come down. It's gonna depend a bit about on the volatility in financial markets as those have been elevated during 2022, and more recently, that type of volatility has come down. We'll see. On the sort of full year, we do have the IRB overhaul. That process will likely end during the course of this year.
As we've said before, based on what we apply for, based on our historical default rates, which we base our models on, we don't see that this overhaul should lead to any net effect on our capital requirements, on our risk rates. In the end, it's gonna be the Finansinspektionen that approves the models. We can say, but we think that we have a good application, and we have a good sort of good assumptions behind this conclusion that in the end, this shouldn't lead to any meaningful net effect for us.
Just to follow up, do you have a sense of why, where your portfolio is different from a key peer? Swedbank provided a quite different outlook for the net impact from this process.
Can't really compare it to peers. What I can do is to look at our historical observed default frequencies in the portfolios and the risk weights we use. Looking at general data for European banks, we can see that we have clearly higher buffers in our risk weights than other banks have on average compared to the historical default rates. Given that we have larger buffers to start with, it's difficult for us to assume that we would have to have even larger buffers compared to average European banks. That's what I base that conclusion on, that we start out with clearly higher buffers than the average bank.
Understood. Thank you for your comment. The other question on asset quality outlook, maybe first on commercial property lending. You stood out among other Swedish banks with a quite conservative approach, and portfolio didn't increase, but I see that it grew in the fourth quarter. I don't know if you changed your view on this specific sector, and maybe you could comment what's your risk appetite for adding new CRE exposures in 2023? More broadly, I believe previously you included in the report some kind of commentary on your outlook for expected credit losses. We were at 7 basis points in 2022 to get a sense of how high can we get this year, given your forecast recession?
Okay, on the CRE portfolio, it is right. We believe that we are conservative to the extent that the accounting rules allow us to be. We've done this bottom-up analysis, and the best number we can come up with at this point is the portfolio overlay of about SEK 300 million. This is not a guarantee that that's gonna be sort of how much we lose in the end. It could be lower than that. It could also be higher. The accounting rules allows you to be forward-looking to an extent, and we have been as forward-looking as those allow you to be at this point. The risk appetite, we didn't grow the CRE portfolio in Q4. As Johan said before, it's that growth rate is driven by reclassification.
The underlying growth in the quarter is zero. Our risk appetite is such that we will continue to support the core customers that we have, and we will not add market share during this period of elevated risks in that market. On the outlook on credit losses, we're not giving any guidance on that for this year. There is obviously a higher uncertainty related to that. What I would say is that we are going into 2023, in my view, with probably the sort of cleanest and healthiest balance sheet we've ever had.
If you look at the reserves we have against Stage 3 loans, how much Stage 3 loans we have as a share of the total book, how much reserves we have, how much portfolio overlays we have, it's a good position to be in when going into a more uncertain environment. Very comfortable in that sense that we have good buffers going into what is likely to be an uncertain environment.
Thank you. Just a minor clarification question, if I may, on your cost guidance, just to check if it's based on the average FX rate in 2022 or the year-end FX rate.
It's based on the average FX rates. That's a good point. Year-end FX rates are higher than average. Everything, if they stay where they are, we're gonna be sort of, not at the lower end of that interval. That's correct.
Okay, thank you.
The next question is from Andreas Håkansson with Danske Bank. Please go ahead.
Yeah. Hi, everyone. We're going through most areas, but a few follow-ups. On the mortgage margins, Masih, you said that you think that they are unsustainably low at the moment. When I look at how you've been pricing your mortgages, it seems like you've been probably the most aggressive in terms of mortgage prices, and I see that your average price at the moment is even below stable and quite a lot below some of your bigger peers. Could you tell us a little bit about your strategy and why you're doing this?
Yeah, can do that. I think, I mean, first of all, it's a timing issue here. At any point in time, we could be either cheaper or more expensive than our peers on mortgages, especially if you look at the list price. I think it's wiser to look at the actual price, so you can both change the list price or you can do something about the underlying model and, yeah, change those prices, what kind of discounts you give depending on what kind of customer it is. I think the main issue here is it's a timing issue. Going into 2022, we had a view on the mortgage market and the real estate prices that they were a bit elevated, and there were some risks.
We started to see inflation come up, and we didn't feel that this was the best point in time to advise customers to take on mortgages at the very low rates we had when we could see that prices were a bit elevated and that rates would go up. That's the stance we took back then. Now we think the market is more balanced. Prices are down 15% or so, and now it's more visible to households what mortgage rates will be, and they've gone up quite significantly. We have a different outlook on the market as such.
At the same time, we have lost some customers that we didn't wanna lose during 2022. We're trying to make sure that we don't lose good customers going forward, and the plan is to come back to our back book market share. That is also behind sort of the reasoning we've had. I think the main issue here is that it's a timing question. When do you change prices, and what price do you change? Is it the list price, or is it the underlying negotiated price, depending on what type of customer you are?
Yeah. I mean, I'm obviously looking at the average prices. Getting back to clients, I mean, we see that you're actually shrinking your mortgage book at the moment. Are you gonna do that by offering a lower price, or are you gonna do that by offering new services, or how do you plan to get back into that market?
In the end, it's gonna be a combination that we have a total offering that is competitive. We've done a lot with service during 2022. If you call into the telephone bank, you'll notice that telephone queues are very short today, and they've been short for several months now. Our service has improved quite a bit. We've improved also the access you have and what you can do yourself in the app. We've have a slightly lower price compared to what we had about a year ago. It's about finding the best combination of these, based on what the customers want. Obviously, in the end, I mean, we wanna improve the service as much as possible. We think the customers appreciate that.
Obviously there's a lot of competition in the market. Mortgage growth in the market is very, very low. It's basically zero at this point. Which means that a lot of banks are chasing less volumes, and that increases the competition, and that's one of the main reasons behind why mortgage margins are so depressed at this point.
Okay. Thanks. Johan, when you talked about capital, you mentioned M&A. Could you tell us, I would assume it's we're talking about smaller transactions, but within what areas would you be interested? Is it asset management? Is it international or what would fit your strategy?
Thanks, Andreas. When I said it, I meant corporate finance, M&A advisory, I didn't mean SEB M&A, but I'll answer the question as if I meant that. In the plan we signed off with the board yesterday, there is no M&A included. The organic stance, the base case for what we are talking about costs, capital, everything on this call is assuming no meaningful acquisitions or disposals by SEB. That doesn't mean that things can't happen. As things happen in the market, we always have to look at it. It's our fiduciary duty, and there are, of course, areas where we could expand. Just so it's very clear, there is no M&A in the current plan.
Should there ever be one, we would of course have to come back because that would change, how we view the statements that we see today.
That's clear. Thanks so much. That's it.
The next question is from Sofie Peterzens with JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from J.P. Morgan. I just wanted to go back to the cost target because if I assume that the average FX rate for 2022, and I look where the EUR versus SEK is currently, it's almost 5% higher. If I adjust for the latest FX rate, well, does it mean that I get to SEK 27 billion, or does it mean that I would get more to SEK 27 and a half billion if I look at the upper end? Like, if we take the kind of current FX rate, what would the cost target for 2023 be? That would be my first question.
Yeah. I don't know what the current FX rate is compared to the average for 2022. You're right that it's probably sort of worse in the sense that, the cost target we've given out would imply a higher cost level. The interval we've given out is based on uncertainty around inflation, not uncertainty around FX. If inflation is such that we would land at SEK 27, and then you would have to add whatever FX does, on top of that. Yeah, it is possible that we end at SEK 27.5 if FX rates move in the direction of that.
Recall, if you look at 2022, the FX effect of our cost line was about SEK half a billion, but we had a positive FX effect on our income line of SEK 1.3 billion. Whatever you do... We are more profitable and have a lower cost-income ratio outside of Swedish krona than we have in Swedish krona. A weakening Swedish krona, although it increases the cost level of the bank, it actually improves the profit level by more. In the end, the net effect of a depreciating Swedish krona is positive for our results.
Okay. That's very clear. Could you just kind of reiterate your rate sensitivity guidance? Does it still hold SEK 715 million for a 25 basis point rate hike in Sweden and another SEK 250 in the Baltics? Could you also just remind us what your rate sensitivity is to a 25 basis point cut in interest rates?
If you look at that guidance, that was based on that, we don't pay anything on transaction accounts when rates go up, and that obviously we don't pay anything on the equity base that we hold. With the same assumptions, you would have the same sensitivity. The question now is, can you make the same assumptions? Is it reasonable to believe that if rates go up further than they have, that we wouldn't have to pay anything on transaction accounts? What we're saying now is that at this rate level, that assumption is less likely to hold. Competition in the market is more likely to lead to banks generally having to pay up for all types of deposits in line with interest rates moving upwards or downwards.
What we do have is obviously the equity base of SEK 200 billion, which we don't pay interest on. It's with the same assumptions, it's the same sensitivity. You can just question the assumptions more at this point in time. That's the point we wanna make. There is still some tailwind from the rate hikes we've seen so far. Obviously the whole lending book hasn't been repriced. That's gonna happen over time. It takes maybe up to two years before that happens. I think there is still some tailwind from the hikes we've seen, but the question is, will there be further potential tailwinds if we get additional hikes at this stage? I think that's a much more sort of uncertain issue.
You also have some headwinds on NII from higher wholesale funding costs. Is, my understanding is that the wholesale funding costs don't reprice all at once.
Yeah. Well, the question is how those potential headwinds are offset by on the lending side. I would say that if anything, lending margins are depressed at this point relative to credit spreads. Hopefully going forward we could have some improvement in lending margins, and obviously that's related to the wholesale funding cost. Net-net, hopefully that will be positive going forward.
Okay, that's very clear. Just a final question. You did SEK 1.4 billion provision for Russia. It's writing down the equity base. You still have SEK 7 billion of exposure to kind of Russia. How should we think about any future write-downs? If you don't believe there will be any more write-downs against Russia, why is that? What makes you comfortable?
Yeah. We had SEK 1.6 billion of equity in our Russian business. We've written down SEK 1.4 billion of that. The maximum additional potential risk we have is SEK 200 million. The deposits we have in addition to that is customer deposits. That's we take in from customers and place at the Central Bank. We have parent guarantees for those deposits. Even if you would assume that there will be any losses related to those deposits, which is just. Well, that couldn't happen. Even if you assume that, we still have SEK 1.6 billion of equity in the subsidiary that could cover any potential losses. For the parent bank, we have impaired that. Yeah, I would say the maximum potential further impairment in Russia is SEK 200 million.
Why wouldn't you see any write-downs on the asset side, considering that most other European banks have written down most of the assets that they have in Russia? Why would you only see it on your equity?
It's not our assets, it's the customer's assets. It's their deposits that we take in, and we place it in the central bank in Russia. It's not our own assets. We have parent guarantees for those assets. These are Nordic companies or German companies doing business in Russia. It's not our assets.
If you're asking about lending, it's very different if you compare to other international banks in Russia because we don't have any Russians in Russia. We are only there for the Nordic and Northern European companies that we already have. Therefore, there's no real exposure to be compared to if you are a bank in Russia for Russia, because we have then a parent company in some of the Nordic countries or in Germany who has a more often than not a guarantee. The credit risk is still gonna be on the industrial company, typically speaking, from the Nordics or Germany. Therefore the credit risk in that sense is the same as the overall bank, regardless of the problems that might be created.
That's why that is a separate issue, which we feel very comfortable with compared to the equity, the money that we own, our money, which we are not allowed to take out, and therefore we do the prudent thing to write most of it off.
Okay, thank you.
The next question is from Rickard Strand with Nordea. Please go ahead.
Yes. Hi, and good morning. Starting off with the first question on Swedish mortgages. Given that you have not hiked prices in line with the competitors recently, but at the same time sort of a comment that the mortgage margins are very low, would you say that that indicates that you're more likely to move your prices ahead, go forward in line with the sort of peers in general?
Also, follow-up question there on the sort of, given that, volume growth is now approaching, close to, 2%, on the sort of an annualized basis, if we start seeing volumes coming down to zero, even negative, just if you could comment how you would prioritize, between sort of keeping volumes up, between that and, sort of keeping your, protecting your margins?
Yeah, Rickard, I'll try to answer that. I can't give you any indications of what we'll do with prices going forward. That's gonna happen when it happens. Yeah, you just have to wait and see. On volumes, I mean, we don't really look at volumes in that sense. We look at customers. We wanna keep good customers in the bank. Whether those customers at any point in time want to borrow or not, that's gonna be cyclical. You're gonna see scenarios where they're gonna borrow and scenarios where they won't borrow, and we won't force them to do either. We want to make sure that we're going to keep the customers that we think we can service. At this point in time, you have very low mortgage lending growth, and then that's fine.
If it goes up, then that's fine too. That's something that sort of happens in the market. That's not something we can dictate really. Over time, we think that the mortgage market will rebalance, that the depressed margins you can see today are too depressed for that business to be viable. It's going to happen over time, and it's going to be probably a combination of something happening to deposit margins and something happening to lending margins, and we're going to find a new equilibrium somewhere at some point. It's been such a fast-moving environment, so it's very difficult to say whether when and at what point this will sort of stabilize. I'm sure that a lot of things will happen during the course of this year.
May I add, it's, I understand the question, and we're posing it same. Let me answer the question about what we are not saying. We are not saying that we're gonna be cheaper or have lower volume or less profitability in order to gain market share. That's not part of the strategy. The overall composition of return on equity or profitability in retail banking, you can see the aspiration we have. We need both deposit taking, savings and investment, mortgages, cards to kind of fit that bill. We need to have a competitive offer that clients like to choose, both with the right price and the right service. That's how we box it in. What that's gonna lead to in terms of dollars, euro cents, kroner next year in volume, I don't know.
It's, just like Masih said, it is important that we maintain our position in the market, and this has gone so fast. The, the hikes you refer to, some of them were a few days ago. We are talking about really real-time, and we don't change the mortgage price every day. There's a little bit of lag and the time and timing issue in this, in this discussion.
A follow-up question also on the SEK 300 million overlay you do on commercial real estate. I guess this is an overlay you have not really started to see any impaired asset quality yet. Or if you have, or how do you expect the timing of this sort of to play out for your customers there where you, where you are somewhat more concerned compared to previously?
You're right. We haven't seen anything yet. The underlying portfolio, both in CRE and the balance sheet in general, looks very solid. Nothing has happened. As I said before, we're trying to stretch the accounting rules to the extent that we can to be prudent, and take into account what potentially could happen. If I just give you an example. Here we have assumed that we will have defaults in parts of the portfolio and that collateral prices will go down by 20%. If in a year's time, this hasn't happened, then we have to rethink this and see whether we should recover this overlay. If something more, sort of negative has happened, then we will have to do the opposite, maybe add a bit more in overlay if nothing has happened to the underlying portfolio.
This is something we'll reassess basically every quarter, and whether it's gonna be sort of higher or lower than this amount that we have put aside at this point. It just depends on market developments. For now, there is no difference or no change in the underlying quality. If anything, during the quarter, as you can see, our Stage 3 loans came down, and the reserves we have came down less. We have more reserves relative to any potential issues in the balance sheet today than we had prior to Q4.
Mm-hmm. Thank you.
The next question is from Namita Samtani with Barclays. Please go ahead.
Hi. Thanks for the questions. My first one is, what confidence can you give us that the investment spend of SEK 800 million-SEK 900 million has a decent return, and who is accountable for this? If I look at asset management flows, they've been negative for the past few years, and this has been an area where you have stated previously, where investment spend has gone.
Yeah. I'll start, see if Johan can support me. I think that's a good question. It's very difficult, obviously, to evaluate the investments you do, especially in the short term. We have now allowed the cost base of the bank to increase for four years or so after keeping it flat for 10 years. The only thing we can see at this point is that when we compare ourselves to other banks, we have seen a higher income growth in the last four years than others have, which clearly sort of is over and above the cost inflation we've seen. It's at the same time, it's difficult to conclude whether that income growth is fully driven by the additional investments we've done or if it's something else.
It's difficult to say what would have happened if you take your example of the asset management business. If we hadn't done the additional investments, how would the flows look like in that scenario? That's the scenario you should compare with, but it's difficult to know how that scenario would look like. We have sort of accountability on all of the investments based on who's responsible. What division is the investments going into, we have KPIs we follow for every part of the bank and make sure that they are following the trajectory that we have assumed that they need to follow given what we allow them to invest. I can assure you that we have good accountability in the bank when it comes to the investments that we do.
Thanks. I've just got a question on ESG, because I saw this article in Business Arena, stating SEB is one of RWE's, that German energy company, main banks for financing. The article states, SEB's support undermines the global climate goals and violates the Paris Agreement. It also states, it violates SEB's policy, which excludes loans to companies whose operations are more than 15% of coal operations. I'm just wondering, are these comments true, from the article, and do you have any additional comments? Thanks.
Yeah. Thank you. I can take that. I would start normally by saying we don't comment on a single relationship, this time I'll make an exception because we asked RWE, and I had it as part of the update on the sustainability presentation we gave quite recently. This is a very tricky area. There is not an answer if it's true or not. It's a matter of opinions. People think very differently about RWE or any utility who's not 100% renewable. We have a luxury position here in the Nordics, not because we are greater or better than anyone, but Sweden and Norway particularly have an extremely high density of non-fossil energy generation. We are a very large bank in Germany, no other Nordic bank is at all comparable to us.
If you were to look at a corporate bank who is in Germany, you would not look like you are a corporate bank in Sweden. You will by nature have a lot more fossil dependence. As you might have seen, gas is now being increased quite a lot, and there has been coal-fired plants, and there has been a lot of oil discussions since the invasion of Ukraine. It's pretty clear to everyone this is huge investments going in. This is the explanation why it is correct when you compare us to our peers around this square where we sit, that we are the only large corporate investment bank in Germany. The financing I actually explained on the Corporate Day. It was the acquisition of Con Edison Energy, so it was a $6 billion.
It's absolutely correct. We did part of that financing together with a large group of international banks. It was a 100% renewable investment, which was not a part of the narrative in the paper.
Okay, thanks very much.
The next question is from Piers Brown with HSBC. Please go ahead.
Yeah, good morning. Maybe just a final question from me on the CRE overlay. I wonder if you could just explain how you factor refinancing risk into your models and your assumptions. When I look at the CRE sector in Sweden, it looks like the main risk is not really collateral values per se. It's the possible inability of these customers to refinance, particularly in 2024, if the wholesale markets remain shut. If you could just maybe shed some light on what sort of assumptions you're using for cost of debt for these companies as we move into next year, that would be very helpful. Thanks.
Yeah. I'll try to do that. It's probably a bit too detailed. I have to ask the risk organization exactly how they've done that. I know what factors they've looked at. So they've looked at capital market dependency, access to equity, for example, and exactly where they've sort of put the thresholds and how much access you need to have and how dependent you need to be. I actually don't know the details. These are sort of, to some extent, crude assumptions that you take a portion of the book, you look at what kind of dependencies you have, and you assume that 10% of it will default, and then you assume a certain decline in collateral values in that scenario.
The model gives you a potential loss in that scenario, which in this case is about SEK 300 million. That's sort of how what we've done. Just note that when it comes to collateral values, they are unchanged to date. Even though we've had this volatile environment for about a year or so, nothing has happened to collateral values, mainly because rents have gone up equal amount compared to discount rates for the collateral. As I've tried to say, I mean, this is as much as we can do. We wanna be prudent and conservative, and this is as much as we can do, given the outlook we have today.
If the outlook changes, if things deteriorate, then it could be possible to take further reserves, portfolio overlays, or if something materializes in the portfolio, then these overlays could be used against any potential underlying deterioration of that credit book. So far nothing has happened, and we're trying to be prudent.
May I just add, it is a cashflow first and foremost dependent analysis. Thereafter, it's an event of default analysis where LTVs come into play, but that's after the event where you cannot, as a real estate company, meet your legal obligations to repay loans or other things. We did show a few quarters ago, one of, I think could be helpful that we where we put in, was it 200 basis points? We just increased the funding cost, or we put STIBOR. At the time, we increased it to 4%, and we just check the interest coverage ratio. You could see there that no one in that scenario we did a few months ago was breaking the 1. It's still the case.
I hear my head of AI's telling me so that is still a valid analysis. We have to do this, what we've done here. We have to put something on top, which is not easy to. You cannot really calculate it. It would indicate zero increased risk. Here's the forward-looking like liquidity risk. Equity market tells you something about what they think about the outlook, but they are not particularly part of the liquidity model or the credit risk model. This is what we've done.
That, that's interesting. I mean, I guess, if I look at the wholesale markets, it looks like these companies would probably need to be paying 7% plus to roll over wholesale debt. From what you're saying, the spreads the banks are asking for are putting the cost of debt from a bank perspective at a lower level. 4%, do you think is still a kind of sort of realistic number for kind of sort of model?
No, no, sorry. We are using the credit spread, which you allude to. We are using the reference rate. We put it up. We increase. If it's seven in your example, it would be 9% or 10% that we would assume. Many of these would even pay 10 or 20. It's not a credit spread widening number I gave you. It's actually the benchmark number, which is a different assumption. It's unclear. Then the analysis we do is not on the market, that is on our clients that we have. We have, of course, very ample ability to service existing clients. As Masih has said in the beginning on the CRE strategy, we will support the clients that we like and that we have. We don't have an...
That means. That's very different from saying that we would increase or do more CRE. We will be very cautious, continues to be that. If we have clients that are dependent on us, also, if they have bond maturities that they might struggle with, of course, we're gonna be there. That's what we do. We do the bonds, and we do the loans to support them.
Mm-hmm. Okay. That's very helpful. Thank you very much.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Thanks. Sorry. Thanks a lot taking my questions. Just to get back one second to NII. If I recall correctly, at the beginning of the call, you stated there were some items, some traveling between NII and NFI in the quarter, so that one is a bit understated, the other one may be a bit overstated. Knowing that this is probably a volatile item, would you be in the position to, let's say, to throw a ballpark on what you think might have been the traveling path between these two lines? This is the first question. The second question I have is on capital repatriation. Just for me to understand, the SEK 1.25 billion buyback consumes roughly 15 basis points of capital.
It's not exactly effective in helping you achieving 15% ROE target. My understanding, and please correct me if I'm wrong, is that you see this SEK 125 as a quarterly buyback, so we should assume this to keep going more or less at the same level every single quarter over the course of 2023, provided nothing really horrendous happens this year. Do I get it correctly? The other thing then is a curiosity. Why impairment in Russia now and not at the time of first half results 2022, even if the sanctions have been there since a while? Why now?
Okay. Riccardo, on the NII and NFI traffic, it's difficult to quantify what the amount is. I think if you just look at market risk rates, mainly the three-month STIBOR, you'll see that it dropped quite dramatically in the beginning of October. It took some time for that to recover and sort of be at the path it should be at given the expectations of policy rates from the Swedish Central Bank. It's that drop I'm referring to, and there were a lot of fixings on the corporate book in relation to that drop, so those fixings were probably at lower levels than they otherwise would be. Now when there are those fixings will be done again in December, January, it will be at sort of more correct levels.
Exactly what the effect of that is, it's difficult to say. I was just referring to the question I got, whether there is anything additional in NII. I think if anything, the opposite in Q4, that it's probably slightly understated. On capital repatriation, the SEK 1.25 billion we're doing until the AGM is not a guidance of what we will do post the AGM. It could be a higher amount, it could be a lower amount, could be the same amount. The only guidance we can give at this point is that we plan to be within our target range of 100 -3 00 basis points by the end of 2024. Whether that's gonna be reached by increasing buybacks or doing anything with the dividend or growing faster or buying something, we can't say.
If obviously an accident happens and credit losses increase because the environment is uncertain, we can't say at this point. We only know that that's where we wanna end up by the end of 2024. Finally on the impairment in Russia, I think if anything, I mean, we are being conservative in that impairment. Just to be clear on that, we still have that equity in Russia, SEK 1.6 billion, and we will do what we can to make sure that that comes back to the parent company and the shareholders of the bank. We just feel that at this point in time, it's gonna be difficult to guarantee that's gonna happen anytime soon. It's been.
It takes some time to conclude that this is a restriction that will be in place for some time, just as difficult it's been to conclude whether the war is gonna continue for a long period of time. These rules have sort of stabilized themselves during the course of the year. We felt that in Q4, we could discuss this with the authors and allow ourselves to be prudent and make this impairment. That's, that's sort of the reasoning behind it. Yeah. It, it takes just time to understand exactly how things will pan out.
Right. Thanks. Thanks all. Very clear. Thanks.
The next question is from Martin Leitgeb with Goldman Sachs. Please go ahead.
Yes. Good morning. Thank you for answering, for taking my question, and thank you for all the time today answering all the questions. Really just one question from my side. I was just wondering, the strong NII print in the fourth quarter, the strong progression in NII over the last essentially two years. Do you think the full Q 20 22 NII print represents peak NII, peak NIM for SEB? I'm just trying to squaring up all the various comments in terms of NII progression from here and appreciate there are a lot of moving parts. I was just wondering from today's perspective, looking at implied policy rate, looking at the assumption in terms of mortgage pricing, deposit acquisition and migration, would you expect NII on a quarterly basis to continue to edge higher?
Is the potential for this to either stabilize or even decrease from here? Thank you.
Yeah, good question. It depends on what view you have on all the types of margins and policy rates. It's difficult to say. I guess if policy rates go higher than they are, that increases the likelihood for NII to continue to go up. If policy rates are cut, that increases likelihoods for NII to go down. In addition to that, I'll just say that we probably still have some tailwinds from the policy rate changes we've seen during 2022 as the whole balance sheet hasn't been repriced at the higher levels. That's pretty much the guidance I can give you, and then you have to add your own assumptions of loan growth going from here and obviously everything that's gonna happen with margins. Yeah, that's... I don't know if you want to add something.
Maybe I could just step back and spend two minutes on the history. You understand that why the benefit is coming is that for households and for the majority of non-financial corporates, we never introduced the negative interest rates. We have had many years of zero or negative cash flow or even, I mean, profitability we wouldn't even speak to. This is why this enormous shift is happening. That as we never lowered the savings rate or the interest rate on deposits for a year or two when still the policy rates were going down, that has just sat, put more and more in the red. This with enormous speed and power reverses.
Right now we are normalizing the interest rate level in the economy, and we're all trying to adapt, and it takes a year or two. That's what the positive is. I don't know where it's gonna go from here, but it is reasonable to assume that whatever has happened will not happen again because we're not gonna from now on go from negative territory to significantly positive normal rates. That's just what I wanted to add.
Thank you very much.
The next question is from Jakob Kruse with Autonomous Research. Please go ahead.
Hi. Thank you. Just to follow up on some of the questions from before. Would you be able to just say anything about in the treasury NII, how much of that was transfer pricing, and if there were any other effects impacting that wage treasury income line? I guess related, when you talk about these NII versus trading income moves, if you could say anything about what kind of magnitude you're talking about there. Finally on NII, just in the Baltic, the strong NII growth in Q4, to what extent does that fully reflect the rate hike already seen? How much sort of additional tailwinds from rate hikes already happening, would you expect to see in Q1 or Q2 this year? Thank you.
Thank you, Jakob. On treasury, this quarter, it's a fairly small proportion of the NII drop in treasury that's related to internal funds transfer pricing. As you can see in the report, it's more now related to that the cost of short-term funding has increased, which has impacted treasury's NII negatively. On the traffic between NII and NFI, I can't really add anything on that. It is probably slightly understated, but exactly the magnitude of that, don't know, and it's difficult to estimate, I would say. We'll see obviously in the coming quarters. On the Baltic NII, it's probably so that there is still some tailwind there because of rate hikes we've seen.
I would assume that since ECB is slightly behind or the rate hikes have come slightly later than the Riksbank, you probably have a bit more effect from further hikes going from here in the Baltic business. As you can see, we have clearly more deposits relative to lending in the Baltic division compared to what we have in the group as a whole. While it's prudent to assume that so the rate hikes in Sweden wouldn't add too much. It's more likely that in the Baltic business, there will be some benefits going forward.
Okay. Thank you. Are you seeing any sort of dynamic moves there already in terms of competition or deposit flows or anything like that that's been going on in Sweden in the Baltic business?
No. I mean, you can see in the disclosure that in the quarter, in C&PC, there were some flows, fairly small from transaction accounts to saving accounts. We're seeing that customers are starting to understand that if they shift money from certain accounts to other accounts, and maybe to some extent lock in their deposits, they can get a better yield. That process is ongoing, and probably that's gonna sort of continue for the coming year now when people now adapt to positive rates, and yeah, try to manage their portfolios.
Okay. Thank you very much.
The next question is a follow-up from Andreas Håkansson with Danske Bank. Please go ahead.
Yeah, sorry for that. It's been going on for a long time already. Just on your. We saw a macro report from you guys coming out just a couple of days ago where you actually started to upgrade a few of your GDP forecasts. Were these the assumptions that went into IFRS 9 model, or was it from a previous report where you were cutting GDP forecasts?
Yeah. no, it's the previous report. it's based on what we had in, back in November, really. obviously these estimates or whatever they will be revised to later in Q1 will be used for the Q1, sort of IFRS 9 overlay or macro assumptions. you're right that there were some smaller positive, revisions.
That's it. Thank you.
Mr. Torgeby, there are no more questions registered at this time.
Okay. I'll thank everyone for spending a bit more than an hour and a half with us. Very much appreciated, hope to see you soon. Thank you very much.
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