Good morning, this is the conference operator. Welcome, thank you for joining the SEB's First Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode. You can register for questions at any time by pressing star and one on your touch-tone 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 very much, good morning and welcome to the financial results for the first quarter 2023. As customary, we will go through a presentation which you can find on the SEB Group website under the IR tab. Turning to page two, the highlights of Q1, we recorded in SEB a 17.9% return on equity on a Core Equity Tier 1 capital ratio of 19.2%, equivalent to a 480 basis points buffer above the regulatory minimum requirement. We saw particularly high activity within the area of risk management, which clearly benefited the client activity and the financial results for FICC, Fixed Income, Currencies and Commodities. The Board of Directors have also resolved to continue the share buyback program for the next quarter to the tone of SEK 1.25 billion.
Turning to page three, just to frame the macroeconomic and the environment around us during this quarter, we could probably now conclude that it's evident that the peak inflation is behind us. We are now seeing the estimates from the IMF and from economists around the world, now I think the debate and the context for going forward will be in what we call the triangle. The monetary policy conundrum between inflation versus risk of recession, now during this quarter, we've added the third leg, which is really financial stability. Financial stability versus how deep should a recession be allowed to be versus the fight to curb inflation will clearly be dictating how we go forward from here. We also saw introduced higher volatility in the financial markets starting the year with quite accommodative performance.
In March, we had the banking scare, albeit short-lived, amongst regional bank in the U.S., thereafter also leading to the event in Switzerland. We can also now add in this graph the bank sector development, which we normally don't highlight here, but we can see that change in sentiment around the banking sector quite clearly with a short, a modest recovery in lately. On page four, once a year, we go through the income, particularly as in a five income, by geography rather than by income type. We do even this year, and it's very encouraging to see that the income from what we call new clients we did not have before 2010, continue to increase. We had an income growth on the Nordic German expansion about approximately 10% year-over-year.
SEB is in about 20 countries. We continue to add new clients, although at a more modest pace than in the past. This has been a very important factor for the last decade and will continue to be for the next decade to improve income growth potential. The next page with a double click on the different countries. It is particularly pleasing to see that about five years ago, we had a lively debate about Germany in SEB. It was the least profitable and clearly the one drag we had. This is the first quarter we now can record that Germany has become the largest geography outside Sweden for SEB at a cost income of 0.27 and a return on equity around 14%.
We've also looked at the geographical distribution in terms of what diversification have we been able to materialize during the last 10 years. Up to your right-hand corner, you can see that in 2010, about 2/3 of the income came from Sweden, and now we're roughly 50/50 when it comes to Swedish versus non-Swedish revenue, including the international networks which spans from Shanghai to New York. All geographies are also doing well, this is a broad-based support for the financial results, but also from the clients that we have taken on in these countries. To the lower right-hand side is a new, I think, new way of trying to describe how much growth we still have as a long-term potential for the decade to come.
This is a graph where we bucket the clients by how many services or products do they engage with SEB. One, they have one product. Two, they have two, et cetera. These products, we typically have 17, where we track how deep and how wide is the relationship with a client. These are things like cash management, trade finance, FX, derivatives, lending, bonds, equities, M&A, et cetera. What is very clear that it takes a long time. One need a very long-term perspective to see profitability come up. The new clients, the new kind of generation of the last 10 years, tend to be in the category of between one and four. The most successful clients, the deepest and longest relationship we have, they tend to be about 10.
The point we wanna make here is that this has enormous growth potential over time, as there is an exponential relationship with income per client on average, and how deep the relationship is. This is part of why we are so convinced that long-term relationship is a clear distinction if you want to have a profitable, stable bank with good customer satisfaction. What we are doing now is trying to migrate the clients that are of newer nature into becoming more mature and then having an exponential income and more or less very limited increased cost, as the cost is taken by having the client on board. It's even more powerful if one would do this on a topic basis, and we continue to modestly add new clients. They typically, actually almost always come in into the one category.
We can also note that the income that we have on a 10 services buying company is typically more than 10 times someone who has one or two. The next page number six, is of course the overall picture of lending demand. It is encouraging to see that even though we have clearly seen a shift in the market when it comes to investment demand, and therefore demand for credits in the corporate space, we still noted a 1% growth in the Q1 versus Q4, representing a 4% annualized growth just for this last quarter's speed.
On the household side, and the real estate side, there's more of a muted picture. Here we have only a positive number on the year-over-year and quarter-over-quarter for Commercial Real Estate, where more than half of that increase is a reclassification. The other half I will come back to. It's actually related to bond to bank financings for existing clients. Next page seven. By popular demand, we've chosen to share some more insights about the Commercial Real Estate clients of SEB. To your left, you can see the average capital structure for large real estate companies that are listed, and we've chosen them because that's the group who use such things as hybrid, the capital markets in the form of secured and unsecured bonds. Non-listed companies use these type of products to a much lesser extent.
Here I think it's important to point out three different conclusions that one needs to analyze and what they should be. First is the equity value. What of the profits attributable to shareholders are in the real estate sector? We can all view the listed companies on how that is valued in the market. The second analysis is how bankruptcy remote is this particular real estate company, or the probability of default, the probability of the company not meeting its contractual obligations that would trigger an event. The third analysis is what is the loss potential for a bank like SEB? It's the third one I'd like to address with the slide here to your left.
For losses to occur, despite the obvious challenges that you see in the commercial real estate space because of increased interest rates, is that first, the equity needs to be evaporated. You need to go into the hybrids and the unsecured bonds, typically this is where it stops for a while. This is where the bondholders and the equity co-investors meet, sit around the table, SEB is not involved, to iron out what value should be attributable to which category of the balance sheet. You need to go through all the hybrids and the unsecured bonds and the secured bonds before you go into the secured bank debt. This is the area where SEB has 90% of its exposure to the larger listed real estate companies.
My, my point is, while we are fairly relaxed that this is not about to create losses for the banking system or in particular for SEB, is that we need for this to happen, at least a 50% reduction of the prices of Commercial Real Estate. Thereafter, you need no cash flow in the company, so they can't meet the contractual obligations. Thereafter, SEB needs to be in an inability to restructure or to mitigate the situation. To your right, you can see a picture of our clients that are rated BBB or lower in the real estate, Commercial Real Estate segment and the activity level. You can clearly experience a very high activity amongst these companies for risk mitigation actions.
Balance sheet protection is really the name of the game within the sector, and we are impressed by many of these companies who have done a lot. Things they have done, and here we've just marked kind of how common it has been, is capital expenditure reduction, how many have actually announced or completed assets divestments, bought back bonds to mitigate refinancing risks from the capital markets, issued new equity to shore up the balance sheet strength, canceled dividends, and the last one is refinancing bonds with bank debt, which is in this category, only the SEB part. We don't know what the numbers outside SEB would be, even on our own client base. This is of course one way to...
This is not a conclusion, it's a conclusion for you to do, but it's clearly is that there are ample ability for these clients to do more. Many of them have already reacted, and the majority of the stronger ones don't have a need to do any of it. For SEB, we will be very early in the discussion to see any real stress, and that is, we have seen none so far, and that will start with a renegotiation, maybe leading to a restructuring. This is the first sign that we need to do some type of change of terms and condition and do something more material to the company. Typically, when they break covenant, that's where it starts. Thereafter, if we can't meet an agreement, there will be a discussion or repossession of collateral.
This is also something that we have no activity around at this moment in time. Next page is page eight, which we like to point out is the importance of customer satisfaction and the kind of shadowed area or the previous one we have shown. We've gotten two new ones since we last had this call, and it's the fixed income Prospera customer satisfaction survey and sustainable advice abilities for different banks. We noted a drop to second place, still a very good position for fixed income. Never happy with being second, we would love to be in the first spot. We maintained our top position both in Nordics and in Sweden when it comes to sustainability advisory services. Last page before I hand over to Masih to go through the financial.
Page number nine is now more important than ever to stress the long term. Things are becoming really heated in a quarter or two, but it is important to look at the resilience of the institution. SEB has over the last 40 years, had more or less a very strong financial performance, accelerated in the last five, and even further since the rates started to become positive and we stopped having this headwind. This normalization of interest rates has also been helpful in the last year. We continue to focus on operational leverage to make sure that income by design, if everything goes well, grow faster than cost. Now I'll hand over to Masih for the financials of Q1.
Thank you, Johan. We're on slide 11 now, and we're gonna look through the Q1 numbers.
As you can see, operating income is up 1% compared to Q4, with a fairly different composition of income, with NII going by 16%, offset by net financial income coming down by 31%. Costs are seasonally lower in Q1, they are up 12% versus Q1 last year. Remember here that in Q1 last year we had some tailwinds. It was still a COVID quarter in the sense that we had less activity. Also the invasion by Russia in Ukraine led to the share price coming down, leading to lower social charges back then. If you look at the expense line this quarter, it suggests that we're sort of in line with the targets we've set, which right now is SEK 26.9 billion-SEK 27.4 billion for the full year.
There's nothing here suggesting or nothing in the developments so far this year suggesting that we would be at the higher end of that interval. It's even more likely we're gonna be at the lower end of that interval given the developments so far. I would also note that the imposed levies are going up, so we're paying 6 basis points instead of 5 for the bank pack. Also the resolution fund is going up this year because of the growth we've had in the balance sheet over the last couple of years. Overall, operating profit up 23% versus last quarter, adjusted for items affecting comparability and 48% versus Q1 last year. If you move to slide 12 and look at net interest income, you can see that the year-on-year development is very positive. We have seen a 60% increase.
This will probably be the peak in terms of the growth rate as we're now comparing ourselves with the last quarter we had with zero rates. The growth rates are very likely to come down from these levels. On the right, you can see the bridge of the Qo Q development of NII up SEK 1.6 billion or 16%. A lot of this is coming from the corporate side. We've seen some improvement on corporate lending, and especially on the margin side, we see an improvement of margins, especially on CRE related lending. We're also seeing improvements on corporate deposits as well as in our Fixed Income, Currencies and Commodities business. Important point out here is that there's a negative contribution from Swedish households.
Right now, we're in Q1, we're seeing more margin pressure on mortgages than we're seeing improvements on the deposit side. This is really also driven by how households are acting by shifting the deposits from transaction accounts that are lower yielding to higher yielding, saving accounts or term deposits. With the tailwinds from the rate hike by ECB in the Baltics and in other improvement funding liquidity, part of that is related to the excess liquidity we have in the Baltics that's saved at ECB, but also a reversal from the negative effects we had in Q4, which leads to a positive effect in treasury this quarter. There are no one-offs, there are no temporary effects in NII this quarter. You can suggest maybe that the FICC fee strength of SEK 200 million, part of that is probably short-lived.
Otherwise there's no temporary effects. We do mention in the CEO letter that we see some aspects of the NII strength as transitory, and by that we basically mean that the rate hikes have been very quick, and it takes time for households and corporates to react and to change how they're dealing with their financials. We're seeing some of that. As I mentioned, households are shifting some of their savings into high yielding accounts. So that part is probably transitory. It doesn't mean that we believe that NII will peak at these levels. We don't know. Obviously, the rate hike we saw this morning will support NII going forward. That's part of the NII strength, which has to do with the past rate hikes is transitory because customers will adapt to the new environment.
If I move to the next slide 13, and look at Net Fee and Commission Income, you can see that they are down 4%, both compared to Q1 last year as well as to Q4 last year. On the year-on-year development, we've seen a positive development for cards as Q1 last year was still affected by COVID-19 and closures. That has been more than offset by weaker asset management fees as well as lower investment banking activity. Quarter-on-quarter, the decline is mainly related to seeing lower card fees and lending fees, but that has been partly offset by asset management fees as equity prices are on average higher in Q1 this year than Q1 last year. We're also seeing some weakness in equities, especially in January and February, we can see that that has recovered in March.
If we move to slide 14 and look at the net financial income development, we report an NFI level of SEK 2.4 billion, which is slightly higher than Q1 last year, but clearly down from the very strong levels we had in Q4. That quarter-on-quarter decline is mainly related to treasury as well as XVA effects of about half a billion in this quarter. We've had very good activity within fixed income this quarter and continued good activity for FX and commodities. Earlier, we've guided for a net financial income level of SEK 1.5 billion-SEK 1.7 billion, excluding treasury and XVA. We're now changing that guidance for the NFI line to be around SEK 2 billion, including treasury. We are changing the guidance because of what's basically happening to the rate environment and how we think that will be helpful for this line going forward.
To support that change, if we move to slide 15, here we are using the NFI line as a proxy of how we've been able to take market shares when it comes to fixed income, commodities, and currencies, in last 10 years or so. As you can see, when we relate our NFI line to the sum of the other Nordic banks' NFI line, we've gone from a market share, so to say, of 13% in 2014 to be at 29% in 2022. We think this is very much related to the continued investments we've done in risk management tools, in IT, in tech, and the fact that we've kept our strategy to support corporate customers as well as financial institutions.
If you move to slide 16 and look at the capital development, in Q1, we've seen an improvement of the capital buffer above regulatory comments by 10 basis points. This has been supported by the strong profit generation, which is 60 basis points after deducting 50% for the dividend. This is around a 440 basis point annual capital accumulation level gross. We have deducted the mandate we got from the FSA to do SEK two and a half billion of share buybacks, despite the fact that we're doing SEK 1.25 this quarter. If the board decides to continue the share buybacks after Q2, there will be no further deduction of the capital. We have some negative effects from market risk. We are going up in the quarter. We still think that's an elevated level and should go down going forward.
We've also added a expected approval of the Baltic retail portfolios of SEK 3 billion-SEK 4 billion as an Article 3 add-on, as we expect an implementation there later on this year. I'll move to slide 17 and look at some key ratios. Typically, usually we go through this pretty quickly. I'll spend a bit more time on it as it's been very topical to talk about liquidity and funding. If you look at the liquidity coverage ratio this quarter, it's pretty much flat from the previous quarter. Remember that this ratio is a ratio, and it's a stress test already in this ratio. Just to give you an example, this ratio measures the liquid assets you have divided by an expectation of net outflows over 30 days in a very stressed environment.
If you have SEK 500 billion of liquid assets and you are assumed to have SEK 400 billion of net outflows, you have an LCR of 125%. If you increase your liquid assets by taking in very short dated deposits, your ratio goes down. We typically look at the nominal amount of excess we have relative to the outflows. You should look at that rather than the ratio in itself because that's very much impacted by how much short-term deposits you have. Right now we have about SEK 900 billion in total of liquid assets on the balance sheet. The NSFR is up 2 percentage points in the quarter, and we've done a lot of wholesale funding already this year. In Q1, we did SEK 66 billion of wholesale funding.
That's more than half of the full year need we have, we're in a very good position. On deposits, you can see that it's up SEK 87 billion in the quarter, we've seen a decline of household deposits mainly in January and February. It was more flat in March. That's very much related to the high cost of living, especially in those two months, as a lot of people have to pay very high electricity bills those two months. We've seen an increase of corporate deposits in the quarter as well. I will do something uncommon. I'll comment the deposit development month to date in April. In April, we've so far seen household deposit inflows of SEK 4 billion, corporate deposit inflows of SEK 29 billion, deposit inflows from financial institutions of SEK 67 billion, treasury deposits increases of SEK 130 billion.
Right now we're around SEK 2,000 billion in customer deposits in total. Finally, slide 18, just looking through our financial targets. We have a target to pay out around 50% of the EPS or earnings per share annually. We have a long-term target of being between 100 and 300 basis points in terms of capital above the regulatory comments. We have a target to be competitive on return on equity with peers and a long-term aspiration of 15% that we're happy that we've reached for two quarters running now. When we're above the 300 basis points in capital, the share repurchase will be the main form of capital distribution. I'll stop there, and we can open up for a Q&A.
This is the Chorus Call conference operator. We will now begin the question-and-answer session. The first question comes from the line of Johan Ekblom with UBS. Please go ahead.
Thank you. Just two questions, if I may. First of all, on the decision around the buyback, I guess your buffer keeps on increasing. You were very clear last year that, you know, if the credit growth slows, there is more scope for capital return. I think some had hoped that there'd be more than the 1.25. When we think over the next 12 months or so, how should we think about the ability to scale that higher, assuming the macro develops broadly in line with expectation? Is the second part of the 2.5 for Q3 locked in, or is there scope to increase that before we get to the Q2 results, or do we need to wait longer?
Secondly, just on NII, I mean, we're clearly all trying to monitor what's happening to deposit flow between types of accounts. Can you give us some indication as how much, you know, you have either in current account, the basic savings accounts or term, and how those are maybe relative to historical levels or how quickly they're shifting? That'd be really helpful.
Okay. Well, good starting one. I'll do that. On the share buyback, we had an approval from the FSA to do SEK two and a half billion of buybacks. We decide ourselves at what timeframe we do that. Obviously now the board has decided to do SEK 1.25 billion next this quarter as of starting tomorrow until the 14th of July. I guess it's likely to say that, if they continue, they will do another SEK 1.25 billion from Q2 - Q3. Obviously post that time, there is a potential to change or ask for an approval to do a different amount of share buybacks going forward post Q3 results. What level that's gonna be, we have to...
The board has to think about going forward, depending on also what happens to the turmoil we saw in March, and what happens to financial stability going forward. Just remember also that we do have more capital than we plan to have in the long term. We do say that share buyback is the main form of coming down on the capital side to the interval we're planning. It's not the only form. The board will also think about what they would want to do in terms of dividends going forward. It's not just share buybacks that will be the tool we'll use to go back to the interval that we are planning for in the long term.
On NII, well, I think there is good public data on how much you have on current accounts in general. You can find that in Swedish statistics. I'll just give you sort of one number I looked at in general for the market, if you will, sort of want to understand what could happen there. If you look at the last time we had sort of positive rates, so before the financial crisis in 2006, 2007, about 35% of Swedish household deposits were in savings accounts. At the trough, so a year ago or so, that 35% had come down to 10%, and now last time I checked it's up to 17%. It's still some way to go before households have sort of reshuffled their savings to high-yielding saving accounts.
We should see that continuing. For us, you have disclosure on this in the fact book. You can see both the movement between the quarters as well as the current level. We have, on the household side, quite little on transaction accounts, a lot on saving accounts, but on the corporate side, we're a bit more on transaction accounts. This move is happening clearly faster in Sweden than it is in the Baltics. They're slowly moving, but we're seeing similar trends there.
Just to follow up on that, I mean, there's a big difference between what you pay on an instant access savings and a three month term, right? Are we seeing big moves happening there as we speak? Or 'cause I guess the 35% doesn't tell us if it's yielding one and a half or three and a half.
No, that's correct. No, we're seeing moves both between transaction accounts to sort of variable saving accounts as well as savings accounts to term deposits. We're seeing all that. What your definition of large is, I don't know, but we're seeing that movement going. We've seen that movement in the last few months. It started in June last year, I would say, and it's been at a fairly high level ever since. At the same time, I mean, in terms of our competitiveness on savings products as of late, we are more competitive now than we were six to nine months ago. It is also possible or likely that because the developments we have seen in April so far, which is inflows of household deposits, that could continue given the high-yielding saving products we have.
That sort of difference between how much we have on the savings accounts and term deposits, I don't think we disclose that, and I don't know the numbers by heart.
Thank you.
The next question comes from the line of Magnus Andersson with ABG. Please go ahead.
Yes. Hi, good morning. Just continuing a bit on the NII there. If you look at the slide 12, I mean, we all understand that the growth rate was exceptional in this quarter, and you talked about peak growth rate, and you implied that the growth rate should continue throughout the rest of 2023. Just when I look at that bridge, I mean, first of all, you talked about the funding and liquidity, saying that it's the excess in the Baltics and also some effects coming through in treasury, from Q4. If you could split that SEK 800 billion, please. Just on the Swedish households there, where you have lending and deposits, which was the reason for your the CEO comment there.
Do you think that when this happens, more deposits migrate into savings, the deposit margins start to shrink. Do you think it will be able to offset some of that with increasing the three month mortgage lending margin when volumes are not growing, since it is currently at an unsustainably low level? That's my first question.
Yeah. Thank you, Magnus. On the sort of SEK 800 billion coming from treasury and liquidity, about SEK 300 million of that is coming from the excess liquidity in the Baltics, and half a billion is coming from treasury. When it comes to treasury, just be aware, if you look at our fact book and the disclosure you have there, it's still a negative NII in treasury of SEK 1.1 billion. That's why I'm saying there's no one-offs here, and it's not sustainable. It should be sustainable, this level. On the Swedish household, I mean, we agree with you that right now the margins on deposits in general are probably a bit too high to be sustainable, and definitely the margins on mortgages are a bit too low to be sustainable.
We do expect that this will change over time. It's difficult to say when and how competition will change, but in the medium term, you should probably see lower margins on deposits, but then higher margins on mortgages, because mortgage margins are down, I don't know, from a peak level of 120-150 basis points a few years ago to 20-30 basis points right now. It's probably not even covering the risk. Or it's covering the risk, but it's definitely not covering the capital requirements on that product. As I said, I mean, there's been massive shifts in the market, and it will take time for this to adapt to the new equilibrium that we'll reach at some point. Exactly when that's gonna be, it's difficult to say.
Yeah, in the medium term, falling margins on deposits and increased margins on mortgages makes sense.
Yeah. On the corporate side, are you seeing any signs of corporate lending margins increasing? Also if you could share how much of your corporate lending book, that is at STIBOR plus margins versus discretionary priced, corporate loans.
Yeah. We do see some margin improvements on corporate, not generally, but in some subsectors. I mean, CRE is clearly one where we've seen new deals in the quarter at up to 80 basis points above historical levels in terms of margins. That's clearly an area we see margins improve. Generally, for investment grade corporates, we haven't seen a big move up. If you look at the capital markets, spreads have come down to more normalized levels after being elevated last year. There are some parts of the corporate book. I couldn't catch your last question there on the-
I caught it.
The vast majority, it's not 100%, you're not too far off. It's STIBOR, LIBOR, EURIBOR plus.
Yeah. Yeah. Okay. Then just finally, if I may, on, do you have any update on this potential Lithuanian windfall tax and, if it could potentially spread to the rest of Baltic? Do you have anything new to tell us there?
I don't know what we've told you in the past, but it's very clear to us that it's likely. It seems very serious, and as I understand it will go to parliament for a vote. Typically, in my experience, if it does, you kind of can bank on the outcome. They wouldn't take it up unless they had, you know, done the pre-soundings to the extent that they know. I think it's a meaningful risk that this could inspire others. If you do look at this has not been going on for the Baltics only for a few months. It started actually with Sweden a year and a half ago.
We had, or even longer, then we had Spain, Czech Republic, Poland, Belgium, and some other that I probably forgot. It is of course the sign of the times that when we have these windfall taxes or solidarity contributions, as they like to call it in Lithuania, it's a clearly short-term way for the fiscal policies to take through the tax line or similar some of these windfalls. It is a risk.
What do you think about the risk of it becoming a permanent tax and not only a two year thing?
Well, I just quote them. They have promised, and it's in the proposal, it will not or never will be permanent. You and I attend on this call be cynical and say maybe one need to be a little bit more careful. It's very, very clear that this is different from any permanent tax. It's actually not even called a tax, but it's completely related to a windfall level of NII. Right now, we are hopeful that that is also true when we get there in a year or two.
Okay. Thank you very much.
The next question comes from the line of Rickard Strand with Nordea. Please go ahead.
Hi. I have a question on the NII bridge there on slide 12. Just looking at the Swedish household deposit pickup there of SEK 100 million QoQ. Given how rates move in the quarter, that is could be seen as quite low. Just wanted to get some clarification if it should be seen in together with the pickup that you have there in treasury, or and if it's sort of due to some delay in the transit pricing or if it's held back by the migration from transaction accounts into savings accounts on deposits?
Yeah. Thanks for the question. No, there's no sort of anything, any money moving from treasury to the division on that side. But it had to do to some extent with timing effects. When do you see the rate hiked on the lending side and when do you change your pricing on the saving accounts? That could be a factor. But it's more a factor of just a migration effect that on the lower yielding saving products, we've had less money this quarter compared to previous quarters. You see money flowing from transaction accounts, for example, to the saving accounts. That is largely behind the fact that you only see a SEK 100 million improvement there. But there's also timing effect of it there as well. Yeah.
Yeah. Also, Masih, on your comments there on the deposit development for April, if you could just elaborate on if the sort of pickup in volumes there is from a sort of existing SEB clients or if you are starting to attract sort of external volumes as well from the new clients?
When it comes to the sort of corporate side and financial institutions and treasury deposits, these are external, existing SEB customers. On the household side, it's difficult to say. We've had a campaign that we launched about a week and a half ago. It's been very successful. We do see a clear increase in calls to our telephone bank based on that campaign. I don't know the numbers, to be honest, but since we have a net inflow of deposits and it's not just a shift between different products, I would assume that some of this is also attracting external customers. We do now have the most competitive rate on three month term deposits as well as six month term deposits. Hopefully that will attract some external capital.
If I could add, the deposit diversification theme, which is kind of popular one quarter every 10 year, has been very popular this year. We have clearly been the flight to quality or flight to safety part of that discussion. Even many clients that are not currently using SEB as a deposit bank, but they might be a client somewhere else, have been part of this too.
The next question comes from the line of Andreas Hakansson with Danske Bank. Please go ahead.
Yeah, morning, guys. Just following up a little bit on the deposit competition. We have in Sweden a number of niche banks that have been quite aggressive on deposit pricing and use it primarily or they're basically the only source of funding, but the risks on that side are quite much higher than the big banks. Are you starting to see, and maybe you alluded to it, are you starting to see actually those types of deposits flowing back to the banks? Is it the start of bleeding rather than inflow, or how do we see the flow between the different players now?
Yeah, I can start. Yes, no, we haven't really seen that, to be honest. I think it's too early and you are right in the sense that the lending side of their business is a lot riskier than our lending side. At the same time, I guess more than 90% of the deposits they have are government guaranteed. As long as you feel comfortable with a government guarantee, it might not move. We'll see. I mean, if the turmoil comes back and it becomes worse and you start to become concerned, it's good to be in the position we have where there is sort of low risk at the side of the balance sheet. We haven't seen that yet, to be honest.
Yeah. Then just a quick question on your movement in stage three And stage two, actually, on CRE lending. Is the movement just modern driven or credit rating driven and do you see any changes in asset quality on the CRE side?
I don't know what's driven by, but we don't see any change in asset quality. I mean.
LTVs are slowly going up, as you can see, but at the same time, they're far from levels where you would experience any asset quality deterioration for us. I mean, generally in the quarter, we've had very sort of stable underlying development of the asset quality of the bank. We actually had more upgrades than downgrades this quarter in total. As you can see in the risk exposure amount bridge, that we've seen an improvement of asset quality in general. Stage 3 loans are down, and we have more reserves than we have Stage 3 loans in total. We're generally in a very good position in terms of asset quality and the reserves we have on.
Cool. Thank you.
Focus on my heart, you fell off the bike. I wish you a quick recovery.
Luckily, it's just the hand that's hurting a bit, but thank you for that.
The next question comes from the line of Maria Semikhatova with Citigroup. Please go ahead. Ms. Semikhatova Maria , please go ahead.
Yes, hello. Thank you for the presentation. A couple of questions. First one on NII. Thank you for the slide. Just wanted to clarify on the Baltic impact. If I add the liquidity component, it was around SEK 0.6 billion over the quarter. Is it in line with your previous sensitivity for the Baltic operations to rate hikes? Let's say going forward, do you still think it is valid because the share of transaction account remains quite stable? Let's say, does it change the pass-through from additional taxes in Lithuania or other places? Can we start with the Baltics first?
Yeah. Thanks, Maria. I mean, I don't think this is that different to the guidance we've given. Just remember, we've had 2 rate hikes from the ECB that have impacted this quarter, 100 basis points in total compared to the 50 in Sweden. You've had more happening for euro-denominated currencies in general in the quarter. Going forward, as I said before, we see some flows from transaction accounts to term deposits in all the three Baltic countries, but it's happening much slower than it's happening in Sweden. The sensitivity should go down, and we've become clearly more competitive on pricing on term deposits, but the customers are just slower moving. We'll see.
I mean, to the extent we get a bank tax in Lithuania, the upside will, I mean, still be paid at, for 60% of it will be paid to the government anyway. Yeah.
Ms. Semikhatova-
Okay, that's clear. Then maybe on corporate, because we discussed a lot about the action households are taking, they're moving from transaction. No, I have some follow-ups.
Yeah, go ahead, please.
Yes. Can I follow up on NII, and then I'll just ask minor questions? Yes, thank you. On, on the corporate side, because we discussed all the actions taken by households, they are moving to savings and term deposits. What do you expect, what actions do you expect by corporates to adjust to higher rate environments? Then just a minor follow-ups. On your CRE exposure, you mentioned 90% is a secured bank debt, with regards to largest borrowers. Just wanted to clarify the remaining 10%, is it bank debt, but uncollateralized, or you have some exposure to on the bond side? Finally, on capital position, today, one of your peers mentioned that it expects a negative impact from IRB overhaul of corporate models.
If you have any update on a potential impact on your side?
Yeah. I can start with the NII question, the capital. Johan will take CRE. On the corporate side, it's quite different in terms of how customers act, depending whether it's an SME or it's a large corporate. On SMEs, they use similar products as retail customers, and we do see some movements that some SME corporates are moving their savings from the transaction account to saving accounts. On the large corporate side, these are typically bilateral agreements. They can't sort of digitally move their money as easily, and it's based on the entire relationship we have with these customers. We haven't seen any sort of active bilateral discussions on the deposit side from the large corporates, and margins are clearly lower there to start with.
It is possible that starts, maybe second half of this year that you'll see more of those discussions. Obviously then we will have discussions on the lending side simultaneously with those corporates. Yeah, on the SME side, you see similar movement as for households, maybe not as quickly, as households are moving. On the capital side, I'll just repeat when it comes to IRB models, what we've said in the past. If we look at what we are applying for in terms of IRB overhaul, the application we have and the historical loss levels we have, do not indicate that we should get, an increased capital requirements.
If anything, if you just are fact-based, it should indicate the opposite, that we today have two large buffers relative to the historical loss rates we've had almost despite what time frame you look at. Saying that, this is not a guarantee for the fact that when the FSA approves the models, there will be an added capital. We are sort of convinced that the history we have and the models we have sufficiently are covering for the risks we have in the balance sheet.
I would just add that the large corporate space typically have professional treasury, and it is more likely if they were to do an exchange that they will use the commercial paper market, that they can find other. Typically, a large corporate policy in treasury is that you need the funds readily available at any given point in time. Of course, generating a return every day, and therefore savings accounts or investment accounts is really not a big product. It's rather that you can use other types of yield-enhancing strategies for corporates. On the CRE, the 10% that is not secured is typically of short-term nature. We are also providing short-term liquidity lines.
It can be overdraft that you have account exposure, and it can also be bridges that you have had a temporary need to bridge a particular cash flow. Those are typically the ones that are not secured as the permanent long-term debt structure, where more or less all of it is secured.
That's very clear. Thank you so much.
The next question comes from the line of Jacob Kruse with Autonomous. Please go ahead.
Hi. Thank you for taking the question. I just wanted to ask on your CRE sensitivity analysis. The comparable sensitivity was based on, you know, re-repricing maturities as well as the as the the floating rate volumes. I just wanted to ask, are you doing this the same way? I see you make a comment around a 2% increase to your one year and less maturity on floating rate debt. If so, roughly how much of the volumes are you repricing in your 2023 sensitivity, when it comes to that stress test of interest coverage ratio? Thank you.
I can start. I don't understand the 200 really, but we'll be putting in 7%. We start at 4.3 for the most exposed group. We take out the 20 real estate exposures, and largest ones, and we check that these are the most significant. Start at 4.3, and then we put in 7%, assuming all of it is refinanced. Not only the pro forma or pro rata share they actually have maturing, just to check as a stress test. I think we are assuming no income uptick or pass-through, which is of course unrealistic.
Just as a stress test, just pushing that through, and there we end up at the 2.9 for 2023 and 2.4 if we do the whole 7% on 2024. That is on average. Then we have, of course, ample room for the one, which is the cutoff point where I was earlier, alluding to, is when you cannot meet your contractual obligation. It becomes the LTV discussion, which we currently stand at below 50% on LTV on these.
Yeah. So this is the maturing, all maturing debt refinance of 7%, and then you make a note saying that assumptions also include interest rate increase of 2% for floating rate debt with a maturity of less than one year. From reading that, my understanding is you're applying the seven or the floating rate +2 to a subset of the overall debt outstanding for these corporates. So my question was just roughly what percentage of the overall debt has been repriced in that 2023 stress test?
Let's see if I can... Sorry, just so I was clear, it's all maturing debt in 2023 and 2024 at seven, not all debt any time it matures. I think the average maturity is around three years. You can roughly think 1/3 of the debt is needs to be refinanced on average every year. The longest ones tend to be five or seven. Of course, the shortest ones are tomorrow, one day long. You have, of course, in reality, we have, of course, excluded the interest rate hedges, which are on average two-three years long too. Even though they are often floating rates, they don't pay floating, they pay through an interest rate swap fixed. That doesn't go for every single company, it's more on average.
The ones you will see next, this quarter and next quarter being challenged is typically unhedged and short-term maturities on the lending side. Those are going to feel the pain here and now.
Okay. Sorry, finally, could you just say what percentage of your book these 20% largest client represent out of the CRE or property management book?
I think it's 20%, about 20% for property management companies.
Great. Thank you very much.
The next question comes from the line of Sofie Peterzens with JP Morgan. Please go ahead.
Yeah. Hi, here is Sophie from JP Morgan. Just in terms of your deposits, just going back, you had a quite significant inflows now month to date in April. Could you just kind of quantify how much you're paying for deposits or these deposits? Are you paying more than on your back book deposits? You used to have this very helpful slide in your fact book on Net Interest Income, which seems to have disappeared. End of the fourth quarter, your average interest cost was 1.63%. Could you just give what the average interest cost end of the first quarter was, if you would still have the same table? My second question would be on costs.
You got it for SEK 26.5 billion-SEK 27 billion costs in 2023. Could you just confirm if this still holds or if we should adjust it for FX? Just a quick follow-up on the previous question. You mentioned that you have that most of these CRE companies also have interest rate swaps in place. Are you the swap counterparty in most cases with these commercial real estate companies? Could you kind of quantify how large these interest rate swaps are and kind of what kind of terms do you have? Do you have daily mark to market on the collateral or weekly, and how those swaps are documented? Thank you.
Yeah. Thank you, Sophie. Then I'll let Johan take the difficult question. On the deposit side, I'm assuming we're paying more for deposits in deposit in April than we have in the past because rates have gone up. I would guess that that's mostly true on the household side. The SEK 4 billion of inflows we've had month to date in April, we're probably paying more for that than we're paying for the back book. I don't imagine that's the case on corporate financial institutions and definitely not on the treasury deposits. On the cost for deposits from the public you referred to, that table we had in the past where we paid 163 on average, that level I think was around 219 in Q1, it's up 56 basis points.
Obviously NII is up in the quarter, the increase on the lending side is larger than the increase on the deposit side. Just have that in mind. On the cost target, we are keeping the cost target. It's the same as you said, 26.5, 27. Adjusting for FX, average FX in Q1, that would imply that the cost target is 26.9 to 27.4. I did stress in my remarks that we are, at this point, more likely to be at the lower end of that interval rather than the higher end, as we've seen the wage negotiations in Sweden now, and we know pretty much where we've landed in terms of salary inflation in the bank for this year.
There's still some uncertainty in terms of other costs that could develop differently, for the rest of the year. Also salary drift is a possibility, but based on what we know at this point, we're more likely to be at the lower end of that cost interval for this year.
Thanks, Sophie. On the swaps, I don't have actual figures in my head, but typically we will do the swaps associated with our loans. It's not a one-to-one. Think about it as a one-to-one relationship. They are predominantly they are done bilaterally with us as well. Those are also secured. Typically, you can have security in the property, or you can have CSAs, Credit Support Annex, that you make sure that this is a very different type of credit risk. Nominally, it can be very large, but it's really just the mark to market, which is an exposure in the credit risk that they would then owe you if there was something to happen in the swaps. That's a much less significant credit risk element.
They are also part of the total exposure that we have to the CRE. They're included.
Okay. Okay. Sorry, just one follow-up on the deposit side. The deposit increase is that you saw month to date in April, how sticky are these deposits? Also Anders I think just said on the call they had before you that they could consider paying for a transaction account. Is this something that you would also consider or that this could happen in Sweden, basically, that banks start to pay for transaction accounts?
Yeah. It's difficult to say to what extent deposits are sticky. I mean, for us, generally for our bank, corporate deposits are as sticky as household deposits, and in the downturn, we typically see a larger increase of corporate deposits than we see for household deposits. In the regulation, household deposits are viewed as stickier than corporate deposits. It depends on whether you trust our history or whether you trust the regulation. Typically, seasonally, household deposit has a better development in Q2 versus Q1, so maybe that's part of what we're seeing as well.
Because typically you have higher cost of living in Q1, and then in Q2 you have dividend season, a lot of corporates are paying out dividends to households, which plays it, on our balance sheet. This could be just what's happening in the market again, that you have this seasonally strong Q2. We do see better momentum. As I've said before, we've had campaigns and we've seen bigger inflows of calls to our telephone bank, and we see more activity generally in that division, both on mortgages as well as, deposits.
Sorry, I'm...
I'll just say that. We have no plans to date to raise rates on transaction accounts, but obviously, over time we follow competition and we will have competitive products. Depending what happens in the market, we will act accordingly.
That's very clear. Thank you.
The next question comes from the line of Nick Davey with Exane. Please go ahead.
Thank you. Good morning. Can I ask two questions, please? The first one's maybe just picking back up on this question of deposit flows. Thanks for those comments on household and corporate stickiness. Can I just focus on the other side of it then, the financial corporate deposits or treasury deposits? It seems like you get no reward when they flow in, but people seem to panic when they flow out. Not thinking quarter to quarter, but just looking into medium term, maybe in more sort of QTs taking place. Have you got a figure in mind as to how much of that chunk of the deposit base could well leave you?
Can you just talk us through any kind of P&L or funding ratio impact that that may or may not have, just so we can, as we go through the ups and the downs on those deposits, have some guardrails to think about. The second question, quickly, just on commercial paper and certificates of deposits. It's picked up again this quarter. I don't know if it's an all-time high. It's probably close. Can you just talk us through what's going on there? I think you've got quite a good slide in your bigger presentation pack where you show the relationship to trading assets, but that seems to have decoupled a bit, and this usage of CP seems a bit higher than normal. Can you just explain what's going on? Thank you.
Sure. I'll start and ask Masih to give you the numbers. I don't have them for financial institutions, but you're absolutely correct. We get no benefit from the market or the regulator or the rating agencies for being the choice for financial institutions to put their surplus deposits. I think it's important to divide financial institutions into the financial institutions that are clients of SEB, who have a need because of custody, trading, or other things, to have an account with SEB, predominantly in the Nordics currencies, and the treasury operations, which is more a day-to-day kind of dealing with other financial institutions and central banks in order to attract or place deposits. The first one you can see if you look at the market shares of financial institutions' deposits, that we are an absolute extreme outlier.
We have over the many, many decades been one of the banks in Sweden in particular, who has a very long-standing and deep relationship with American investment banks, with European commercial banks that have any business in the Nordics currencies or in the Nordics. That will continue. I would bet a lot on that being very, very stable, but it's large amounts per institutions, and they move quickly around. There is a reason. If you look at the longer term horizon, this is, it's clearly a very, very strong source of liquidity for SEB and funding, but it's not really acknowledged anywhere, and that one could debate if it should be somewhat or not.
When it comes to treasury deposits, that is something that is more part of an optimization exercise, which we tried to explain in Q4, that you can actually choose quite precisely if you wanna get some inflow or not in order to manage your positions in the bank with the surplus liquidity that we control.
Yeah, I can expand on that. Treasury deposits are generally money we take in from money market funds in the U.S. that do not have access to the Federal Reserve, and then we place that money overnight at the Federal Reserve. This is a service we make for these customers of ours, this is overnight money and we can sort of put the tap on or off on a daily basis. It's an optimization exercise. We like to do this service for these customers. We're not making good margin on it. Doing it means that our deposit base goes up and some people are happy about that. At the same time, as we're expanding the balance sheet when we do it, both the LCR goes down as well as the leverage ratio.
You try to find a good balance between different regulatory ratios that people look at when they're analyzing a bank, whereas we try to look at the actual sort of liquidity position in the bank. At year-end, obviously, we try to minimize the treasury deposits to make sure that we don't pay excess amounts for the bank tax and resolution fund fee, because as I said, we don't make any real margins on this as, but at the same time, we're paying 11 basis points in taxes at year-end. On the commercial paper, you should be aware, I mean, you've probably seen that in the U.S. you have very large inflows into money market funds. These money market funds typically buy commercial paper, and we have a very sort of good commercial paper in the sense that we're viewed as a low-risk bank.
There's a lot of demand for that right now. Obviously in the turmoil we've had, and the instability we've had, we make sure that we take use of that. We have, in the short term or last six months or so, issued a bit more commercial paper to make sure that we have both liquidity as well as, appealing to these money market funds that do have a lot of inflows and have a lot of excess capital, which they can use to some extent to buy our commercial paper.
Brilliant. Thank you for the color. If I bring it all together and I'm thinking to the medium term, I think you've mentioned well then the structural element to this and then a kind of volatile element. In three, four years from now, is there any reason with QT these balances would be meaningfully lower, or is it more just a structural component and then just a bit of up and down along the way?
I'll start and Masih, you can again fill in with the details. QT will and is aimed and designed to inevitably lower the sum of deposit and free liquidity in the system. It is about to go down. That should be a very orderly, non-dramatic phenomena, and it's the whole point of QE and QT. Thereafter, it's which institution will benefit or not in that environment. We are of course, one of those institutions that will most likely, if everything works out, benefit as this is then gonna be part of the market share, which is the more stable and reputable and creditworthy counterparty, and that's the market share. That's how it's gonna pan out per institution in that scenario.
Yeah. For us, to the extent that this happens, you have to look at what kind of deposits are flowing out. If it is financial institution deposits, there is no value in those basically in terms of our regulatory ratios. You don't get an improvement of NSFR just because you've attracted financial institution deposits. Therefore you don't need to offset that by doing wholesale funding. If corporate deposits flow out, you need to offset some of that. Still, the weight of corporate deposits in NSFR isn't that high, so you probably need to do about half the wholesale funding relative to the outsize of corporate deposits if that would happen. Whereas household deposits, you need to do almost as much in wholesale funding.
To the extent you need to do wholesale funding, you have to look at what banks can do wholesale funding at affordable levels. Obviously we have SEK 300 billion or so in extra space in our cover pool, so we can do that. In terms of senior funding, we have among the lowest CDS spreads in the market. In a relative world, we will probably benefit from this development. In a relative world, we have lost on the fact that we've had a lot of QE the last 10 years or so.
That's really helpful color. Thank you.
The next question comes from the line of Namita Samtani with Barclays. Please go ahead.
Hi. I've got two questions, please. Firstly, you printed a 17.9% ROE for this quarter, and you don't believe NII has any one-off effects. Do you believe you can print this ROE next year, potentially when rates fall or we possibly enter a recession? Secondly, is there any way to keep the household deposit beta lower in Sweden? Are you able to offer money market funds which give more attractive returns, or are customers, you know, are they looking for money market funds, or is it just the movement from transaction accounts to savings accounts? Finally, just a request, could we please have that net interest margin table, which has disappeared from the fact book back, for the second quarter results? Thanks.
All right. That request, it's noted, we'll see what we'll do. On the return on equity, I mean, it is a high level this quarter, but we do have, I would say, below normalized expected credit losses. 4 basis points is probably lower than we will have in the long term, the NFI line is a bit elevated. We do guide for around SEK 2 billion, but we're at SEK 2.4 billion. If you make those adjustments, we'll be at a lower level. A year from now, we most likely have built a bit more equity, so we need to have a higher profit just to keep pace with the equity buildup we have in the bank. We'll see.
Surely, I mean, given the higher interest rate environment, we do see a higher normalized return, and that is what we're supposed to generate because the risk-free rate is going up. For investors to be willing to invest in banks, you need to get a higher return than you had in a zero rate environment. Whether that's gonna be sort of in line with our aspiration or higher, I mean, we have to wait and see. Here and now, we don't see any real deterioration of assets quality. To the extent that we will see that, we do have plenty of reserves on the balance sheet as we've shored up a lot of reserves during the last couple of years. Yeah, I think that answers your question. Johan seems to be want to add something.
No, just on the money market, which I think is more a personal reflection. I worked for 25 years, and every year I've been passionately marketing the formidability of using the financial markets, such as money market and corporate bond funds and government bond funds as an alternative. That of course, have been dead for a decade, and it's a big thing now that we need to re-educate all the customers that there is an alternative to saving in deposits. In Sweden, this is not particularly common like we've seen in the U.S., so it's not very easy to talk to retail customers and say, "Yes, the best rate we offer today is, what, 3.75%. That's on a one-year deposit.
We have funds that will give you 4%-10%, but you need to take the market risk. That's a very, call it well understood in the Anglo-Saxon world, particularly the US, and not at all as understood. Typically many majority will look at what does the bank offer me, and they don't really know that there is a market out there they can access directly through funds. If we go to Baltics, it's actually the number one-explanatory factor in the short run is that the Baltics have not moved over to even SEB's place savings accounts. When we have a much better yield, that is on offer, but they're not moving.
As we talked about this three quarters ago in Sweden, and now it's happening a little bit, that you move out to the placement accounts, and this will accelerate as people are now finding themselves to review the financial situation. Also, I think it is a everything else being equal, quite positive, although marginal, for the funds in money market, fixed income, and credits.
Thanks very much.
The next question comes from the line of Riccardo Rovere with Mediobanca. Please go ahead.
Good morning, everybody. Thanks for taking my questions. A couple if I may. Sorry to get back on deposits again. If I look at your balance sheet, I mean, deposits, customer deposits have gone up SEK 100 billion. Loans are up maybe SEK 10 billion, so the loan to deposit ratio is going down. You clearly have access to commercial paper. The interbank position is balanced, and you still have almost SEK 400 billion of cash at central bank accounts. The question here. When I look at these numbers, the feeling that I have is that you really have no incentive to pay up deposits. You could actually be in the position to say no to deposits and lose some of them or redirect them somewhere else, you know.
Would you agree with that, or do you think that is too aggressive? The second question I have is on the overlays. You charge the less than SEK 300 million credit losses in this quarter. You have SEK 2.2 billion of overlays out there. How should we think about those? I mean, is it fair to say that by the end of 2023, a decision on those will have to be taken and allocated or released or whatever? And if you can, is it possible to have an idea if part of the SEK 2.2 billion overlays is somehow already allocated to Commercial Real Estate, given that Commercial Real Estate is supposed to be one of the most vulnerable sectors at the time of COVID-19, shopping malls and stuff like that? Thank you.
I start, then Masih can fill in. On the incentive to pay up for deposit, you're absolutely correct. There is no such incentive if you purely would do short-term maximization of profits, we don't really care. The long-term maximization of standing with our clients, you need to pay. It's the right thing to do. If you were to redirect any of our customers because of that, let's call it logical reason, you would lose them potentially or at least invite another bank institution to provide them with other things. In the long run, that's a very, very costly strategy because it costs us 10 times more to bring a client back than to keep them in the bank. It's really the client-centric thing that will be first on the agenda and thereafter...
That's also looking at the market dynamic, and thereafter we will optimize rather than maximize the profit, because that's long-term maximization. On the overlays, I struggle. Hand over, but I think it's always good to have in the uncertain times. Masih?
Yeah. On whether there's gonna be a decision by the year-end, whether those are sort of reversed, it just depends on the outlook at that point. I mean, they could be either used, that something has happened that is related to the reasons why we put the overlays on, or that the uncertainty related to the reasons we have, why the overlays are there is gone. It's very difficult to predict at this point whether that has happened or not by year-end. So it can't really say when and if that's gonna happen, or if is definitely the case, but at some point you won't have the overlays. The question is whether that's gonna be next couple of quarters or whether you have to wait until 2024. It depends a lot on the macro outlook at that point in time.
Masih, do you have an idea if any, if part of the SEK 2.2 billion is already allocated somehow to Commercial Real Estate?
Yeah, I mean, we did take SEK 300 million in Q4 related to Commercial Real Estate, so we did disclose that back then.
Okay. Thanks. Thank you.
The next question comes from the line of Martin Leitgeb with Goldman Sachs. Please go ahead.
Yes. Good, good morning. Thank you for taking my question. Just a couple of follow-ups on NII, please. In your opening remarks, you flag some of the NII benefit being temporary in nature due to customers adopting to the higher rate environment. I was just wondering if you could give us a feel or sense how quickly you think this adjustment will be. It seems like the data in the first quarter, data back, suggests that transaction accounts within corporate and private customers are down to 47% of the deposits in that division, down from 51%. It seems like this adjustment is well happening, but I was just wondering, is this the pace you would expect?
Would this essentially slow down soon, or could this go on for a while? Secondly, I was just wondering if there is any element within NII where the benefit of higher rates is yet to come through, whether that's some form of longer duration assets, swaps, bond books, which could support an high progression from here. I'm just trying to understand where NI for SEB could settle going forward. Obviously, their 1Q run rate is up 60% year-on-year or over 70% since 2021. So a remarkable step up. I'm just trying to understand, what a kind of steady-state level of NII is for us to be going forward. I was wondering if you could give us any steer or any comment on where you think it...
Whether you think whether consensus expectation of around SEK 41 billion analyzed is a fair assumption. Thank you.
Okay. Thanks for that. We do say that we think that some aspects of the NII line is transitory. We have no idea how quickly that will happen, how quickly that will go down. When it comes to how much, sort of, migration you could see from transaction accounts to other accounts, there should be a sort of end of that at some point, because you cannot take your transaction account deposits to zero because you have to pay your bills and so forth. When we reach that point, we don't know. Maybe just assume that the pace you've seen in Q1 just goes on for a couple more quarters. I don't know.
We think that we're just stating the obvious, that people would adjust their savings to a new environment, and that adjustment hasn't fully happened yet. Higher NII, I think, I mean, NII should be higher in five years than it is now because we will do new lending and stuff like that. There's no sort of steady state of NII. It's difficult to say whether we will ever reach steady state of NII. It should, over time, go up as we expand our balance sheet. The numbers we produce in Q1, there are no one-offs in them. They're sort of steady state here and now. We have a rate hike that was announced today that will be supportive going forward.
At the same time, you have these migration effects in the portfolio that will make sure that the potential improvements from here will not be as fast as you would have had these migration effects not happened. That's pretty much all the guidance I can give.
Thank you. On the, on the NII transmission, is there any lagging impact in terms of some of the benefit of prior rate hikes you're seeing yet to come through?
Yeah, there are some lags on three month mortgages, for example. We reprice that book a third per month. When you have a rate hike, it takes three months at least for that book to be fully repriced on a list price change, for example. You're gonna have lag effects elsewhere as well. On the corporate side, fixings are down, large fixings once every three months, even though you have fixings every day, basically. Yeah, there will be a sort of delayed tailwind from rate hikes later on. Over time, as Treasury sort of reshuffled its liquidity book to higher yielding bonds, you're gonna see a positive effect there as well, but that takes time, some time as well.
Yeah, the markets book, we also logged securities that have taken a hit in the upward trend of rates and spreads, and those will also come later.
Perfect. Thank you very much.
The next question comes from the line of Alex Demetriou with Credit Suisse. Please go ahead.
Hi. Thanks for taking my questions. Just one question. We've spoken a lot about the tailwinds from higher rates, but just if we look at some of the headwinds, what would be the main headwinds that you see on NII, and how would you be able to mitigate these? Is that solely just like an improvement on the lending asset margins? Are there other levers that you can pull? Thank you.
I can start. I mean, the obvious is not on margins, it's actually a tailwind, or neutral. It would be that the interest rates bite and investments are not gonna happen, and therefore, loan demand will be muted for longer. That goes for households, it goes for mortgages, real estate, and all of the corporate. That's the major tailwind on volumes. The other tailwind is asset quality. Who knows what the state of asset quality will be if we enter into a more severe recession than we are currently predicting.
You want obviously means headwind.
Sorry, headwind.
No, that's perfect. Thank you very much for that. Quickly, just a second one. Just, what kind of actions have you taken to improve your market share flows?
Market share for what? Sorry.
Oh, sorry, mortgages. Sorry. My bad.
I mean, quite large actions. I was looking at the queue, number of minutes that people have to wait in queue in the telephone bank. Year to date, it's 2.8 minutes, I think. Last year to date was 28 minutes. That's a pretty large difference. We've have a much better situation there when it comes to that. We've added maybe 30 FTEs in different parts of Sweden that are making sure that that administrative process of approving mortgage has come down significantly by, I think, 67% in terms of time, how long it takes. The whole process around the mortgage product is much, much better today. We have a better offering in our app as well.
You can do more of a self-service there when it comes to fixing rates for so, and so forth. I think there have been very large improvements. In March, we're pretty much at our back book in terms of market share, and we see a good development. You could see the numbers that we had. Despite the fact the mortgage books didn't grow in Q1, we did add about SEK 6 billion of new commitments in Q1 for mortgages, and that's usually a leading indicator of what's gonna happen to the lending book going forward. We'll see whether that materializes now, but we do see encouraging signs.
Thank you very much.
Gentlemen, there are no more questions registered at this time.
We'll wrap up. Thank you very much everyone for today's call and wish to see you soon.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.