Good morning, this is the conference operator. Welcome, and thank you for joining the SEB's third 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 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 very much, and good morning, and welcome to our Q3 results call. As customary, you can follow the slideshow that we will refer to. You can find it on sebgroup.com under Investor Relations. Starting with some highlights, we had a return on equity during the third quarter of 19.8% on a capital tier one ratio of 18.9%, resulting in 430 basis points of capital buffer above the minimum requirement. We saw a significantly improved availability and customer satisfaction among our retail customers in Sweden, and that was not only during Q3, but has been evolving during the year. Credit quality remains exceptional and very robust, and we will continue with the share buyback program volume of SEK 1.25 billion per quarter.
Flicking to the next page, I thought it would be interesting to share a few data points we've received during this quarter. As some of you have heard me say before, banking is all about its employees. The human capital that we deploy is of utmost important, and the most highly correlated employee survey index to performance is engagement. But starting with the customers, as you may remember, we did have some issues during 2022 when it came to operational statistics around the effectiveness of banking. This was post-COVID and had many potential explanations, but we now have seen a marked improvement, where the queue time for the telephone bank has got more than 30 minutes, down to less than three, both for corporate and private customers. In this quarter, we also had a new recent all-time high in our NPS.
It's of course the net promoter score that we measure on actual clients in SEB after interaction with us, and we've now established a level in the mid-70s, which is typically regarded to be excellent. We also have gotten the SKI survey, where they specifically ask about the telephone service and if you got help with the errand you were looking for the bank to solve. And here we came out among all banks in Sweden in the third quarter, ranked number one, with an acceptance score of replying yes of 84%. We just recently did our annual survey around engagement among employees, which is, as I said, highly correlated to high performance institutions.
We also here noted a new all-time high in the bank of a score of 82, which takes us to the highest decile of the financial industry, included in this very vast survey. Two more awards was mandated by Prospera. One was one we haven't had for some time, which is, of course, the most, appreciated equity house in the Nordic, as well as the Nordic external asset manager of the year. On the next page, we have a slightly more mixed picture. These are our classic surveys in society about banks, where we saw a one-notch downtick on corporates in SKI and flat in corporates in the finance barometer. It was also flat around, private individuals among larger banks.
However, we did see a clear positive trend in private wealth management, and the private banking score improved from seventh place three years ago, to now being number two. On the next page, it's just a very long time series of the performance of SEB. I would argue that we are fighting short-termism as we speak. There's been quite a lot of very short-term perspectives being introduced in the finance industry, in the banking sector, and it is, of course, resulting in looking in very much on this particular year and an elevated level or a higher than average level of profitability and income. But I do like to think about these things in multiple years, and you can just see a bank in play, which is very, very well diversified.
You can look here in this graph on income and profit in the worst time we have experienced in the early 1990s, almost not traceable in these numbers. Russia crisis of 1998, the IT bubble burst 2001, the global financial crisis, et cetera. If you do have a multi-year perspective, you can see a very robust institution that has the swings and roundabouts, and it tends to even out over time. On the next page, we've double-clicked on the, what I call the de-risking of the banking sector, and in particular, around SEB, the last 10, 11 years. I think most of us know that we have added a significant amount of capital in the banking industry, and so in SEB, we have stronger liquidity measures and better liquidity availability than ever.
We have had very much a tightening of underwriting standards, and we have had asset quality improvements during this time. But here are three different ways to also think about de-risking swings and roundabouts and the diversification of an institution. The first one is to look at our internationally exposed business, large corporates, and financial institution, and see how the geographical export and development and diversification has changed over time. And here we can see a clear and very strong picture that the dependence on concentration risk of being Swedish has been reduced, and the international part of SEB has slowly but surely increased over time. Another way is to look at the credit quality of the non-retail bank books. This means that this is not household lending or SMEs, but mid corporates and large corporates, et cetera.
Here you can also see that the asset quality improvement can also be traced just by looking at credit rating distribution in the portfolio, and we currently have the vast majority in investment-grade exposure. There is also a diversification measure, HHI, where a lower number is better, where you actually look at non-correlation among different areas, and here we've done this analysis on sector, manufacturing, finance, insurance, real estate, and households. Here we can also see that we have very little concentration risk or single dependence compared to the average Nordic peer.
This is, of course, something when the market is not moving in one direction for all segments, something that is hugely valuable, and that means that also in the next phase of whatever the market or the macro environment might bring, that we stand strong and able to conduct our business in any macroeconomic circumstance. Now I will hand over for the financial results of Q3 to Masih.
Thank you, Johan. We're on slide number 8, looking at the financial summary year to date. We've seen an income growth of 31%, very much driven by the strong growth of net interest income, up 49%. The growth rates year on year are coming down, but still at high levels. Expenses are up by 11% so far this year compared to last year. We've seen a clear reduction of expected credit losses of being only 1 basis point compared to 7 basis points last year. And the biggest growth we have in the P&L year on year is on imposed levies due to increased risk tax in Sweden, but also the introduction of what's called the solidarity contribution in Lithuania.
When it comes to the year-to-date numbers, one should note that on the income side, we have a positive effect from weakening Swedish krona of about SEK 1.5 billion and a negative effect on the cost side of about SEK 400 million. So overall, the weakening Swedish krona is positive for our financial results. We're also reiterating our cost guidance for 2023, and with the current FX rates, that guidance is in a bracket or interval of SEK 27.1 billion-SEK 27.6 billion. If we move on to the next slide, slide number 9, and look at the Q3 numbers isolated, we continue to see an improvement of net interest income, although the quarter-on-quarter growth rates are coming down quite clearly and stand at 3%, in this quarter.
Fee and commission income is seasonally lower in Q3, which is typically the case, but they're slightly higher than the same quarter last year. We continue to have a good level of net financial income, same level as Q2 of SEK 2.6 billion. One should note that we have a couple of one-off items in this quarter reported on the other income line. One of them, which is about SEK 0.5 billion, is related to a buyback of a covered bond that we have bought back, where we have a net gain. Then we've done a liquidation of an old SEB subsidiary, which has led to about SEK 100 million of a net gain. On expected credit losses, you can see that we have a small net reversal. We've had a small positive effect from the macro updates we've done during the quarter.
We have a couple of new reserves for a couple of counterparts, but we have a couple of releases as well, and we've reduced the portfolio overlay by about SEK 100 million, which now stands at 2.7 billion, 2.5 billion at this point. Move on to next slide, slide number 10, and look at the operating leverage, the same slide as Johan showed, but at a sort of slightly shorter time span of 11 years. The conclusion here is that we've been able to double the income of the bank for the last decade or so, at the same time as costs are up by about 20%, and combined, this has led to a quadrupling of our profit before expected credit losses and imposed levies.
On the next slide, you can see the development of the credit portfolio. The overall picture is that credit demand is muted across the board, both when you look at households as well as corporates. Obviously, this is the whole intention of the current monetary policy, so it seems like it's working. There's a slight FX-adjusted decline of the corporate lending book, but at the same time, we've seen some new off-balance sheet exposure during the quarter, so we have a slight increase of the FX-adjusted credit portfolio. Swedish mortgages continue to be flat. We do continue to see an elevated level of amortizations, and the number of transactions in the market are lower than historically. Just to note on commercial real estate, the FX-adjusted growth rate is slightly negative.
So despite the fact that there is a general trend of strong bank financing, that is not enough to offset the general lower demand when it comes to credits from CRE. Move on to the next slide and update our view of the real estate market. Here is a slide we've showed a couple of times before. To the left, you have a typical balance sheet structure or capital structure of the listed real estate companies we have, all of them listed. You can see that in general, these companies have about a 50% equity on the liability side of their balance sheet, which is financing the investment portfolios or properties that they have. Below the equity, you have about a 30% buffer of unsecured bonds before you would start to hit what we typically do, which is secured bank lending.
So generally, you need to see a very sharp deterioration of collateral values before it impacts the financing we do to these companies. On the right-hand side of this slide, it's got the same portfolio. Here, we're only looking at the companies that have a triple B rated or lower rating, and what levers they have pulled over last year, and then we've updated this with the levers they have pulled during Q3. As you can see, we've had one or two more companies that have suspended dividends or have done bank-to-bond refinancing, but generally, there's been fairly small changes. I would say about this portfolio that many have pulled levers, they're in a slightly wait-and-see mode.
At this point, many of them feel that they've pulled the levers they need to pull to be in a sufficiently good place, I guess, awaiting the future macro development and the potential changes in policy rates. Move on to the next slide and deep dive on net interest income. So as I mentioned before, up 49% year-on-year, and only up 3% quarter-on-quarter. Here, we continue to see a positive contribution from our Baltic business, and this is offset on a different line, imposed levies, as we're paying more in Lithuania on bank taxes there. The contribution from Swedish households continue to be pretty flat, so we've seen a continued margin pressure on mortgages, but that's been offset by improved margins on deposits.
What's worth noting when it comes to mortgages is that, despite the fact that margins are very low and still lower than the back book margins, in Q3, we had slightly higher margins on new mortgages that were issued compared to Q2. Whether this is a new trend or not, it's difficult to say, but at least we've seen a positive development there in Q3. Forward looking on NII, and we understand there is a lot of sort of uncertainty on how this will develop. I think the best guidance we can give is that if policy rates are unchanged at current levels, the most likely scenario is a slow downward drift of the net interest income line. Moving to the next slide, looking at fee and commission income, holding up well, flat year-over-year. In Q3, it's slightly down, mainly a seasonal pattern.
We see less activity in investment banking-related fees, but that's been offset by slightly higher asset management-related fees, and card fees are pretty much unchanged, held by fairly good consumption and high inflation levels. Move on to net financial income on slide 15. Same level as Q2, SEK 2.6 billion. We've seen a negative effect of XVA quarter-over-quarter of about SEK 400 million, but that's been offset by a fairly large revaluation of our stake in one of our strategic holdings, in this case, Euroclear. We continue to believe that this, the NFI line should be around the historical level of about SEK 2 billion per quarter, and there is no sort of reason to change that. So move on to the next slide. Look at the capitalization of the bank.
The capital buffer has come down by 20 basis points in Q3, standing at 430 basis points. We've seen a fairly large negative effect of regulatory changes. This is related to the Pillar II add-on we had in our last supervisory assessment, as well as the move of the commercial risk weight score from Pillar II to Pillar I. This has been almost fully offset by the profit generation post-dividend that we had in the quarter of 60 basis points. And worth noting that we have deducted the full SEK 2.5 billion we had in approval from the Swedish FSA when it comes to share buybacks, despite the fact that we're only executing on half of that during Q4. On the next slide, we have some few key ratios that we typically show.
I think it's worth noting here is that we have probably one of the highest net stable funding ratios we've had at 114%, up quite significantly from Q4 last year. We've done a large amount of wholesale funding year to date, more than SEK 180 billion, as we are preparing for potentially more uncertain times in 2024, as we know that tightening will continue, and that could sort of shore up liquidity or make it more difficult. So we've prepared for that by doing more wholesale funding this year. Finally, on the next slide, we just reiterate the financial targets we have, around 60% dividend payout ratio of EAT, a long-term capital buffer of 100-300 basis points.
We are reiterating that we should be within this interval again by year-end next year, and that we want to have a return on equity that is competitive with peers, and obviously now we're above our long-term aspiration of being at 15%. And just finally, just note that when it comes to share repurchases, we do say this will be the main form of capital distribution when we are in excess of the 300 basis points when it comes to capital buffer. It doesn't necessarily mean it's gonna be the only form of capital distribution. With that, I'll hand it back to you, Johan, so he can talk about an upcoming event.
Thank you, Masih. That's the last slide of the prepared remarks, and this is just a placeholder and a strong invitation to all of you to participate in our annual event, which is called Transition in Numbers, on the progress of the bank in the last twelve months within the area of sustainability and transition. We will also update the key metrics that we are sharing, the brown and the green, as well as financed emissions, in this event. So, heartily welcome to all of you. We will have several external speakers as well of note. Operator, we'll stop there and take Q&A, please.
Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Rickard Strand with Nordea. Please go ahead. Mr. Strand, your line is open. Mr. Strand, maybe your line is on mute. We cannot hear you. The next question is from Nicolas McBeath with DNB. Please go ahead.
Good morning, can you hear me?
We can hear you well.
Perfect. So first, a question on profitability. So almost 19% ROE in the quarter, and you've been delivering around 18% or higher ROE for a few quarters now. So could you please elaborate on how you think about the sustainability in this kind of profitability? What main drivers do you see impacting your ROE for the next couple of years?
Yes, thank you. I'll start. First, the process we typically have in the bank is that we evaluate these at the end of the year, and this goes both for the return on equity target or aspiration of 15%, but also, by the divisional cost income and more specified return on equity. We do this through a triangulation, one could say, where we look on internally, what do we think we can achieve with the current plan? We then look what is required, compared to peers, that we need to be a very competitive investment compared to other in our sector. And then the third, is what is required in the overall market in order to attract equity capital in a, stable way, returning a well-balanced risk-adjusted return. We will do that again.
As you are implicitly alluding to, this is, of course, a different environment, and we've now had several quarters where we've been above the long-term aspiration. Generally speaking, we will do the work now in Q4 around what we believe for the future, where we do have more benign circumstances going from the strongly negative interest rate environment to the more positive. It doesn't mean that we will change it, it depends on where we land, but definitely we will have a review on all these things, as cost income is also on the group level below. I think the difficult thing we will have is to try to have a steady, stable state after these very large movements that we are currently adapting to. We are still it at the end of the beginning.
So we are in the beginning of changing the environment quite dramatically from the last decade, and now we are kind of getting to the peak level of short-term interest rates, macroeconomists predict, and then we will have a slow-moving adjustment during 2024. So I'll, I'll say on strategy, Nicolas, it's, it's, it's very clear in the business plan that by design, we are trying to enhance return on equity regardless of where we start, through an asset light focus. So we do have several measures in the strategy which are pointing to less capital-intensive areas, and that we wanna expand in those in order to permanently improve the return on, on capital employed and equity. Masih, anything else?
No.
Okay, thanks for that, Johan. And then, also a question on capital. So, how confident are you that you will indeed be within your target range by end of next year? And, yeah, what are you waiting for before you increase the capital repatriation to shareholders? And just related to that as well, even if you increase the buybacks, it looks like it would be difficult to calibrate down the excess capital just using share buybacks given your strong capital generation. So should we expect most of the excess capital and earnings to generate to be shifted out by extra dividends rather than buybacks? And then I'm speaking about dividends above your ordinary 50% payouts. And if so, could you say anything on the potential timing of extra dividends?
Is it likely for Q4 this year, or more likely that we should wait until the end of next year before we see larger extra dividends, if that's your ambition?
Yeah, I can start there, Nicolas. Yeah, I guess, I mean, when it comes to how we will get to the 100 to 300 basis points, it depends on your forecast of the capital generation in the next five quarters. We obviously, as always, had a board meeting yesterday, and the board reiterated that target to be within that interval. Exactly how we get there, as I said before, we have share buyback as the main form of capital distribution when we're above 300 basis points. But it doesn't mean that's the only lever that the board can pull to get there.
Whether it's gonna be share buybacks, an extra dividend, or combination of the both, or whether we will grow our business more, or which doesn't seem to be the biggest case right now, that there's a strong deterioration of the economy and some of the capital is consumed that way. It's just difficult to say. What we know at this point is that, this is what we've decided right now, to do another SEK 1.25 billion share buybacks. We reiterate the target for year-end next year, and we're committed to that target. And exactly how we get there, it's difficult to say exactly what the timing of that will be.
One way I would look at it, when we set this target, we had a buffer of 590 basis points, and we're just over halfway of the timeframe, the three years we said that we will be within the 300, and we've come down to 430. So from one perspective, we've pretty much done exactly what we said that we should. The decrease of the buffer, starting of 590, down to 300, has gone at the pace it should go at if you would have assumed a linear decline of the buffer down to 300 basis points.
Okay, but what are you waiting for at this point? Why are you not increasing the share buyback pace, given the kind of rates of the how much capital you accumulate basically every quarter now? Is it something you're seeing, some kind of uncertainty that is you know making you a bit more cautious in this quarter and the next, as it looks?
I don't think we're seeing anything but what everyone else can see, in the sense that there is a lot of uncertainty. We have geopolitical uncertainty, and that is tripling down, trickling down to a lot of economic uncertainty. We have recessions or threats of recessions in many of the jurisdictions where we operate. We do have a very strong starting point in terms of assets, quality, and profitability going into that. But at the same time, it is obviously a fairly uncertain environment out there. We don't have a crystal ball. I don't think we can see what this will lead to more than anyone else can, but obviously, we have a more uncertain environment. We don't have anything in terms of knowing about something that will happen that is negative, that you don't know about.
There is nothing like that, that we have information you don't have-
Mm-hmm
... in terms of negative things that could happen, but we have the same information when it comes to the general macroeconomic uncertainty.
So just to follow up on that, if the uncertainty prevails for another year or so, do you think there is the risk that this kind of target, capital target that you've set could be pushed back another year?
It's a very hypothetical question. This is the target we set two years and almost two years ago. And that is what's been reiterated at this point. So we will keep on that, and we have had a history of setting targets and achieving the targets we've set. To the extent that we have given out guidance and promises, I think the track record we have shows that we have lived up to those.
Okay, perfect. Thank you.
The next question is from Namita Samtani with Barclays. Please go ahead.
Morning. I've got three questions, please. Firstly, why has the regulator given you a Pillar II add-on of 100 basis points for your IRB models, when you've previously said in the past you didn't expect the review to have much impact? And secondly, a big picture question: If rates were to get cut, there are other European banks which could sustain or even grow their net interest income trends they're seeing right now, given the hedges they have in place. I guess that would be a bit more tricky for SEB, given the lack of hedge. So do investors have to accept that revenues for SEB will probably decline as rates get cut, or do you see offsets in other parts of the revenue stream?
Finally, just in the report, you talk about continuing to see some asset quality deterioration in the quarter. Could you tell us which sectors or countries you're seeing that in? Thanks.
Yeah, I can start. So on the Pillar II add-on, that is not based on an assessment of, at what level the new models will be calibrated. The add-on is based on the fact that the models have not been approved yet by the Swedish FSA, which is the case for all Swedish banks. I would say that this is a combination of, us not working fast enough with the models, but also on their side, not having had a resources to look at the models at the pace that was needed for them to be approved at this point that they need to be approved. So as long as the new models have not been approved, this is the add-on we have. It's a capital add-on to create an incentive for us to get the models approved as soon as possible.
So I think there's a signaling value in that, that the FSA believes that a buffer of 100 basis points or add on 100 basis points creates strong enough incentive for us to get the models approved, i.e., the new models should lead to a capital consumption increase of less than or clearly less than 100 basis points from their assessment. So that's a way of looking at it. So as soon as the models are approved, we will have new calibrated models, and this add-on should be removed at that point. On potential rate cuts, yeah, I guess it's correct that you have some banks that have deposit hedges that we don't have. I think you need to look at what does that cost in terms of capital consumption related to what you're hedging yourself against.
With the legislation we have up here in Sweden, we have very sort of strict capital add-ons, when it comes to interest rate risk, that makes these kind of hedges not profitable in the long term. Saying that, we do have other natural hedges in our business. So if rates are cut, that will probably have a positive effect on our fixed income business. It could potentially have a positive effect on our FX business, as rates could be cut at different paces in different jurisdictions, leading to FX moves, which would benefit our business as we are helping customers with hedging their FX exposure. And obviously, it could have positive effects on our fee-generating business, when it comes to asset management business, when it comes to investment banking. So I think we do have other natural hedges.
We were a pretty profitable bank in the zero interest rate environment. We are more profitable now, but obviously not all the cylinders of the bank are operating at full speed now, when rates have moved and volatility has been introduced. So I think in a rate cutting scenario, we have other parts of the bank that could perform better than they are now. On asset quality deterioration, I would say, there is a general deteriorating asset quality, but it's more in sectors that have more leverage or are closer to the end consumer. So consumer discretionaries, builders, any or financial, sorry, leverage finance is an area where you have more deterioration. I should say, though, in Q3, in terms of volumes, we had more upgrades than downgrades in the balance sheet.
In terms of the number of companies that were downgraded, we had more downgrades than upgrades. So if there is any sort of signal value in that, is that we, as a bank, have more exposure to companies that aren't that negatively impacted by the current macro decline.
Thanks very much.
The next question is from Sofie Peterzens with JPMorgan. Please go ahead.
Yeah, hi, here is Sofie from JPMorgan. So just a follow-up on the share buyback. So this year, I guess it's quite clear that the share buyback will be SEK 5 billion, but is it fair to assume that it could be up to SEK 10 billion next year? Or, would you even consider like SEK 15 billion, SEK 20 billion share buyback next year? Like, if you could maybe just talk a little bit what the maximum and minimum share buyback amounts are that you kind of consider and what the main drivers here are. And then my second question would be around commercial real estate book.
I see that the ICR stress that you do on 7% interest rates are only for 2023, but considering that we're in November next year, it seems that maybe 2023 is a little bit short dated. Could you also give the ICR stress numbers, assuming you would do the same stress for debt that matures in 2024 and 2025? And then, just a final question on the windfall and banking taxes in the Baltics, how should we think about the tax in Latvia and, I guess that the banking tax in Sweden is unlikely to be included in the 2024 budget that was proposed by the opposition.
Do you think this is something that the current government could potentially consider next year or in future? Thank you.
Okay, so I can start on the buyback volumes, and please, I'm not guiding, but I'll reason with you what the natural limitations are. It's very important when you engage in a larger scale share buyback that you can hand on heart and say that you're not affecting the price, and that has to do, of course, with the liquidity and the volume being traded. I would today make a guess. We haven't done this yet, but I would make a guess, and that is that SEK 10 billion would not be any problem whatsoever. SEK 15 billion might. So I have no more guidance to give than that, but there is some natural limitations to it.
... Masih, you want to do the ICR?
Yeah, I don't think we have any numbers on 2024 and 2025. I guess it depends on your expectations of interest rates and how they will continue to move during 2024 and 2025, whether they will come down. So we don't have any numbers on that, so we'll be disclosed, I think it's for 2023. I'll just add on the share buybacks. We have a typically a mandate from our AGM to do up to 10% of the outstanding shares, but some of that is used for other sort of hedging programs when it comes to long-term intensive programs. So that's sort of the up-absolute upper limit. On the windfall taxes, there is a discussion in Latvia, that's correct. We don't know how that's gonna end up.
One of the proposals is to halve the mortgage rates in the country, which obviously feels a bit strange because they're in the ECB, and ECB wants to raise rates so that inflation is curbed. But we don't know how those discussions will end. Obviously, if that happens, that would have a negative financial effect on us, but it would also have other more severe effects, I would say, when it comes to the climate for doing business in that country. So obviously, we're following all of these discussions both in Latvia and other parts of Europe, and trying to make our voices heard when it comes to how we think this will be negative for growth in the long term and the stability of the financial industry.
What about Sweden? You think that the probability of a windfall tax is zero in Sweden, even though the opposition proposed that?
No, I mean, the budget has been presented, and it's gonna be supported by the parliament, I think, in November. And there is no proposal in that budget from the current government, which has a majority in the parliament, to introduce a windfall tax or increase the current bank tax. So I think there was a proposal from one of the, or a couple of the opposition parties, but they're not in power, so that doesn't impact anything at this point.
Okay, that's clear. And you don't think a windfall tax could be something that the Swedish government considers, like, one year down the line?
It's difficult for us to speculate in that. We can only sort of confirm that there is no windfall tax in the budget that was presented, which is the one that will be in place for 2024.
Okay. Thank you. And actually, if I may, just one final question. Foreclosed or forbearance, did you see any increase in the forbearance this quarter?
No, we haven't.
Okay. Thank you. That's all.
The next question is from Alex Sheridan with Jefferies. Please go ahead.
Hi, thanks for taking my questions. Just more of a theoretical question. So we've seen, you know, changes in the savings rates following changes in the Riksbank rate. So you gave, you know, previous guidance about level of where interest rates have been charged in the transaction account. So are you able to comment on, you know, either the historical spread between, you know, savings rates and the Riksbank rate? And are you likely to see any changes in savings rates not triggered by the change in the Riksbank rate? Thanks.
Yeah, I can take that. Historically, it depends on how far back you go, but if you go back to just before the financial crisis, which is the last time we had policy rates at current levels, so typically, we saw back then that banks introduced positive rates on transaction accounts approximately when the policy rate hit 3.5, 3.75%, which is very similar to what happened this time, as banks here typically introduced a positive rate of 25 basis points when the policy rate was increased to 3.75. So it seems to be very similar. On other saving accounts, I would say generally right now, the interest rates or the yield of that is fairly high compared to what the policy rate is if you compare that to the history.
Whether the savings rate could be increased, even if policy rates are unchanged, that's obviously possible. It depends on competition. We don't see that that's gonna happen right now, but it depends on competition. If there is more competition for deposits, and we wanna make sure that we have a competitive offering, that could potentially happen, but we've seen very little of that historically.
Thank you. Then just a follow-up question. What are you seeing in terms of mortgage margins at the moment? Do you still see them quite compressed? You know, how do we kind of think about those going forward, and when are they gonna, in your view, kind of normalize again?
Yeah, I mean, as I said before, we've seen an improvement of new mortgages, margins on new mortgages during Q3 versus Q2. It's difficult to say whether that's a new trend or not. Margins are at extremely low levels, close to zero, but at least they were slightly higher in Q3 versus Q2. We can see that in Q3, there's been slightly better activity in the market. You saw a fairly good amount of new sort of houses coming up on the market and apartments during Q3, and we've seen a fairly sort of good level of transactions compared to Q2. So there's potentially a demand effect here, but I think the most interesting part here is the supply effect.
You've seen new entrants in the mortgage market in the zero or negative yield environment, where you've seen these new entrants having a viable business model in that environment, and that business model is not viable anymore, to the same extent when we have positive rates.... So there are a few smaller mortgage providers that are clearly struggling in this more normalized environment, and maybe that's helping the supply side, and therefore, margins won't go down any further from the current levels. But that's more sort of a speculation.
Perfect. Thanks very much.
The next question is from Riccardo Rovere with the Mediobanca. Please go ahead.
Thanks, thanks a lot for taking my questions. Three, if I may. First of all, I would like to, to know if you can comment a little bit more on the contribution of the liquidity funding treasury department, which came, if I understand it correctly, SEK 500 million negative this quarter. It was positive Q1 and Q3, Q2, sorry. The second question I have is on the overlays. If I remember correctly, if I understood correctly, you've used SEK 100 million or so, now you're left with SEK 2.5 billion, is still a sizable amount. What we should do with that? And the third question I have is again on capital. Correct me if I'm wrong, in this quarter, you have your RWA go up by SEK 34 billion because of commercial real estate.
You deduct the SEK 2.5 billion of buybacks, SEK 1.25 billion that you have announced, another SEK 1.25 billion that you have not even started, but not even yet announced. You don't take into account the profits that you will make in Q4, so you upfront everything, and you take nothing on the positive side, which, you know, is like saying that you're doing anything you can to bring the number down. So reality is that the common equity ratio is probably about 19%, which is exactly what it was before the CRE risk weight.
So the question is, with a buyback of SEK 125 billion per quarter, which erodes at best 15 basis points capital per quarter, so nothing, how can this tool be preferable to a cash dividend, considering that you need to get AGM approval, Swedish FSA approval, while on the DPS, you just need... it's much less complicated to bring up the payout ratio. How can it be that instrument so more, let's say, the preferred one? Also, considering the stock at 1.3, 1.4, 1.5 times the tangible equity, depending on the days. Thanks.
Thank you, Riccardo. That was an interesting question. So starting with the liquidity, the liquidity buffer, in treasury, I don't recognize the numbers you mentioned. There is no SEK 500 million negative effect in Q3 that I know of. So I don't know where you get those numbers. The liquidity portfolio in treasury has some credit risk in it, but very small amounts that generally the yield on that portfolio sort of should, over time, go up with the fact that the new securities invested in that portfolio will be higher yielding. There is a negative effect on maybe the P&L that's driven by the internal funds transfer pricing, which means typically that treasury has charged the division less for the lending activity.
So you see an offsetting effect in the divisions when you see a negative effect in treasury. Maybe you're referring to that change during the quarter. On the share buybacks and dividends, I mean, the only thing we can say is just to reiterate the targets we have for the full year, next year to be, or the end of next year, to be at the within the interval. Which one of the sort of two share buybacks and dividends that are preferable? Again, I mean, it's a balance, a combination, because that's what we have in our targets, to do a combination. It is possible that share buybacks standalone are not sufficient to take us down to that interval, then you would have to do other things. An extra dividend is possible, but there could be other effects as well.
You could have a deteriorating macro environment. You could have much stronger lending growth because you have customers that need help with liquidity. You could, I mean, hypothetically, you could consume the capital in other ways, acquisitions. We are doing AirPlus, which we are closing next year. That's gonna have a negative effect of just over 40 basis points. There are other ways of using the capital, but surely, I mean, the main sort of levers to start with are share buybacks and dividends, and exactly what combination will be used to get to the 300 basis points, we don't know yet, but the promise is to get to 300 basis points.
Okay, Masih, and the overlays?
Yes, sorry.
Think about it.
It's correct. We're at SEK 2.5 billion, we have total reserves of SEK 7.7 billion. So we think we are well reserved going into a potentially more uncertain environment. What we did this quarter is to remove or reduce one of the overlays by SEK 100 million. So typically, how that works is that we have put on an overlay sometime in the past, based on a certain uncertainty, a certain scenario that could happen. We now removed or reduced that overlay by SEK 100 million because the scenario we had used for that overlay, the SEK 100 million, is not really viable anymore. So to the extent that we have argued for the SEK 2.5 billion to be added as overlays...
If the justification of that changes over the course of the next quarter or next year or two years, then that overlay would have to be reversed. So that's how it works. We justify it by looking at a certain uncertainty. If that uncertainty goes away, then the overlay goes away as well.
Okay, if I may follow up one second, because this is somehow linked to the capital creation. Reality is that, I mean, the situation is deteriorating. It's already deteriorating, okay? You've got the CEO, I mean, right or wrong, the market is concerned about CRE in Sweden. Sweden, right or wrong, is supposed to maybe enter into recession in 2023. So all that stuff should be somehow captured by your internal models in expected losses, one way or the other. And you have also, but if it, if that is the case, in any case, it's translating in zero losses, zero. And you have this SEK 2.5 billion. So this SEK 2.5 billion is actually capital, is another 30 basis points of capital or so. So k- it...
Why, why does it mean that your risk cost in 2024, and maybe even in 2025, will stay at very low levels, unless the SEK 2.5 billion overlay is a capital buffer that stays there forever?
Yep, we have no intentions to having portfolio overlays forever. We've done benchmarks with other European banks in terms of the amount of overlay we have as a share of the balance sheet. We're pretty much sort of in the middle of the pack. So we don't think we stand out in any way. This is obviously something that was introduced post or in conjunction with the pandemic, when the general perception was that the models couldn't fully capture the uncertainty you had. And, I mean, I guess this is something that will need to be discussed with policymakers and regulators, to what extent do the models capture the risks and uncertainties you see?
Because, we have felt that this has been prudent to do, and we are keeping at it, but obviously have good discussions with the auditors on how these overlays should change over time. But it's not a permanent overlay we intend to have forever.
All right. Okay, thanks, Masih. Thanks a lot.
The next question is from Magnus Andersson with ABG. Please go ahead.
Yes, good morning. Just two very short ones on capital. First of all, the way you see it, is the below 300 basis points management buffer target cut in stone, or will it be up for negotiation in Q4 in some kind of annual target review that the board does? And secondly, just when did you apply for the current share buyback approval?
Yeah, I can start. Set in stone, I mean, it's difficult to say. I mean, if we have a, let's say, a pandemic in Q3 2024, is it then still set in stone? So it's very hypothetical. The only thing we can do is to just say, well, do we still have this target or not? And we still have this target, and it was reiterated in the committees we had with the board and at the board meeting yesterday. So that's the only thing we can confirm at this point. When it comes to the current share buyback, you have typically a four-month notice period with the FSA. So four months before we got the approval, and we got the approval a few weeks ago, we applied for it. So that's how it works.
Yeah. Okay. Could there be an element in here of return on equity being, I mean, good enough, high enough, also on the current capital position, so that actually managing the capital base is less important now than it used to be than it was when you introduced the target in Q4 2021?
Well, yeah, I'd say absolutely. If you are profitable enough, with the capital buffers you have, you feel less pressure to completely optimize your capital capitalization, especially when you have a fairly uncertain macro environment. So the combination of the uncertainty in the macro environment, us being a profitably, profitable enough bank, helps with having more flexibility on how you adjust the capital buffer to the long-term levels you want to be at.
Okay, thank you. And just secondly, on cost, to follow up on Namita's question there, where you elaborated on the income side and what the offsetting factors could be if rates would fall and you get pressure on NII. I mean, in relation to that, what flexibility do you have on the cost side if income growth would slow significantly in 2024? We see, for example, that headcount continues to increase, and have done so for several quarters now in a row, for Q4 2021, I think.
Yeah, that's correct. The headcount did increase in Q3 as well, but I think it was only 64 people, so clearly less than what we've seen in previous quarters. So there's been a clear slowdown there. We typically try to operate the bank looking at the long term, things we want to develop. There are a few levers to the extent that you have less activity in some parts of the bank. You would obviously could reduce headcount in those areas. Those are typically sort of very sort of activity-related areas. Investment banking, as an example, is an area where you typically adjust the headcount you have or adjust the capacity you have to the sort of prevailing environment. We typically, as a bank, are much less volatile in adjusting our headcount than sort of pure US investment banks.
So we're much more stable in that sense, but there is at least some flexibility in there. But, it depends on what kind of headwinds you have on income in, let's say, 2024. But typically we are investing for the very long term. We have a strategic direction for 2030, so the main focus is actually on building on our capabilities to fulfill the targets we've set for that year rather than 2024.
Yep. Okay, thank you very much.
The next question is a follow-up from Riccardo Rovere with Mediobanca. Please go ahead.
Yes, thanks for taking it. Very, very quick one. In the report you say that the fact that you bought back cover bond portfolio is gonna have a negative impact on NII going forward. Is it possible to have an idea, rough idea of what could be the impact if it's material or not?
Yeah, I can take that. It's actually mathematically the exact same number, because if you buy the bond back at $0.95 on the dollar, you'll make 5%, so if that's 500. If you refinance that at the same time, you will just have it in the new spread out over the maturity. So I would probably think 3-5 years or something like that.
It's six years.
Six years? Good, Masih. Six years, you divide the 500 by six, that's the negative impact you didn't have before.
Okay, okay, that's a small one. Okay, thank you.
The next question is from Rickard Strand with Nordea. Please go ahead. Mr. Strand-
Hi, uh-
We cannot hear you.
Can you hear me now?
Yes. Please go on.
We can. Yep, thank you. So, first, follow-up question on buybacks. Given that you announced SEK 1.25 billion program yesterday, and then you do a SEK 2.5 billion deduction, should that imply that the run rate will be the same into Q1 2024? And then a second question on capital repatriation is that the ongoing tax case in Germany that you have currently not taken any provision for, just want to hear how that affects the capital planning, if you think that could play a role here in the planning on the 300 basis points target for end of next year? Or do you think that that will not impact the planning for next year, so to say?
When it comes to your first question on the share buybacks, I think it's sort of reasonable to think that Q1 will be another quarter with the same pace of share buybacks, as that is the approval we have. And since the notice period to the FSA is four months, it will be difficult for us to apply for a new program above the SEK 2.5 billion and be able to execute on that in Q1. So I think the base case scenario should be that we execute on SEK 1.25 billion in Q4, and potentially, if the board then approves that, to execute on SEK 1.25 billion also in Q1. That's the approval we have.
On your second question on the German tax case, what we've said in our report, annual report, we've updated that, sometimes in the quarter report, is that we haven't provisioned, obviously, for the tax risk in Germany, and we have the intention to appeal that would go the, the court system. And that process could take anywhere between 5-7 years. So we don't see that as a potential risk in the very short term or maybe even in the medium term. It's something that could potentially have a negative effect, longer down the line.
... part of it, so do you think that it still would be unregarded?
Well, I think, everything is regarded. So when you do an assessment of the capitalization you need, everything you know about and things you are uncertain about will be included in the assessment you do. As we discussed before, obviously, the return on equity we have at this point is also included in, that assessment. We do wanna run a, an efficient balance sheet in the long term, but in the short term, you feel less pressure when you have the levels of profitability we have today. So all these sort of different, uncertainties and, information we have is regarded in the planning we do.
Then a follow-up, a question on, Masih, your comment previously, if I heard it correctly, that if we see rates being still at the current level, we should expect that NII starts to gradually decline from this, the current run rate. If you could elaborate a little bit on the main drivers you see there, and what you think will sort of cause this decline from the current level.
Yeah, I'll do that. I mean, there are a few caveats there you need to have in place. So the first one is that lending growth is very muted, so if the balance sheet is not growing, that's one of the caveats. The second is, as you mentioned, policy rates being unchanged. We know at this point that there is a continuous trend with customers adapting to the higher interest rates. So we've seen flows from lower-yielding saving accounts to high-yielding saving accounts. That should continue for a few more quarters. So potentially, if you keep everything else set equal, so no lending growth, no policy rate changes, the only impact you have on NII is this sort of continuous adaptation to the rate environment, money moving from low-yielding saving accounts to high-yielding saving accounts.
And then that should have a negative effect on net interest income, and therefore, there should be a slow drift downwards. That's how we reason around it. It's, it's very uncertain, I should say, where NII will go from here. Could be higher, and it could be lower in Q4. It's difficult to say, but in the sort of more medium term, next few quarters, it is possible or maybe likely that the only effect on NII is this continuous move, from certain savings accounts to others.
One, on the same topic, given the sort of quantitative tightening that's currently happening and which is done taking down deposit volumes, that in then a combination with potential repricing of current yeah your current loan book, what is the net effect of those two impacts having on your NII?
Yeah, difficult to say. I mean, one should keep in mind that we have done a significant amount of wholesale funding already this year. Had we not done that, let's say we had kept our net stable funding ratio stable at the level it was at when we went into this year, then obviously, NII would already be at clearly higher levels than it is. So we've already had a negative effect of already adjusting to a quantitative tightening world by issuing more wholesale funding. So whether that's gonna, forward-looking, have, even more negative effect or not, it's difficult to say, but we have clearly, used some of the NII strength by already adapting to the new environment.
Okay, thanks a lot.
Gentlemen, Mr. Torgeby, there are no more questions registered at this time.
Okay, thank you very much. Then we'll conclude the call there, and hope to meet you all in the near future. Thank you very much.