Hello, and welcome to the Swedbank fourth quarter 2017 report. Throughout this, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Today, I'm pleased to present Gregori Karamouzis, head of investor relations. Please begin, Gregori.
Thank you, and good morning, everyone. Thanks for joining the call for our full year results. With me in the room, I have our CEO, Birgitte Bonnesen, our CFO, Anders Karlsson, and our CRO, Helo Meigas. They will each make an introduction and make a few comments on the results for the quarter and the full year, and then we'll open up for questions. Birgitte, please.
Thank you, Gregori, and warmly welcome to all of you to the presentation of another strong quarter for Swedbank. I will kick this call off by commenting on the fourth quarter and the full year of 2017. Then Anders will run you through the financials. Helo will talk about the asset quality. And after this, Anders and I will wrap up things by presenting our priorities for the next couple of years. First of all, I am very proud to present another strong quarter, and I'm particularly pleased with the high activity levels that continue to bring strong financial results. Swedbank, as you know, is the largest retail bank in four countries. We have the largest number of both private and corporate customers in Sweden, Estonia, Latvia, and Lithuania, and we do enjoy particularly large and profitable market shares in retail product areas of lending, payments, and savings.
In the fourth quarter, we saw a continued solid mortgage volume growth in Sweden and in the Baltics. The corporate lending demand was stable. We did have a very high activity, but we also continued to prioritize profitability, and this is what you see in the result. The benign stock market development supported our asset management business at the same time as PayEx contributed positively in payments. The asset quality remains solid. And let me just highlight one area, the cards area. We don't talk about that very often, but card transactions increased by 6% in the quarter and 10% the whole year. The acquiring volume for Swedbank increased by a bit over 10%. We have an average of almost 90,000 transactions per second, and we peaked in December with 440,000 per second in a 30-second period.
That tells you something about the size, but also the resilience of our systems. We continue to focus on digitalization, automation, and in the quarter, we did take another step to adapt the development organization to be more flexible, to reduce time to market, and to ensure deliveries. 2017 has been a fantastic year. We reached our financial targets, and we completed all important deliveries for the year. We know our strength, and we have a clear direction, and we delivered. We have strong income generation that allowed us to reach our ROE target of 15, and we also continued the strict cost regime and came out on target. Consequently, the board proposes to pay out 75% of the profit to our shareholders for the sixth year in a row.
In 2017, we've taken important steps to continue to meet our customers wherever they choose to meet us, and to work with automation of the many, many processes eligible for automation and robotization in Swedbank. We've set up a structure for innovation that ensures value realization when we engage with third parties. We've taken steps to analyze where we should continue to do ourselves and where we would actually be better off with a partner. A few examples: in the payments area, the acquisition of PayEx will strengthen our e-commerce offering to merchants instead of Swedbank developing this ourselves. The partnership with Kepler Cheuvreux strengthens us in a way that we could never, ever have done on, on our own.
The investment in an integration of the fintech company, Mina Tjänster, into our mobile bank. This is a service that gives our private customers a tool to more cost efficiently manage their subscriptions and utility payments. This is a very important thing, and it took only six months from first contact to delivery to customers in our app. This is important because all of this is about speed. Further, to enhance the digital offering to customers, we continue to develop our virtual assistant, Nina. Lastly, another thing worth highlighting is that we've taken an important next step in partnering with fintechs and intensify innovation in setting up an accelerator program in Riga. We also launched an open banking sandbox, which already in only two months have more than 1,000 fintechs signed up and testing their ideas.
I would like to say something about sustainability, because sustainability is the core of Swedbank. 2017 has been a year where we have demonstrated our commitment to sustainable banking in all areas of the bank. This has earned us recognition in the Fair Finance Guide, among others. We have won prizes for gender and equality, and sustainability in all four countries. We issued green bonds for ourselves and customers. I'm very proud of the work that all our employees have done in this area. This is part of our DNA. Our employees are also more engaged than ever, and employee satisfaction improved significantly in 2017. This is extremely important, as for a bank, employees are the most valuable asset. I would like to say a few words about the Swedish mortgage market before I hand over to Anders.
We welcome the normalization that we are currently seeing, primarily in the expensive apartments. I think that recent years' development are long-term unsustainable. We see healthy activity in January, and the strong Swedish economy with low unemployment and low interest rates, combined with household strong balance sheets, all support the adjustment that we are seeing. We're closely monitoring the development and remain very optimistic about the longer-term outlook. With this, I will hand over to you, Anders, please.
Thank you, Birgitte. I will jump directly into the business segments, and then run you through the rest of the financials. Starting off with Swedish banking, they delivered a strong result, primarily supported by good mortgage loan volume growth in line with our market shares and a benign stock market. NII was positively impacted by increased mortgage loan volumes, and margins were stable. Deposits grew by SEK 6 billion, and margins were stable. Net commission income was impacted by the benign stock market and the consolidation of PayEx. Asset management income increased as a result of positive asset performance, and brokerage income was up due to better sales in retail structured products. PayEx contributed with a full quarter result.
Other income increased, mainly as a result of a strong quarter for Entercard, as we sold off a portfolio and lower provisioning in the insurance company, and asset quality continued to be solid. Baltic banking delivered record high profitability. NII was positively, positively impacted by loan volume growth in the private segment, while lending margins were stable. Deposits were up, mainly due to a seasonal effect in the private segment in Lithuania. Net commission income increased substantially on the back of annual asset management performance fees in Latvia, and net income from cards was higher due to lower expenses in the acquiring business. There is a structural change in the Latvian pension system that going forward limits the performance fee component in the market.
As the Swedish krona weakened against euro this quarter, the net FX effect in the Baltic banking result was positive by SEK 28 million, and asset quality continued to be stable. Turning to large corporates and institutions, their result reflected the mixed market movements in the quarter. NII was stable. Net commission income was positively affected by asset management performance fees and the benign stock market, as well as by the annual travel bond market maker fees. Net gains and losses were weaker compared to last quarter, due to a continued slow trading activity and negative valuations, valuation effects quarter-over-quarter. Credit impairments in the quarter were lower than in Q3. To summarize, at group level, overall, a very robust performance in all key business areas, especially seen in the mortgage loan volume growth and asset management income.
As Birgitte mentioned earlier, we decided during the quarter to reorganize our IT and business development units, and therefore, we are taking a restructuring charge of SEK 300 million. Excluding the restructuring charge, total expenses came in as expected. Turning to capital. Capitalization remains strong with the CET1 capital ratio at 24.6%, implying a buffer to the Swedish FSA's minimum requirements of 270 basis points. Basel has now presented a final revision of the Basel III proposal, which was largely as expected. A long period of calibration at the EU level and implementation at the national level is now awaiting. We will therefore not set our capital management buffer until there is more clarity of the final rules to be implemented in Sweden. We are comfortable with our current capital buffer and find great comfort in our capital generation capacity.
There is no need to review our dividend policy on the back of the proposal that has been presented. Also, while we are attuned to capital implications, the introduction of IFRS 9 in 2018 will only have a minor impact on our CET1 capital ratio, reducing it by 6 basis points as of January 1, 2018. Now, looking back at this quarter, the CET1 capital base was impacted by accrued earnings and negative IAS 19 effects. Risk exposure amount decreased by SEK 11 billion. As we finally receive the proceeds related to the sale of Visa Europe, risk exposure amount was reduced by SEK 3.4 billion. In addition, year-end effects released proceeds related to season market movements and behavior reduced credit market risk and CVA by around SEK 5 billion. Let me summarize the year from a financial point of view.
We had another financially strong year. We reached our return on equity target by delivering 15.1%. We had a strong organic income generation supporting profitability, also in light of large positive one-off income effects in the comparable year of 2016 and 2017. We increased our revenues with 8% underlying. Underlying expenses were in line with our guidance of SEK 16.1 billion. With that, I hand over to you, Helo.
Thank you, Anders. I should give now a short overview of credit in Q4. It was a strong quarter with stable credit quality. We recorded volume growth in all our home markets. Total lending growth in Q4 was SEK 13 billion. Mortgage lending in Sweden, where we see continued high activity despite the decline of the housing prices during the last couple of quarters, was the biggest contributor to the portfolio growth. We continue to have strong credit quality in all our home markets. Swedish Banking reports credit impairment of SEK 264 million, related to a couple of exposures in the services sector. In large corporates and institutions, credit impairments were SEK 59 million, and Baltic Banking once again had recoveries, this time in the amount of SEK 12 million.
For the total year, we report credit impairments of SEK 1.3 billion, which lands us at 8 basis points to the total credit portfolio. This is slightly below the lower end of our guidance. Thought to do also a short deep dive into our real estate-related lending. Being one of the largest real estate lenders in Sweden, this is, of course, the market that we follow very closely. From the credit perspective, we continue to be positive to the business opportunities in the property management area as a result of a strong economy and the structural need for new housing in Sweden. Our focus is on projects with strong cash flows, sound balance between equity and bank financing, and conservative pre-sale rates, which show projects match the demand on the market. Now, a few numbers.
Our total real estate lending portfolio in Sweden is close to SEK 1.1 trillion, of which around 80% is in mortgages and tenant-owner associations. Of the total portfolio, only SEK 21 billion is financing to residential property developers, more than half of which is to large real estate construction firms with diversified portfolios, where we have long relationships. Our exposure to the construction projects of tenant-owner rights, where we have seen the biggest uncertainty over the last quarter, is around SEK 14 billion. We have been conservative in this segment over the last couple of years with limited growth, and this results in our portfolio having very high pre-sale rates of around 90%, and most of the projects being finalized in 2018 and 2019.
This means we are very comfortable with the credit quality also in this part of the portfolio, but of course, we maintain a close dialogue with our clients. With that, I hand back to Birgitte.
Thank you, Helo. And now looking ahead to strengthen our competitiveness even more and to increase the customer value, during the next few years, we will increase and raise the investment pace and put more resources into digitalization and automation of the daily banking services.
... If you look at our investment agenda, you can put it into four buckets. One, we will further strengthen our digital channels, the mobile bank and internet bank, and increase the use of automated self-service solutions. We will improve the productivity in providing tailored offers based on customer data. Here, I'm talking about data analytics investment. With PayEx, we now have an excellent platform to develop our digital payment and e-commerce solutions. The product offering of PayEx has started to be rolled out towards all Swedbank customers in Sweden and will eventually be rolled out in the Baltics, too. The automation, the fourth bucket, of our internal and external processes will be speeded up. Robotics and use of our virtual assistant, Nina, will also be in focus. So to maintain our market-leading cost efficiency is still one of our top priorities.
The mentioned investment and the ongoing efficiency efforts will reassure that we can keep this competitive advantage. We know where we're going, and we are agile enough to adapt to changing conditions and still deliver at a high level. Anders, please say something about the cost.
Yeah, absolutely.
Guidance for the next two years. Mm-hmm.
As you all know, we have, during the past number of years, established a strong cost culture in Swedbank that has contributed significantly to reach our return on equity target of 15%. For the full year of 2017, as I said earlier, we met our cost target, again, excluding the one-off restructuring charge. As we look ahead, cost efficiency remains a top priority. But as Birgitte said, we will speed up the investment agenda. And the important factor that will improve our speed and ability to deliver the value of our investments to our customers is the reorganization that Birgitte mentioned earlier. Just to remind you, our daily work with cost efficiencies continues. This means, in essence, that we will absorb the mandatory investments, such as regulatory requirements and inflation-related cost pressure, such as salary increases.
With this in mind, total expenses for 2018 and 2019, respectively, will be below SEK 17 billion for each year. Volatile and unpredictable expenses, such as pension costs and FX movements, are included in that cost frame. Beyond the cost guidance of 2018 and 2019, we do foresee the higher investment level to broadly be maintained, and investments into the areas mentioned by Birgitte will allow us to offset underlying cost inflation, and over time, lead to net cost reductions. Our market-leading cost efficiency will continue to be a key competitive factor for the foreseeable future and be a core component supporting us in our 15% return on equity target. Thank you.
Let me just say a few words to conclude and then ask Gregori to open up for questions. I think we've delivered an amazing year, and we stand really strong to meet the challenges of 2018 and 2019. We see that customer trends and needs are changing faster than ever. New regulations are a challenge, but we also see a lot of opportunities in this, and we are confident in our strength and strategy and optimistic about the future. All our home markets show strong economic activity. Export is picking up on the back of European economies regaining strength. This leads to strong labor markets and high corporate activity. In Sweden, we still see a solid underlying demand and supply for housing and a continued natural organic turnover. This supports continued mortgage loan growth.
Interest rates are low, and fiscal stimulus in Sweden, through tax cuts, will improve the disposable income in Sweden during the next year. Finally, household savings are expected to remain at high levels in Sweden. Remember, Swedbank is a large retail bank with activity in all segments and in all areas of our geographies. With this, I will hand over to Gregori to open up for questions.
Thank you, Birgitte. Operator, we are happy to take any questions from the people on the line. Thank you.
Thank you. Ladies and gentlemen, if you haven't already and you wish to ask a question, please press zero and then one on your phone keypad now to enter the queue. And then after I announce you, just ask that question. And if you find that question has been answered before it's your turn to speak, simply press zero and then two to cancel. And the first line we go to is Peter Kjell of SEB. Please go ahead, Peter. Your line is now open.
... Yes. Hi, good morning. Peter Kjell from SEB here. First of all, just double checking whether I heard you wrong, correctly. When you discussed the cost guidance for the coming two years, I think you mentioned under that you expect net cost reductions beyond 2019. Did I hear you correctly there?
Yes, you did.
How should we look at that? Is it an investment, an increase in investment that we're seeing now or two years time, and then that would be reversed fully? Or should we, or do you think that there's more to do than solely that?
What I said is that the investment levels will broadly be maintained. That is our best estimate at this point in time. But as you understand, when you listen to Birgitte, some of the investments comes with both bringing value to the customer, but also bringing efficiencies into the processes that the banks are running, so.
In terms of automation, which you're mentioning, what kind of potential cost savings do you see from such, from increasing investments in that? How much of your number of employees could you potentially remove from automating more processes?
It's a very interesting question, Peter. We gave you guidance for 2019 and 2020, and then we gave you an indication beyond 2019, and that is all I can give you at this point.
Okay. Then just questions on the corporate side. You're not seeing, well, you're seeing corporate loan volumes being flat year-over-year, and that goes back to your kind of comments roughly a year ago, I think, on not growing within the real estate area. First of all, if you could just comment on kind of what your expectations are on corporate loan growth for, say, the coming year, but then also what you see in terms of margins. Because when I look at LC&I, it looks like volumes are largely unchanged in the quarter, but you're seeing an increase in NII. So if you could just comment on that, please.
Yes, it's right. When you look at the volumes for this year, it's flat, but we've had a lot of activity. We've had a lot of new lending coming in. But as you know, and we've said in each quarter, and we really succeeded in walking through now, is the focus on profitability. Anders, you want to say something?
On the LCNI, NII, it is rightly, as you say, it's up a bit. And there are mainly two explanatory factors for it. One is that the average utilization during the quarter is slightly higher than you see at the end of the quarter. And the second one is a, I would say, small improvement in margins.
And the margin improvement there, should we read anything into it? Is it solely mix related, or have you been working with margins on existing customers to kind of mitigate the higher fees and capital requirements?
As you know, in the steering, we have a, we are working with return on risk-adjusted capital requirements for the business areas, and we are constantly working with improving these numbers. So, that will continue. That we never end with.
Okay. Then just one final question, just a small number one. You mentioned that there's a change in regulation in Latvia relating to performance fees, where you've had significant performance fees the last two years. What impact would that have for 2018? Or if you say, let's assume that it was implemented in 2017, what would have the performance fees in Latvia been under the new regulation?
The change, the change in Latvia is that the fee component is being capped, and new benchmarks have been put in place. So if I want to be on the conservative side, I would say that you will not expect to see performance fees in this year going forward. But that's my best guess, Peter.
Okay. I think I'll stop there. Thank you very much.
We are now over to the line of Jan Wolter at Credit Suisse. Please go ahead. Your line is open.
Yes, morning, Jan Wolter, Credit Suisse. So, just around the, the cost target that, that you disclosed today, what level of incremental IT investments and, and other investments, have you put into the budget for, for 2018 and, and 2019, just roughly? And what is the underlying assumption around inflation in, in those two years as well? So that's the first question. And the second one is, we didn't see much back book repricing, I think, in Q3 and Q4, in the Swedish mortgage book. So, how should we think about the back repricing going forward? Is there still roughly SEK 100 billion to be repriced, and, and, and what's the difference there between the front and the back? Thank you.
To answer your last question first, Jan, I think it is extremely difficult for you to have a sort of a, a clear view on what exactly will happen when the back book gets in for repricing. With the current market rate, there is still an uptick to be expected from it during 2018. If market rates move, I might change that communication. As far as the cost target comes, I would rather describe it as a cost cap. We will be below 17, is the thing that we have been communicating, net. There are so many moving parts in this, so it's really difficult to extract exactly what you're looking for. I remain with the 17 cost, below 17, cost guidance.
And then you had a third question, John, that I missed.
Yeah, I think it was around the cost cap there, the underlying assumption on inflation for 2018 and 2019. Just try to gauge the external driver of the cost line, as well as the bank's own budget in terms of investments that you plan. So the underlying inflation, what you're working with.
I think we have managed the underlying inflation over the years. We haven't done any specific calculation or forecasting on that. We will absorb it in our daily cost efficiency work. But I think you have a broad—you can do your own calculation based on what you see in Sweden and in the Baltic countries in this year that has passed.
Thanks. And the final question is on the market share in the Swedish mortgage market there, where you've been at 24-25%. Is that still the ambition going forward, to try to maintain that? So capture around that level in of new production and then maintain that market share, or could you see the bank coming down a few percentage points from where we are today? Thank you.
No, ambition is definitely to keep our market shares. However, just repeating what I said on the corporate side, we still don't compromise profitability or risk.
Okay, that's clear. Many thanks.
We are now opening the line over with Palermo of Goldman Sachs, please go ahead. Your line is now open.
Hi, good morning, and thank you for taking my questions. The first one is on the Swedish real estate landscape. Competitors pointed to signs of stabilization year to date, and was wondering, is that a pattern you recognize? And if you have some anecdotal evidence showing this, and what are your expectations for 2018 and 2019 in terms of house price development, and how would that translate into your mortgage growth expectations?
Very sorry, it's Gregori here. The line was a little bit bad, so we didn't hear the first part of your questions. So can I please ask you to repeat them and see if you can be a little bit more clear.
Yes, sure. It was on the Swedish real estate landscape. As a competitor pointed to signs of stabilization year to date, and I was wondering if this was a pattern you, you recognized? And then how does that translate into mortgage growth expectation based on your expectation for 2018 and 2019?
We, we see this normalization of prices that have increased exceptionally over the past couple of years, and this is something that we welcome. We are still optimistic for 2018 and going forward. And, here, you need to remember that, Swedbank lends to, in all segments, all over Sweden, you know, lots of houses, small houses, flats outside of Stockholm and Gothenburg, where you had these pockets of exceptional price increases. The second thing that, sort of makes us confident is the fact that the underlying, as I talked about, the underlying macro in Sweden is very strong. And, you know, there's still a demand that exceeds supply in Sweden for housing, especially in, you know, we see demographic trends, more people moving to cities, not only Stockholm and Gothenburg, but also other bigger cities.
So there is a lack of housing, and especially affordable housing. So, we will be there to lend to all our customers through the next couple of years, and hopefully for a long time after that, too.
Okay. Thank you. Thank you very much. And then has the recent slowdown impacted at all your mortgage growth expectations? And if you have a number that you could put around it.
Yeah, that I wish I had. I think it is a very good question. It's... If you look at January, it's been very high activity in January, but it usually is. So. And then as you know, we are awaiting the new amortization requirements from the Swedish FSA in March... So I really think it is too early to give you any sense of what growth rates to be expected in the year.
Okay, thank you, thank you very much for this one. And the second question I have is on the fee income side, if you could say a word on Robur and the outflow we're still seeing, and what would you expect for 2018? And secondly, still on the fee income, what would be the outlook in terms of revenue growth that you expect for PayEx, please?
Yeah. Robur, as we see, 2017 has been a year where Robur has actually taken themselves into the next level, I would say. We see a really strong performance in the majority of the funds. We've also launched a sustainability profile for everything that Robur does in terms of a policy for responsible investment. And we have a very competitive offering price-wise, too. So next year, or this year, 2018, should be a year of a lot of investment or and a lot of activity. As you also see, the savings level of Swedes is really high. So we think we have a lot of opportunity there.
We see a second thing, if I can just mention that, on the pension side, that more and more Swedes are becoming aware of the need to save for their pensions, and this is something that is helping us as this, goes for a lot of our customers. So we've seen positive inflow on that side by the fourth quarter.
To add to that, I think exactly what Birgitte said, economic activity is sort of the driving, underlying driving force for this line. Then adding, which you all know, asset management income is a function of how the stock markets are developing as well, and that I don't want to forecast, especially not today. Secondly, PayEx will be included during the year. There are two key things in PayEx. One is the products and services they have that Birgitte mentioned that we are providing to our customer, which is a broader customer base than PayEx had on their own. But the second more important part with PayEx is, as also Birgitte said, the fact that this is the platform on which we will develop our future e-commerce and payment solutions to our merchants.
All in all, economic activity will be the answer to your question.
Thank you very much for everything.
We now have the line of Andreas Håkansson of Exane BNP Paribas. Please go ahead, your line is open.
Good morning, everyone. I mean, we've gone through most of my questions. Just a little bit to follow up on the NII side. Could you tell us, you don't want to give an outlook on volumes yet, but could you tell us overall margins on that? And then also, when I saw some comments about treasury, and it sounded like you expected stable treasury result. Historically, you used to say that you could see trading go up and NII go down, but it now feels more like NII could be flat in treasury. Could you just tell us about that? And then next follow-up or question on asset quality. There was a pickup in Swedish provisions in the quarter. Could you tell us if any of that was at all housing related? Thanks.
Thank you, Andreas. To start off with, with your question on margin development going forward, I think the only answer I can give you is that, as you know, we prioritize profitability, which means that we do not compromise on price if we don't have to. As you also know, STIBOR has been moving all the time during the past quarter and also this quarter and into this year, but we have not changed the prices towards the customers because we are not pricing our loans on a daily basis. So my best answer to you is that we will keep on to the margins and the pricing going forward. As far as group treasury accounts, at this point, our estimate is that 2018 will roughly be at the same level as 2017, NII and NGL combined.
On your last question, the answer is no, there is no real estate-related provisions in Swedish banking.
Okay, very clear. Thank you.
We're now over to the line of Namita Samtani of Macquarie. Please go ahead, your line is now open.
Good morning. I've got a question on the new amortization requirement in Sweden. What percentage of your customers does that impact? And secondly, when stress testing your mortgages, what interest rate scenario do you use? Thank you.
To start with the latter part of your question, the interest rate we use for our mortgage customer is 7%. And when we talk about the new amortization requirements, we don't expect the impact on our client base to be very high, or rather, it's quite low because of the DTI cap of 500%, what we have had on our new lending for the last couple of years.
Okay, thank you very much.
We're now over to the line of Johan Ekblom at UBS. Please go ahead.
Thank you very much. Just a few quick follow-up. On the cost side, I mean, have you said or can you provide us any color if you think that there are revenue opportunities on the back of this incremental investment? And, you know, is this a very long-term game or something we can see also over the next two years as these investments come through? Secondly, just on IFRS 9, can you give us any color how we should think about provisioning for 2018 if you continue to grow your loan book at around the same level? And then finally, just a clarification on the Latvian fees. Is this a fee so performance fee throughout the year, or is this only a Q4 impact? Thank you.
I can answer your first question. You know, we don't do anything that doesn't have a strong value realization in it, be it a revenue generation or cost efficiency. And I think that you – if you look at one of the, some of the initiatives that we've taken this year, some of it is strongly revenue generating, others are focused on cost. So I think this is a difficult to give you more clarity on that. And Helo?
Mm-hmm. Yes, on your question regarding the provisioning for next year, we don't guide on the impairments anymore, and we don't see that IFRS 9 would in any way change the way we do provisioning. We have a new starting point, as you see in the numbers, and that's the only thing that you should be kind of looking at.
As far as the Latvian case, it's a Q4.
Thank you.
We're now on the line of Kim Bergoe at Deutsche Bank. Please go ahead.
Morning. My sort of detailed questions have been answered, I think. But just a more sort of high level, you're saying you'd had a fantastic 2017, and looks like sort of all the stars have been aligned, and you made the best of it as well. But how should we think about, particularly on the revenue side, how should we think about it going forward? I guess volumes have been very high. It looks to me like they can pretty much only go one way, and margins have been stable. How should we be thinking about your earnings capacity going forward? Where do you see the opportunities to grow earnings in 2018 from a strong 2017 base? And then just one question on your IT and investments and all that.
It sounds to me like these investments are sort of, you know, on a good platform, but does it go deeper? I mean, is your platform sort of strong enough for these IT investments, or do you need, do you think you need to make bigger investments going forward? Obviously, one of your peers, which I guess is specific to them, but there are other banks talking about having to make larger investments. Thanks.
We have an IT investment plan that we're very comfortable with. For those of you, I think, including you, that followed us, you know that we are not a big bang bank. We do everything in increments, and now we have a very strong value realization structure that helps us to focus resources into the right development. It's not like we don't have in our plan sort of that sort of complete overhaul of our system, if that is what you're after. We build on the platform that we have, and it's sustainable over time, as you also heard from the number of transactions as we process. Anders, maybe you want to say something. Yeah. Thank you.
I think I will not go into the trap of giving you the answer on how exactly 2018, 2019 will pan out in terms of macro. But if I look at where we stand today, as we said, there is high economic activity in all four home markets. Sweden's economy is strong. The decrease in investments within the real estate sector is picked up by fiscal and other investments, as we speak, export is picking up. The same goes for the Baltic countries. As far as volume growth, we can't say exactly how the market will, the mortgage market will develop over the year, but there are fundamentals that is very strongly supporting a continued growth in the market. And when it comes to corporates, what you see is a net number.
What Birgitte said, and what I reiterated is that actually the activity is very high, but we are constantly, diligently working with the profitability in the portfolio rather than going for volume.
Yeah. Okay, thanks. If I can just sort of follow up on, in particular, on the mortgage side. So if we see the activity, as you're saying, is continued high in general as well, and lending growth is still outpacing growth in household income, and therefore, leverage continues to go up, what's your impression? How does the authorities in Sweden think about that? Do you think could there be additional measures taken to try to curb that?
... Sorry, I missed the last part of the question. It was a bit of a noise here for that community.
Yes, it was, so Swedish mortgage lending growth continues to outpace household income growth, and therefore, leverage continues to go up. Could you give us your sort of flavor for how you think the Swedish authorities are thinking about this? And they're pointing out that leverage is a risk to financial stability. Would you expect, should we expect more measures to be taken on top of the amortization requirements?
There is quite a bit of discussion now about the new amortization requirements coming in place in March and the effect it will have on the market in general. So of course, we are not close to all the discussions what the financial supervisor is having internally, but my best guess would be they would first want to see what's going to be the impact before they go after additional measures.
Okay, thank you.
We are now over to the line of Riccardo Rovere at Mediobanca. Please go ahead. Your line is open.
Good morning to you. Good morning to everybody. Just one question from my side. If I understood correctly, some of your previous comments, you're basically stating that your kind of DPS policy seems to be correct. In light of, you mentioned, if I remember correctly, changing rules, what kind of change of rule are you referring to now that Basel IV has more or less been addressed? If I understood it correctly, some of your previous comments.
Thank you, Ricardo. No, what I... I mean, you know Basel IV as much as I do, and you know that the output floors, in whatever shape and form they come, will have an impact on all Scandinavian banks in one way or another. What I said is that what we need, what is now happening out there is that EU will take this under consideration. I expect a number of quantitative impact studies to come out in the market, and then it has to go through the legal processes in EU before it becomes relevant for the Swedish implementation nationally. And before that, it is very difficult to foresee anything. That is what I was referring to. Thank you, Ricardo.
Okay, thanks.
Okay, we're now to the line of Natasha Blackman at Société Générale. Please go ahead. Your line is open.
Hello. Thank you very much for taking my questions. I've got two questions, please. The first is on your funding plan for the year. So across senior and subordinate debt, would you be able to provide a bit of an update on what you're expecting to do there? Also, on the senior non-preferred side, would you be able to comment on when you might access that market?
Hi there. I'll take the question. It's Gregori here. In terms of funding plan for 2018, we have quite a bit of less maturities throughout the year, and in 2017, we issued around SEK 200 billion in total of long-term funding. So having SEK 115 billion of maturities in 2018, we're aiming to issue around SEK 140-SEK 145 billion in total. In terms of the senior non-preferred issuance, we have received the final requirements now from the Swedish National Debt Office, and there is a, as you know, transition period up until January 1, 2022, by when we need to have issued this type of instrument.
We are currently in compliance with our existing senior unsecured debt outstanding, but we're not either in a hurry to start issuing this instrument until the insolvency law has been adopted and allowing us to issue these instruments, by default. So 2018 will most likely not be the year when we do our first issuance. We will be pushing that into 2019.
Okay, great. Thank you very much. I just have another question as well, on margins. So lending, deposit, margins are all up. Has there been a change in the competitive environment now that Luminor has been listed? Would you be able to comment on that?
Can you re-repeat the question again? Sorry, we didn't catch the last part of the question.
Sure. Okay, so lending deposits and margins have all, you know, increased. Has there been a change in the competitive environment now that Luminor has been listed?
Sorry.
This is all in the Baltics, what I'm talking about here.
Not really. The margins in the Baltics were stable, and so were the margins in Swedish banking and LCNI broadly. So the competitive landscape has not changed.
Okay, that's fine. Thank you. Thank you very much.
We're now over to the line of Jacob Kruse at Autonomous. Please go ahead.
Hi, just two questions. Firstly, I thought going into this quarter that you would have a benefit from the fall in three-month STIBOR and the increase in one-week STIBOR in Q4. And I just wanted to check if that, if that's how it panned out, and if so, do you expect to see any reversal of that in Q1, given that we haven't really seen the same kind of movement, or I guess, the opposite on an average basis? And my second question was just with regards to some of the new entrants in the Swedish mortgage market, I guess Avanza, Hypoteket. I know they're very small at the moment, but do you see any, do you sense any competition from those guys?
Secondly, do you feel that you need to provide the same kind of capital market or?
... distribution of loans to investor type product, to compete both on the institutional and retail side? Thank you.
Thank you. I will start off with the first question. You're right, that STIBOR has been moving, as I alluded to, it has been moving in Q3, and it has been moving in Q4. Quarter-over-quarter, it has been more or less stable. I would urge you to use STIBOR as an, at best, an indicator of NII development. We have not changed our pricing on deposits or for that matter, on mortgages. So the outlook is taking Q3, Q4, and what we have seen in this year into account stable.
On the, on the new entrant side, I think that, yeah, even though they're small, you know, this is the exciting thing about running a bank in Sweden. You see this all the time, new entrants coming in with new ideas, and, we follow this very closely. We do our own development internally. We, we talk to new entrants. We see whether if these are ideas that we should, take into Swedbank, or whether some of the ideas that we have, we should share with them, the, the new entrants that come in. So it's an ongoing process. I think that's very dynamic. Have we considered, the setup that you see, like in Hypotek? You know, we go through this, constantly, and of course, we also look at this and see whether it's relevant for us.
Is it relevant?
Well, we'll see. We don't see a huge, you know, increase in competition from these new entrants yet. And, you know, we follow the demand of both the investor side and also our customers for lending. So we'll see. You will see, too.
Okay. Thank you.
We're now on the line of Magnus Andersson at ABG. Please go ahead. Your line is open.
Yes. Hi. Just on cost, first of all, is anything of the restructuring charge of SEK 300 million related to integrating PayEx in any way? And secondly, on costs and your cost guidance, can you say anything about the trajectory over 2018 and 2019, i.e., coming from an underlying level of 16.1, how that would develop? And then I have a final question on asset quality now. As Andreas alluded to, you had higher losses in Sweden, but you also have very low losses compared to where you've been for a while in your large corporate operations. Are we done and dusted with your provisions in Norway now for a while? Thanks.
Thank you, Magnus. The SEK 300 million in restructuring charge is not related to PayEx, it's related to the reorganization that I mentioned. As far as the cost trajectory comes, what we have said is that we, as you know, we have in the past been guiding on the decimals, and as I also alluded to in some call, that 1% movement in euro, Swedish krona, FX, is changing our cost with around SEK 50 million. So we don't want to be bound by that. We want to have that within the, cost frame and, and have the freedom to develop our business the way we would like to do under the, cap of 17. I can give you, you know that PayEx is coming in with a full year effect.
The delta between the years are roughly three, between 17 and 18 is around SEK 350 million.
Yeah.
Well, that is as good as it gets.
Regarding your question on our oil and offshore portfolio, as you know, we have been very early in taking a conservative look on the possible provisioning need in this portfolio. So as we look at the portfolio on the market in general today, there certainly is a significant stabilization due to a higher oil price and some pickup in the investments. Restructurings for certain parts of the market are still ongoing, but we do not see that it would have any significant impact on our provisioning in 2018.
Okay. Thank you. Just if I, if I follow up on the SEK 300 million, are there any savings that you expect to come out of that restructuring charge?
Yes.
Would you say?
Yes, it is.
Okay.
It's, it's gradually coming in because it is about overlapping positions, when you put two, different organizations into one. So yes, there is, but it's gradually coming, during this year.
Okay. Thank you.
Okay, before we go to Vivek Gautam at JP Morgan, if anyone has any further questions, please press zero and then one on your phone keypad now. Vivek, over to you.
Hi, good morning. I have a few questions. The first one is on cost. Your guidance of SEK 17 billion cost for 2018 and 2019-
... below SEK 17 billion, would we assume that you will absorb any further restructuring costs in that? The second one is on the mortgage and basically the margins. You mentioned the mortgage and deposit margins were stable through the quarter. When I look at the quarter and quarter progression, your margins increased from 104-107 basis points. Can you tell us what is driving that? And in the Swedish banking, can you tell us which industries does the impairment relate to that increase in Q4?
Okay, thank you. On the first question about future possible restructuring charges, they are not included in the SEK 17 billion cap. Your second question, I was-
I think I got it, Vivek. The NIM you were referring to, right? It was slightly up. Is that correct? The 104-107. I think, yes. What we have commented on throughout the call today is that margins are more or less stable between the quarters, but we also said that there were some small margin expansion in the corporate business. In the Baltics, mortgage book has also seen some small mortgage margin expansion. So that could be explaining the couple of basis points that you've seen. But overall, the back book is stable in most lending assets.
As to the provisioning in Swedish banking, the biggest contributors were the couple of cases in the services sector, but you shouldn't read anything into it in terms of a start of a new trend of provisioning. It was just individual bad business plans.
Just to follow up on that, you mentioned the restructuring charges are not included. Do you expect any restructuring charges to come over the next few years?
It's not something I will comment on currently. If it comes, we will definitely communicate around it, but, it's not something I can comment on now.
Okay. And then the second follow-up on the margin comment. Basically, I also wanted to understand of benefit from lower STIBOR in the quarter because you did not change your customer rates, which will probably reverse as STIBOR moves up. That was basically my second follow-up.
I think what you, what you have to have in the back of your mind is that there is a liability side to this, a funding side, and it's not that treasury is funding each and individual loan. So you, just to complicate the picture slightly for you, treasury is running a capital market funding activity where they are using derivatives, and there are certain dates at what they are resetting. So I think using STIBOR as something more than an indicator is a bit of a danger if you want to try to get your, your hands around the NII.
Thank you.
That was the final question in today's call. Per, please pass it back to the management for any closing comment at this stage.
Thanks, everyone, for participating on the call. We will, for sure, see most of you on the road over the next couple of days. Thank you, and have a good day.
This now concludes today's call. Thank you all very much for attending, and you may now disconnect your lines.