Ladies and gentlemen, welcome to the Swedbank AB Second Quarter Report for 2019. Today, I am pleased to present Gregory Keramuzis. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Gregory, please begin.
Thank you, and good morning, everyone. Thank you for joining us on our Q2 financial report call. With me in the room, I have our CEO, Anders Karlsson and our Chief Risk Officer, Head Omegas. We will open up for questions following our initial brief remarks. With that, I hand over to Anders.
Thank you, Gregory. And once again, good morning, everyone, and thank you for joining us for this presentation of the 2nd quarter results. I would like to touch on 4 areas today before I hand over to Gregory, who will walk you through the financials in more detail. Firstly, some overall comments on the financial Q2 secondly, the updated financial targets that we announced today Thirdly, a brief update on business trends. And I will conclude with an update on the ongoing money laundering investigations.
The 2nd quarter was impacted by the continued geopolitical and macroeconomic uncertainty around the world. Despite this backdrop, we saw an increase in Swedbank customer activity in all our 4 home markets. Increased demand for loans and mortgages and rising stock markets had a positive impact on our financial results. We delivered a return on equity of 16.6% in the quarter. Net interest income was strengthened as a result of higher lending volumes.
We need to take your thoughts on this. I think if I'm correct, operator, I think it's not being broadcasted. So we take a pause and make sure that you check the line. Hi, everyone. It's Gregory here again.
We'll give the there are some lines that are not working. So we'll give it a couple of more minutes and leave the it to the operator to make sure that everyone can listen. Okay. Hi there again. I think it's going to work now.
So we give it another go. So I welcome you again this morning for joining us on this call, where we are going to present our Q2 financial report. With me in the room, I have our CEO, Anders Karlsson our CRO, Gale Omegas. We will open up for questions following our initial brief remarks. And with that, I hand over to Anders.
Please, Anders.
Thank you again, Gregory, and good morning again, everyone, and thank you for joining us for this presentation of the 2nd quarter results. I would like to touch on 4 areas today before I hand over to Gregory, who will walk you through the financials in more detail. Firstly, some overall comments on the financial result in the Q2. Secondly, the updated financial targets that we announced today. Thirdly, a brief update on business trends.
And I will conclude with an update on the ongoing money laundering investigations. The Q2 was impacted by the continued geopolitical and macroeconomic uncertainty around the world. Despite this backdrop, we saw an increase in Swedbank customer activity in all our 4 home markets, Increased demand for loans and mortgages and rising stock markets had a positive impact on our financial results, and we delivered a return on equity of 16.6% in the quarter. NII was strengthened as a result of higher lending volumes. Net commission income improved and was seasonally stronger.
Expenses increased as expected and communicated last quarter, primarily due to the ongoing investigations and our investments to further strengthen our AML capabilities, but also to continue to develop the bank into the future. I am satisfied with the strong set of results and that my colleagues continue to do a great job. The Board has, as you saw this morning, decided to change the dividend policy from 75% to 50% of the annual profit to further strengthen the bank's capital position. The change is made against the backdrop of a higher countercyclical buffer in Sweden. The negative impact on the pension obligations from lower longer market rates, continued loan volume growth and the uncertainty regarding the bank situation after the turbulence of the past months.
We therefore decided to act prudently and in a timely manner to increase the capital buffer. We also decided to introduce the intention to maintain a CET1 capital buffer exceeding the FSA's to 300 basis points. The dividend will be decided annually with respect to the bank's capital target and the outlook for profitable growth in our home markets. At the end of the Q2, Swedbank's common equity Tier 1 capital ratio was 16.1%, exceeding the Swedish FSA's minimum requirements by 150 basis points. Our return on equity target of at least 15% remains.
By making these changes, we ensure that Swedbank will be will remain one of Europe's financially strongest banks. This is important for all our stakeholders, authorities, owners, and we secure our ability to support our customers' growth. When I was asked to become acting CEO, I decided 3 priorities for the bank: focus on the customers, continue to develop the bank for the future and to manage the ongoing investigations and develop our AML capabilities further. The Q2 results confirm the strength of our franchise, but we are by no means complacent or take anything for granted. We know that we must work hard every day to regain the trust, and we know that this will take time.
The top priority in all our business areas is to maintain relations with our customers, contacting them, meeting them and listening to them. Swedbank invests heavily in digitalization. We invest in our own infrastructure. And just as importantly, we invest in new products and companies within our ecosystem. One example is the recent launch of our collaboration with Kaching Retail, a leading supplier and developer of mobile payment solutions for larger retailers.
We have also made further efforts to contribute to and promote sustainable finances. We have invested in our own solar park and launched a new discounted loan for customers who buy solar cells in Sweden. In all three Baltic countries, we now offer a new green leasing product that will encourage both our private and corporate clients to choose newer and environmentally friendly cars. Let me then update you on the ongoing investigations. Shortcomings have been found.
The international law firm Clifford Chance with the assistance of forensic expertise is conducting an internal investigation. The purpose is to confirm facts and circumstances of any historical failings in AML compliance and money laundering exposure. Clifford Chance also reduced the bank's current AML program to ensure that it meets industry best practices and regulatory expectations, including U. S. Standards.
This investigation is comprehensive. For the Baltics alone, the review covers more than 18,000,000 registered customers in the bank's database and EUR 15,000,000,000 transactions between 2007 March 2019. We continue to cooperate fully with the authorities, and the conclusions from the ongoing investigations will guide our continued work. We will continue to update you on the ongoing investigations in our quarterly reports. A successful fight against global money laundering requires increased collaboration between lawmakers, regulators and banks.
It is in this period that Swedbank, together with 5 other large Nordic banks, have launched a joint Know Your Customer platform called Nordic KYC Utility. To conclude, the strong financial performance and the changed dividend policy contribute to a sound financial platform, which we will use to create more value for customers, shareholders and for society. With that, I hand over to Gregori.
Thank you, Anders. And let me start off with net interest income, which is higher quarter over quarter, mainly due to a lower resolution fund fee and continued loan volume growth of SEK21 1,000,000,000 both in corporate and private segments. Swedish Banking's private mortgages continue to grow, but slower than our back book market shares. Corporate lending in Sweden and and I also grew by SEK 8,000,000,000, primarily in property management and manufacturing. In addition, our Baltic operations grew lending by SEK 8,000,000,000 in the quarter, equally in corporates and private individuals in all three countries.
We are, of course, very happy with this development. This quarter, we received the final level of this year's resolution fund fees, which is around SEK 100,000,000 lower than anticipated. This led to a positive delta in the quarter of SEK 65,000,000. For the whole group, the fee level will be around SEK 1,100,000,000 for 2019. As I mentioned last quarter, at times when the short term interest rates are increasing, there are timing and phasing in effects impacting NII within the group, that is between the business and group treasury.
During this transition period, Swedish Banking benefited in the Q1 as they were paid for the deposit margin expansion, while group treasury was only partially compensated for the market funding increase, and we talked about this last quarter. This quarter, we see the opposite effect as Swedish Banking pays group treasury for the increased funding cost as the asset side is being repriced. This is what you see in the deltas on this slide. The margins component is being lower in the business and income being higher in group treasury. Overall, at the group level, 2 quarters into the year, following the repo rate hike in December, we have a positive net effect in NII of around SEK 250,000,000.
And in the second quarter, we see the full effect from the assets side repricing. Now if we look at Swedish mortgage margins specifically, the 3 month fixings saw, as expected, around 10 basis points decline this quarter as market rates continue to increase in average terms. On the other hand, however, the longer fixings saw 10 basis points increase as longer dated market rates decreased. We have seen margins stabilizing at these levels towards the end of the quarter. If we look at the Baltics, mortgage margins expanded further, while corporate lending margins were stable both in the Baltics and in Sweden.
The day count effect had a positive effect of SEK 40,000,000 this quarter. Group treasuries, NI, for the remaining part of the year is expected to gradually move back to a level in between Q1 and Q2, everything else being equal. Now let's look at commission income, which was seasonally higher this quarter. We see the usual seasonal effects in cards as usage is typically higher in the Q2. Our Asset Management business benefited from the overall positive market development in the quarter, and we also see continued inflows in rubbers mutual funds, this quarter primarily in fixed income and index funds, while there were outflows from equity funds amidst the choppy markets, especially in the month of May.
Corporate Finance and Real Estate Brokers both improved in the quarter as a result of higher customer activity. Turning to net gains and losses and other income. Both income lines were characterized by good customer activity. In LC and I, following exceptional trading conditions in the Q1 of the year, returned to normal but still solid activity levels, especially in FX and fixed income. In Group Treasury, the holdings of Visa and Asiakastieto shares, which are held at market value, led again to a positive delta of around SEK 220,000,000 in the quarter.
And lastly, looking at some of the other core products of the bank, the insurance and credit card business. We see that both continue to demonstrate steady growth. In the insurance business, sales were good, and we did also see lower claims. In Entercard, the credit card joint venture we have with Barclays, we saw seasonally higher activity. And now turning to capital.
As Anders already mentioned, the changed dividend payout ratio boosts the CET1 capital ratio to 16.1%, and the buffer to the Suezeta sales minimum requirements stands at around 150 basis points. This past quarter, net profit, excluding dividend, impacted the CET1 capital base positively, while the pension liability valuation again impacted negatively, following the significantly lower long dated interest rates. Just to give you the numbers, the discount rate was lowered by almost 50 basis points in the quarter at the same time as the inflation expectations increased with almost 20 basis points, a strange situation indeed. Positive asset development mitigated somewhat, but all in all, the CET1 capital base was negatively hit by SEK 2,700,000,000. Looking ahead, as Anders also mentioned, the countercyclical buffer in Sweden will increase to 2.5% as of September 2019, leading to around 40 basis points increased capital requirements for Swedbank.
And with regards to the pension obligation and the FX impact, just to give you the magnitude, during this past 18 months, currency and interest rate movements have impacted our CET1 capital buffer negatively by more than 100 basis points, increasing ria and our pension liability. The risk exposure amounts in the quarter increased by almost SEK 2,000,000,000. The main effect for the increase was the continued loan volume growth, where total volume increased, as I said earlier, by SEK 21,000,000,000. Mitigating this were positive rating migrations in the Baltics and Sweden, and we also saw positive collateral valuation that decreased real in Swiss Banking and LC and I primarily. Now summing the quarter up before I hand over to HELO.
We delivered another set of strong results with the full positive effects from the repo rate hike now visible in the net interest income figures. Customer activity was good across products and geographies. We continue to see solid underlying loan demand and corporate activity, underpinned by relatively benign macroeconomic conditions in all our home markets, despite the uncertainty surrounding many parts of the global economy. Expenses were, as expected, higher due to the ongoing investigations and initiatives strengthen our AML processes further. This quarter, these specific expenses amounted to around SEK 250,000,000.
Our underlying expenses guidance for the full year remains at SEK 18,000,000,000. The last couple of quarters, we talked about headwinds on expenses from FX movements, and we've seen this quarter the Swedish krona weakening further, which adds a bit more than SEK 50,000,000 for the full year at the current FX rates. Reminding you, however, that a weakening Swedish krona is net positive for the bank's results. Asset quality remained resilient. And now I hand over to Hille, who will walk you through the details.
Hille, please?
Thank you, Gregor. I shall give now a short overview of asset quality. We recorded solid credit growth in Q2 with loan portfolio increasing by DKK 1,000,000,000, of which SEK 3,000,000,000 was FX effect. Aside from mortgages, growth primarily came from property management, the majority of it in Sweden. We see growth in all real estate segments, while our exposure to housing developments, which we have been talking about in previous quarters, is slightly down.
We are comfortable with the growth in property management as we are focusing on our customers and projects with capacity to serve interest and amortization also in a stressed interest rate scenario and are cautious with retail properties as well as properties with high leverage. Moving now to credit impairments. The total gross amount of Stage 3 loans as of the end of Q2 is SEK 12,000,000,000, which is an increase of SEK 1,000,000,000 quarter on quarter. This constitutes 72 basis points of total gross loans in the group. Credit impairments in Q2 were DKK 109,000,000.
This comes primarily from DKK 106,000,000 impairments recorded in large corporates and institutions. Credit impairments in Baltic Banking were DKK 25,000,000, while in Swedish Banking, we have small recoveries. The increase of provisioning in large corporates is related to a provisioning of a few cases, which is partly then offset by positive rating migrations. So all in all, I reiterate what has been said earlier, credit quality in all our foregone markets stay strong. With that, I hand back to you, Gregor.
Thank you, Hilo. And operator, we are ready to take questions from the line. Thank
And our first question comes from the line of Magnus Andersson from ABG. Please go ahead. Your line is now open.
Thank you. And good morning. Just started with the changed dividend policy. Can you at this stage if you're starting with increased capital requirements from potentially increased capital requirements for commercial real estate, do you have any further insights into this, what the impact could be for you, what the kind of definition that will be used and what the timing will be? Because I guess this is one point that has impacted you in your decision to lower the dividend payout ratio.
I'll stop there.
Magnus, it's Gregor here. Let me take the first part of the question and then I hand over to Anders when he answers the second part of the question. Definitions are still unclear with regards to exposures and geographies. We understand that having spoken to the Swedish FSA that their intention is to clarify these definitions before year end. There are, as we speak, gathering complementary information from the banks, we understand.
And they intend to include this aspect of the capital requirements in their 20 20 SREP process. So that's the information that we have. So it's too early to give you an impact number. It's a very wide range depending how you interpret the definitions.
Okay. Okay. And secondly then on the ongoing SREP process and the discussions you're having with the Swedish FSA right now ahead of your upcoming capital requirement. Is have you got any indication in any directions? Or are you concerned that you might get any additional company specific add ons?
Has that been a part of your decision as well?
Thank you, Magnus. As you know, we are in the midst of that process where they are trying to finalize their view on the minimum capital requirements for the bank going forward. When they do that, they also take into consideration our forward looking capital planning. So and we are in discussions with them frequently
questions.
Okay. So no indication there that has had an impact as of now?
As I said, we are in the middle of doing it. So
Okay. And then what happens now? You introduced a range of the for the management buffer. What happens above 300 basis points? Do you think you will increase the dividend?
Or are you considering buybacks? Or have you is it too early to think about that?
Yes. We have today, the Board's made the decision to change the dividend policy, and that is what stands until further notice. But it's also important that we are reiterating our ROE target of at least 15%. And the buffer range that we are talking about 100 to 300 is a target. But the ROE target, the profitability target is something that prevails as well under these circumstances.
And just to add to it, Magnus Anders here. We have said this before. With that target, you will not accumulate excess capital.
Okay. And then just on costs. You mentioned that you had some additional FX obviously this quarter from the weakening Swedish krona. So I guess that your target implies around SEK 18,900,000,000 in costs for this year. Last quarter, you talked you gave us kind of an outlook statement for 2021 2020 to 2021, saying that roughly 50% of the AML related cost inflation would disappear once the investigations are over.
But in terms of timing, is that really anything that's realistic to expect in the coming 1 to 2 years? Or shouldn't we just use the 18,900,000 as a starting point for looking ahead?
Thank you, Magnus. As we have touched upon, there are or three aspects of the investigation. 1 is the internal to get to the bottom with what has happened and if there are deficiencies that needs to be corrected as we speak. That will continue into the early 2020. And you have seen what the Swedish FSA and the Estonian FSA have said in terms of their timing.
But the big unknown is, as you are probably aware of, the timing for the U. S. Authorities. So it's difficult to answer your question. It will move into 2020.
When it will pan out or disappear, it's not in our hands at this point.
Okay. Finally, just on costs. You've had a very rapid increase in capitalized IT investments per year since the start of 2015 with very high levels in 20 7 and 2018. Do you think that we have peaked here? Or will it continue to increase and thereby result in significantly higher amortization of IT intangibles going forward?
Yes. The buildup, Magnus, is on the back of several projects, regulatory, many of them. And we there are many of them that we're still working on. So I think the current levels are levels that you should assume, at least for the foreseeable future.
Okay. So levels of around SEK 900,000,000 to SEK 1,000,000,000 per year? That's the level now, yes. Yes. Okay.
You very much. That's all for me.
Thank you. And our next question comes from the line of Armin Kari from Nordea. Please go ahead. Your line is now open.
Thank you and good morning. So the first question is on expenses. So the guidance is intact for the full year, but I just wonder is sort of the disposition between different cost items also the same? Do you feel you can still invest as much in sort of the underlying business, but still deliver on your guidance? Or has sort of the investigations and consultancy and so on taken up a higher fraction of that budget you set for this year?
Thank you. Well, we had a plan, which we are following parallel to the investigations. They are, to a large extent, not all but to a large extent, handled by external resources. We gave you a forecast, a best estimate. It holds for this quarter and the previous quarter, and we see no indications of that changing at this point.
So we are continuing to develop the bank in the speed we want, and we are, at the same time, running the investigations.
Okay. And then there was some comments out from you that you're not satisfied with your market share on the new lending of mortgages. Could you say if there's anything in terms of processes you could do to sort of attract the higher fraction of the new lending? Or is it mainly the price component you have to adjust to achieve this?
I think there are 2 elements. What you see is the net. There are you have the new loan origination. At the same time, you have churn in the portfolios. And one way to manage the market share going forward is to be extremely proactive, not only reacting to amortization requirements requested by customer, but even be foreseen that before they act.
So that is something that we are working quite heavily on to understand the underlying signs to be able to get in touch with the clients before they even think about changing. And that is a very, I would say, efficient way of maintaining market share. So that is one component of it.
Evan, I mean, if we look at the long term ambition of the bank, we're of course not happy with losing market shares in the long run. But as you know, in the past 6, 7 months, we've seen a repositioning in the mortgage market, including the larger mortgage providers. And this calibration seems now to have stabilized when we exit this past quarter. So we will see how loan volumes and market shares develop from here going forward.
Okay. And then I understand it could be hard to comment on this, but I'll give it a try anyhow. On the investigations, you tell us that you have found some deficiencies in your own AML systems. Is there anything you could sort of give us any more flavor on? And also if this has only been historic if you found this already been resolved or if it's still things you need to cater to?
Yes. Thank you. Yes, it's difficult to get very specific. But as I said in conjunction with the Q1, we have seen efficiencies, for example, in KYC processes, in screening and transaction monitoring. And so that is sort of examples of the shortcomings.
Whether we are perfectly clear today, I am not in a position and I don't think any other CEO of any bank would be in a position to say that everything looks dandy today.
Thank you. And our next question comes from the line of Andreas Haakonsen, Danske Bank. Please go ahead. Your line is now open.
Thank you and good morning everyone. Just some follow-up questions. Just back on the dividend guidance you gave. You said that you're now going to decide your dividend annually. So you're talking about the payout ratio that you can decide annually?
Or is it just the outcome of the margin pressure was easing towards the end of the quarter. So going forward, should we believe that volumes is now going to be the main driver of the NII given that we're seeing the rate impact fully and margins are stabilizing? Or what should be the drivers from here?
Thank you, Andreas. As far as dividend comes, it is a decision that is made annually. The dividend policy of 50% stands. I'm not sure I can say more than that.
Yes. And then on your question on margins, Andreas, yes, you are correct. Assuming that rates do not move from here, volumes should be the main driver for NII.
Okay. Thank you.
Thank you. And our next question comes from the line of Peter Kessiak from SEB. Please go ahead. Your line is now open.
Yes. Hi, good morning. Just two questions from my side on the NII mainly. I think, Gregor, you mentioned that we should expect treasury in Q3 and onwards to be somewhere in between the Q1 and Q2 level. Did I hear you correctly?
And what does that is there any offset in the divisions? And then on the funding side, you mentioned that you are postponing the issuance of senior unsecured and so on. Is that still the case? And can you wait with that until 2020? And for how long really?
Peter, thanks. On your first question about the treasury, it is, as I said, it's going to be somewhere between the Q1 and Q2 levels. I think in Q2, we were at 3.16, Q1, we were at 1.25 roughly on that particular line. What you should expect from here is we have now a quarter where we have achieved the repricing on the asset side and the deposit margin expansion, which we saw last quarter. So this current level going forward is the level of the NII and volumes will be the driver from here.
So you've understood this correctly. And then on the senior unsecured and the funding side, we have altered our funding plans slightly. As we talked about last quarter, we have a very solid liquidity position with NSFR, this quarter actually going up a bit as well, 211%. And we have opted to issue covered bonds, where spreads have not been impacted during these past 6 months. This doesn't mean, however, that our plans to do our inaugural EMRA eligible security have been changed.
We're still planning to look at the market during the fall after the summer and see when the markets are there for us to issue. But having such a liquidity position, a solid liquidity position that we have, we can afford to wait. So we haven't, if you want, describe it this way that we haven't yet seen any P and L effects from the theoretical funding spread widening that we've seen on senior paper. Okay.
And then just to double check that I really understood the NII question correctly. So treasury NII will be down somewhat Q3 over the Q2 level, but and there's no offset in the divisions. And thereafter, it's many volumes driving NII.
That's correct. Everything else being equal, that should be the development, yes.
Okay. Thanks.
Thank you. Our next question comes from the line of Johan Ekblom, UBS. Please go ahead. Your line is now open.
Thank you. Just a few quick clarifications. Just to come back on Andreas' question on the dividend, should we take the 50% to mean 50 percent of reported profits so that we can still have that kind of variability in the absolute level of the dividend that we've seen in the past? Secondly, just in terms of mortgage pricing, I mean, you're saying you want to be a bit proactive to avoid the churn. And I think for those of us that have been around long enough, there was a policy FedBank tried before the financial crisis with quite negative effects on group NII.
So how should we think about the sort of balance between defending overall margins and market share? And then the final question is just do you have any comments to the story in the media yesterday on potential linkages to new AML cases?
Okay. Thank you, Johan. On your first question, the answer is definitely yes. On your second question, my point is, as you know how the market works, there are list prices that are announced in the papers. If you want to change those lift prices, you get an impact on the full back book quite quickly coming in.
So the alternative would be to be more precise with very profitable customers that you do not want to lose when you where you might end up with a limited negative impact compared because you need to give them a discount. But I would argue that, that is a much more customer friendly and much more income protected way of handling this year. That is my answer to your second question. The answer to your third question is, I think it is quite clear that Swedbank should in no way be possible to draw any connection to things like this that was in the media about Syria. That we need to be clear on.
If we have failed in the past, the internal investigations will find that.
Thank you.
Thank you. And our next question comes from the line of Sophie P. Fittsons, JPMorgan.
Here is Sophie from JPMorgan. So just to understand if you could give a little bit more flavor around the AML investigations, both the external ones and internal ones. Does it only include or what's in scope of these investigations? Is it only the Baltics? Or does it also include investigations businesses that you have exited like Russia and Ukraine?
Thank you, Sophie. I would like to guide you to an interim report where we are trying to be a bit more explicit when it comes to it's on Page number 10 in the interim report where we are trying to give you some flavor both of the scope of the internal investigations, which is similar to the scopes of the external investigations to a very large degree. As far as the markets where we have exited, that data is very, very difficult to get hold of. So what is in scope is Swedbank and the branches globally, including relevant wholly owned subsidiaries primarily in the Baltics.
Okay. And in terms of the investigations that you have done so far, can you comment if there has been any sanctions for it?
Thank you, Jan Sophie. No, I cannot comment specifically on that question.
Okay. And will you be publishing the report on the internal investigations?
What we
have said, Sofian, I think that you will you saw a first attempt, this quarterly report to give you some more flavor. We will continue to update you on these issues over the next coming quarters whenever we have a quarterly result.
Okay. And in terms of your core equity Tier 1 buffer, it's the range is quite large, 100 basis points to 300 basis points. I know there have been a few questions that if you go above 300, doesn't mean your dividend is increased. But AGM, it's so large because most other Nordic banks have 100 or 150 basis points buffer. Do you think the invest or the potential fines could be of the size of 100 to 300 basis points?
And is that why we should basically assume such a big buffer?
Hi, Sophie, it's Gregor here. Let me give you first part of an answer. And the buffer range is there because we have some uncertainty still on the regulatory front in terms of future capital requirements, and we want to be within comfort on that side. And the other part of your question, Anders will answer.
It is not taken into account in the range or the capital buffer range. What I said and what I strongly believe is that there are some underlying fundamentals that are driving the buffer down to the levels which are too low to be acceptable for any stakeholder, including shareholders. That is the prime reason. But then you need to sort of accept the fact that Swedbank are under specific signal, taking responsibility at this point. Okay.
And then signal, taking responsibility at this point.
Okay. And then just a final clarification on Johan's question. So the 50% dividend payout is on stated profit. So hypothetically speaking, if you would get a big fine end of the year from ECB or Swedish FSA or one of the crime authorities that are looking in this Red Bank and that's fine with equal your full year's profits, would that mean that the dividend that you pay for this year is 0?
It's a mathematical calculation, Sofia. So it's 50% on the annual profit. So if there is a deduction in the profits due to a potential fine, that will be hitting the bottom line basing the dividend policy on.
Great. Thank you very much.
Thank you. And our next question comes from the line of Riccardo Robere from Mediobanca. Please go ahead. Your line is now open.
Thanks for taking my question. Just a couple, if
I may. The first one is the capital that we see in the 1st semester, what kind of dividend accrual has been logged into the number that you've just disclosed? Is it 50%, 75%? This is the first question. And the second question, sorry to get back once again on the buffer.
We have been seeing it traveling around 150 basis over the next over the past, say, 2, 3 quarters. Should we expect this to move progressively over the next quarters to a number more similar to 300 basis points in view of all the uncertainty affecting Sueda.
Ricardo, On the dividend or sorry, on the CET1 capital ratio, yes, it's a year to date accruals. It's a 50 percent dividend policy that is in that ratio. If the policy had not been changed this quarter, the ratio would have been 15 0.7%. And then on your the second part of the question was about the buffer, right? And we will be building the capital buffer during the next quarters, year, year and a half as we are continuing to lend to our customers.
So that you should assume is the case. There is, however, an underlying volatility that you have seen in our ratio stemming from the interest rate movements in the market and FX. So that is, as you know, we have a buffer to be able to withstand that volatility as well. So these are the moving parts. We will be building capital, continue to lend to our customers and catering for the volatility in the ratio.
Okay. Okay. Great. Thanks a lot.
Thank you. And our next question comes from the line of Jacob Kruse from Autonomous.
Could I just start by just clarifying on the net interest income, the movements in treasury and in the margins that you gave on Slide 5.
Should I look at the overall if I start
to think about the underlying margin movement, can I combine the treasury movement of minus 2.07% sorry, plus 2.07% and the margin of minus 182% or should I take a subset of that treasury? So could you just give some indication of how much kind of underlying margins before transfer pricing moved in the quarter? And maybe a follow-up on margins. Your comments around volumes being the driver of NII from here on out. So should I read that to say you don't see further pricing pressure on your mortgage book if you look at the front to back book or if you look at the competitive dynamics?
And then just a question on AML. The EUR 15,700,000,000 transactions that you are reviewing, Could you give us a number for what that is in currency terms? And is the overweight of these transactions into looking at the high risk non resident portfolio? Or is it more just a broad base of group transactions sample
that you've taken? Thank you.
Hi, Jacob. Let me start with your questions on margins. It's not as easy to just net those numbers, the treasury and the margins. I tried to give you the components earlier on this call where I said that when we look at the net effect in NII after these two quarters because you should look at these two quarters together combined around SEK 250,000,000 of net positive impact. And that is on the back of margin expansion net, if you look at asset side and deposits.
So that is the number. If you look at this particular quarter in the margin figure, you have, as I explained, some margin pressure on mortgages. But then on the other hand, you have margins expanding in the Baltics and corporate margins being stable. And then when the business now is paying treasury, treasury gets a boost in their NII as they incurred the funding cost headwind in the Q1. So those are the moving parts.
It's not really just netting that number, but €250,000,000 is
the number that you should be looking at
on the back of the interest rate movements. And then lastly, before I hand over to Anders on the margins looking ahead, yes, I've described the situation as having stabilized. There is a 2 a couple, 2, 3 basis points of difference between the front and the back book when we were exiting the quarter on the shorter duration, so on the 3 month fixings. If you look at the longer fixings, however, we actually saw a margin expansion this quarter with 10 basis points and we see that there is a gap meaning that front book margins on the longer fixings are higher than the back book margins are. So it's depending on the fixings you're looking at, different situation.
Yes. And thank you. No, I don't think it brings any value to the table, Jacob. The thing by mentioning this is that with the forensic validation requirements, they are looking through everything to secure that they are not missing something. So that is why they are looking through that.
Of course, there is a risk based approach for it when we dig further into it. But it's not that you can single out a specific part of it. If you want to do a comprehensive investigation, you need to include everything into it. So giving you a investigation, you need to include everything into it. So giving you a number of that would be I don't think there is any value to anyone on that one.
Okay. Thank you.
Thank you. And our next question comes from the line of Marco DeMatteo from Goldman Please go ahead. Your line is now open.
Good morning and thank you for taking my question. I wanted to ask whether as a consequence of your updated dividend policy and capital target, you would expect a positive impact on your wholesale funding costs and on your rating and in particular on some of the negative rating watch and outlooks you currently have?
Hi there and thanks for your question. Of course, it's impossible to give you an answer on how spreads will move from here. But for sure, our bondholders are a very important stakeholder that we are sending a strong signal to when we are going to build our capital buffer further from here. When it comes to rating agencies, we have not been put on a negative watch due to a weak capital position. However, though, strengthening the financial position of the bank and the capital position specifically should be a positive or viewed as positive by the rating agencies.
But their credit watch or negative outlooks are more focusing on the ongoing investigations. So we will need to wait for those to be finalized by the regulators before they conclude their watches.
Thank you very much.
Thank you. And our next question comes from the line of Adrian Chuggy from RBC. Please go ahead. Your line is now open. Hi, there.
Thank you very much.
Most of your questions have been answered.
I just have a follow-up question on NII. Can you provide your sensitivity to the NII from a potential decline in the rates by the ECB by, say, 10 basis points? Thank you.
We in our fact book, we have the usual sensitivity in the back. That is, as you know, a group level. So it includes both Sweden and the Baltics. So I think you just need to look at the assumptions there and the parameters that are Baltic specific and look at the balances on the Baltic specifically and then assume a 10 basis what a 10 basis points move might do. So it's very difficult to split that out and isolate that 10 basis points move on particular ECB movements.
But the difference in the Baltics is that the pricing there is on the asset side and deposit side is more fixed in the sense that you don't have the impact of risk to set rates the same way as you have in Sweden. So liability side and the asset side should be moving in tandem more or less.
Okay. Thank you.
Thank you. And our next question comes from the line of Riccardo Robre from Mediobanca. Please go ahead. Your line is now open.
Yes. Thanks for taking my follow-up question. Just a qualitative one. Would you say that the AML cases and all the noise surrounding it is having an impact on the franchise and the customers of Sueda. And if that is not the case, if we have to assume a time frame, a time horizon during which clients may decide to stop the banking with Zoetzer, Could you say that maybe 6 or maximum 12 months, if what someone has to decide to leave Zweta, 6 or 12 months would be period beyond which, if nothing has happened, probably nothing will happen?
Thank you, Ricardo. Initially, when the media coverage was extreme, we saw some impact on our customers, primarily in Swedish Banking and the Private Banking segment, but also in some incidences in large corporates. That has gradually decreased, but you need to be humble on that question. But it has been limited. That is my answer to your question.
Okay. So basically, when the press coverage was extremely intense, you saw something. And then when the press coverage started calming down a little bit, the situation got back to some more normality. Do I get it kind of right?
Yes. But I also need to be clear on the fact that one of the highest priorities that I set out was to get in touch with the customers, listening to the customers. So the business areas were clearly focused on reaching out and trying to manage the situation. So it's a combination of the fact that media coverage has come down to and it has calmed down and our all our efforts to get in touch with the customers. I think that is a combination of things explaining it.
Thanks. Thanks a lot, Anders.
Thank you. And our next question comes from the line of Sophie Parsons from JPMorgan. Please go ahead. Your line is now open.
Yes. Hi. Here is Sofia again from JPMorgan. Sorry, I had one more follow-up question. So in the past, you have always reiterated that the Baltics are core to your business.
But hypothetically speaking, if we get a big fine or refined that actually there is function breaches and AML severe AML issues in the Baltics, would you consider exiting or scaling down significantly your Baltics going forward? What impact do you think all these investigations will have on your Baltic franchise growth and commitment to the regions?
Thank you, Sophie. I think we've been quite clear that we have defined 4 home markets and that stands. As far as impact on the franchise in the Baltics, it has been much less than you have seen primarily in Swedish Banking.
Okay. So you're fully committed 100% to the Baltics? Yes. And also, I mean, should we expect that investigations to lead that you have to exit certain client relationships?
We are constantly working with that. And as I have said before, if anything turns up in the internal investigation that we find that we need to act upon, then we will act upon it.
Okay. Thank you.
Thank you. And there are currently no more questions registered at this time. So I'll hand the call back to you, speakers, for your closing comments.
Thank you. And thank you again, everyone, for participating actively on the call. We'll see each other over the next couple of days. If not, we wish you a good summer. Thank you.
Bye
bye. And this now concludes our conference call. Thank you all for attending. You may now disconnect your lines.