Good morning, and welcome to Swedbank's 2022 full year and Q4 results presentation. My name is Annie Ho from Investor Relations, and also on the line is our CEO, CFO, and CRO, Jens Henriksson, Anders Karlsson, and Rolf Marquardt. As this is also the full year report, we will have a slightly longer presentation than usual before we open up for questions. With that, let me hand over to Jens straight away. Please go ahead.
Thank you, Annie, a warm welcome everybody to this presentation of Swedbank's result for 2022. It's a year marked by the pandemic, war, and inflation. In these turbulent times, we are a reliable and stable partner. We listen and use our expertise to support and help our customers with advice and financing, and contribute to financial stability for society at large. The Q4 was characterized by a weaker macroeconomic outlook. Increased prices and higher rates reduced demand as our home markets enters into recession. Inflation rates are forecasted to subdue and policy rates will peak during the first half of 2023. Swedbank is a low-risk bank in our four home markets, Sweden, Estonia, Latvia, and Lithuania, are characterized by strong public finances, well-managed firms, and resilient households.
In this situation with high energy prices, increased costs of living, and a continued global uncertainty, there is a need for stable, sustainable, and thus profitable banks. In these turbulent times, I am proud to present a strong result for the full year of 2022. We have for a long time positioned the bank to benefit from a normalized rate environment. As a result, net interest income was up SEK 6 billion. During the year, margins on mortgages are down while they're up on deposits. The turbulence in the markets and falling asset prices affected net commission income that was down 4%. Other income was up 6% mainly from insurance-related income. We control our costs. More than two years ago, in a low inflation environment, we announced a nominal cost cap.
Apart from the cost related to the closing of the Danish branch and the winter allowance to employees in the Baltics, we delivered spot on target. Weaker macroeconomic outlook drives impairments, and they were up SEK 1.3 billion compared to 2021, all according to IFRS 9. For individual assessments, recoveries were larger than the provisions. During 2022, we made other impairments for IT systems and goodwill of around SEK 1 billion, and the bank tax landed at the same size, SEK 1 billion. If the tax were to be removed, this would fully benefit our customers. In total, net profit was up 5% compared to 2021. Our cost to income ratio was down to 0.40, return on equity was 13.3%, and earnings per share is 19 Swedish crowns and 43 öre. A sustainable bank is a profitable bank.
The returns we generate to benefit our owners, our customers, our employees, and society at large. During the quarter, we have delivered in accordance with the plan we presented at our Investor Day with improved availability and based on our proven business model and pricing strategy. We report a profit of SEK 6.8 billion in the last quarter of 2022. Return on equity was 15.8%. Our cost to income ratio was 0.36. As you see, net interest income developed well. Deposits margin were up, while the mortgage margins continued to be under pressure, down a couple of basis points. Net commission and other income were down compared to the previous quarter, and cost increased in accordance with our plan. We have a strong and stable position.
Our credit quality is good, and our proven business model with a thorough and conservative credit origination process delivers. During the quarter, we had credit impairments of SEK 680 million connected to the weaker macroeconomic outlook. Provisions on individual engagements were only SEK 30 million. Since the beginning of the pandemic, we have held an expert portfolio adjustment above what the model shows. It increased somewhat during the quarter and is now SEK 1.7 billion. Our exposure to everything property related is in line with the bank's strategy and risk appetite. In line with what we communicated at our Investor Day, we have proactively added on to our risk exposure amount while waiting for the dialogue with the Swedish Financial Supervisory Authority to be finalized. This is prudent, and this is transparent.
Our liquidity and capital position is strong. We now have a buffer of 3.4 percentage points relative to the capital requirement. Geopolitical tensions are high and the debate on threats and cyberattacks continue, and we continue to invest in security. We are stable and well prepared. Our dividend policy is to distribute half of the profit. That is a dividend that contributes to society through savings banks, pension funds, insurance companies, retail and other investors, and foundations which in turn donate to local sports and cultural activities to help their communities grow. The Board of Directors proposes a dividend of SEK 9.75 per share. The remainder of the profit is used to grow our business in line with the strategy. In Swedbank, we have, for the last 3 years, focused on our fundamentals, and this has produced results.
I am proud of the plan we presented at the end of last year, Swedbank 15/25, where we will grow business and reach a sustainable return on equity of 15% by 2025. We set out four business priorities in Sweden, Estonia, Latvia, and Lithuania in line with our core business. First, we are leveraging our proven business model and pricing strategy. Secondly, we are growing our share of wallet for existing customers. Thirdly, we are growing the business in prioritized segments. Fourth, we're improving our availability and operational excellence. These are priorities that will grow our income three percentage points more than cost on average. We will not hold more capital than necessary and maintain our focus on credit quality, and that is how we reach our goal of 15/25. The Swedish housing market has stalled.
Falling home prices and lower turnover increased competition. We maintain our long-term pricing strategy. We are not the most expensive nor the cheapest, but we have the best full service offering. In Estonia, Latvia, and Lithuania, there is a structural underlying demand for mortgage loans from younger generations looking to buy their first home, and this is driving volume. Swedbank has the best full service offering, and our many savings options give customer an opportunity to choose what suits them best. We have raised interest rates on our savings account in both krone and EUR as we empower our customers to save for a better future with a good return. In Sweden, savings in fixed income funds increased while it decreased for equity funds during the quarter. We see steady interest and growth in fund savings in Estonia, Latvia, and Lithuania.
In Sweden, corporate lending decreased slightly compared to previous quarter. Activity in the capital market rose and Swedbank assisted customers to raise capital in the bond markets. A continued focus on our four home market is an important part of the Swedbank Fifteen Twenty-Five Plan, and we have thus decided to close our branch office in Denmark. Corporate customers will be served going forward through a strategic partnership with Danish Sydbank, and it's a similar to solution to the one we have with SR Bank in Norway. As we pointed out on our Investor Day, we want to grow among mid-sized corporates. In January, I recruited Bo Bengtsson to be the new head of LC&I, and he has a long experience working with these types of customers, and he will deliver on our corporate strategy and grow our market share in the segment.
Swedbank stands in the middle of the digital transformation in society. For us, it is always our customers that take priority as we develop the bank. Increased availability is also a key part of the Swedbank 15/25. In Latvia, as a first step, we have rolled out a cloud-based omni-channel communication platform that makes the next generation of customer meetings possible. New technology now integrates services via branches, telephone, the internet bank, and the app. The platform will be gradually launched in our other home market. We have a 200 year history of innovation, and during the quarter, we made it possible for customers to use facial recognition or biometrics for identification by mobile phone when customers order their BankID. We've also been awarded with two European prizes that recognizes customer value delivered through our virtual assistant.
Swedbank has for several years focused on reducing our own carbon footprint through less travel, less postal mail, and more energy-efficient offices. In the quarter, we took a new and important step as we adopted science-based targets for our credit portfolio. The targets cover five sectors, mortgages, commercial real estate, power generation, oil and gas, and steel. To contribute to a climate neutral world, our financed carbon emissions will be reduced, as you see on the slide, by between 29% and 59% by 2030. These sectors have been chosen based on their impact on the climate, the bank's portfolio exposure, and available data. Anders, I will turn over the microphone to you for you will do a deep dive into results.
What an introduction. Thank you, Jens. I'm pleased to dive into the financials in more detail. As I go through the results, I will mention a couple of one-offs, Overall it has been a really good quarter and full year. Let's start with lending and deposits. The total loan portfolio was stable. Swedish mortgage lending volumes were broadly unchanged. The trends in the housing market, which we saw already last quarter, continued. Both house prices and the number of transactions decreased while extra amortizations increased as a reaction to the economic outlook. Corporate lending decreased by SEK 4 billion, excluding FX of SEK 2 billion. Lending in LC&I decreased by SEK 2 billion despite a good amount of activity. During the start of the quarter, we increased lending by SEK 10 billion through higher RCF utilization and lending to the manufacturing sector.
This was offset by repayments to both RCFs and term loans across several sectors in December. Baltic Banking increased lending by SEK 2 billion each in both private and corporate segments. Customer deposits increased by SEK 14 billion excluding a positive FX impact of SEK 7 billion. Deposit volumes were lower in Swedish Banking, driven by a decrease of SEK 6 billion in private transaction deposits. We also saw a movement of around SEK 15 billion from on-demand savings accounts to term savings account. Baltic Banking contributed with an increase of SEK 25 billion excluding FX, mostly in on-demand deposits, and mainly due to seasonality of salary bonus payments and distribution of government funds. LC&I had stable volumes. Now looking at the revenue lines, starting off with net interest income, which increased by 31% quarter-on-quarter.
The strong development was driven by an expansion of net interest margin, particularly in Baltic Banking and Swedish Banking. There was a positive adjustment of the Swedish deposit guarantee fee that decreased by SEK 130 million. In terms of outlook, the view of our macro research team is that during the first half of 2023, both the Riksbank and ECB will raise rates further. Let me reiterate our belief that the higher policy rates go, the narrower the expected positive differential in pass-through on lending and deposits will become. These market dynamics were already apparent during the latter part of Q4. We will continue our pricing strategy and aim to strike an optimal balance between volumes and margins subject to changes in risk, market rates, market growth, and competition. Over to net commission income, where card commissions were seasonally lower.
There was also a negative effect of SEK 80 million from adjustments relating to Mastercard. Asset management was broadly stable. We saw a shift from equity to fixed income funds, which negatively impacted income. In terms of Swedish mutual fund flows, we saw net inflows totaling SEK 28 billion, mainly institutional, while retail flows were stable. Corporate finance and securities increased by SEK 20 million, thanks to the annual market maker fees. Turning to net gains and losses, which was once again strong. Client trading performed well, especially in FX within LC&I. The result in treasury was positively impacted by FX swaps and covered bond buybacks, which more than offset negative effects in hedge accounting and derivatives valuation. Valuations in the liquidity portfolio improved due to narrowing credit spreads. Other income decreased by SEK 90 million due to lower profit in net insurance and Entercard, while the savings banks continued to perform well.
Regarding expenses, we exercised strict cost discipline throughout 2022. Full year underlying expenses were in line with the cost cap of SEK 20.5 billion set two years ago. Total underlying expenses ended at SEK 20.65 billion, a deviation of 0.7%. The deviation can be explained by the SEK 60 million of winter allowance to colleagues in the Baltic countries and the one-off of SEK 80 million relating to the closure of our Danish branch in Q4. For the full year, AML investigation costs totaled SEK 443 million, and the FX effect was SEK 320 million, reminding you that the FX effect is positive for net profit.
As part of our Investor Day in December, we stated that we would use a cost income ratio of 0.4 to support our ambition to reach a sustainable 15% return on equity in 2025. This is therefore a long-term supporting KPI that looks through the annual cycle. Going forward, we will continue to exercise strict cost discipline. Moving to other impairments. As part of the annual impairment test, we have recognized impairments of SEK 681 million relating to PayEx regarding goodwill, internally developed software, and brand. As we mentioned at our Investor Day, the card acquiring business in the Nordics has been facing challenges to reach profitability in a market with increased competition and rapid technological development. While it continues to add value from a total customer offering point of view, we intend to implement measures to improve profitability going forward.
The Baltic part of the business is, in contrast, profitable, operating within a market where cash to card conversion is still occurring. In addition, the Baltic merchant payment operations is an integrated part of overall business banking, and so we will continue to develop the Baltic merchant payment business. Over to you, Rolf, to talk about asset quality and credit impairments.
Thank you, Anders. The macro development continued to deteriorate. The updated macro forecasts were downward adjusted for Sweden and the Baltic countries. Interest rates, energy costs, and inflation impacted households and are becoming challenging for some households with limited margins. The number of bankruptcies increased and retail sales slowed down. Swedbank's credit quality, on the other hand, was strong in the quarter and with only limited negative signs in credit risk indicators. This reflects that our customers generally are well-equipped to manage the changing conditions. Going forward, we expect to see more credit migrations due to the weakened macro situation. These tendency also are the background to the very low level of individual provisions and increased provisions for expected credit losses. In the Q4 , past due loans to corporate customers were stable both in Sweden and in the Baltic countries.
For private customers, past due loans were stable in the Baltic countries. In Sweden, they increased slightly but remained at a very low level. The amount of exposures in forbearance were unchanged. Now turning to the numbers. Credit impairments ended at SEK 679 million in the Q4 . The updated macro forecasts increased provisions by SEK 207 million. Credit migrations added SEK 343 million, and out of this, Swedish Banking accounted for SEK 198 million, which was mainly related to property management and the retail sector. In Baltic Banking, credit migrations added SEK 118 million, mainly explained by the manufacturing and transportation sectors. In Large Corporate Institutions, we had SEK 27 million of effect. Expert portfolio adjustments increased by SEK 34 million to SEK 1,738 million.
Reductions were made by SEK 115 million for oil and offshore exposures, while provisions increased by SEK 160 million for property management and SEK 70 million for retail. Individual assessments were limited and ended at SEK 32 million. When we summarize 2022, we can conclude that the provisions of SEK 1.5 billion are almost exclusively explained by the updated macro forecasts and credit migrations. Regarding individual assessments, we saw net releases. Expert portfolio adjustments were largely unchanged, releases have been made for oil and offshore exposures, while increases have been made primarily for property management, manufacturing, and agriculture. Turning to property management. The foundation here is our origination standards based on strong cash flows and collateral. It is not only about formal criteria.
A key element is to be close to customers, to have a continuous dialogue and to support good customers, but also to detect problems at an early stage and to be able to respond quickly, and this we do. We also take note of the fact that these companies have shored up liquidity to manage maturities, in most cases for the coming 18 months or longer, and that structural changes are ongoing in the sector, which reduce risks. Against this background, we assess that the bank is well-positioned also under more stressed conditions. With that, back to you, Anders.
Thank you, Rolf. Turning to risk exposure amount and capital. Last quarter, we implemented the new definition of default as part of IRB overhaul. This quarter, ECB required a recalibration of Baltic models due to the new definition, which added SEK 11 billion of risk exposure amount. At our Investor Day, we gave an estimate of our latest view of the CET1 buffer impact from the IRB overhaul exercise. While the discussions with the regulators are still ongoing, we have decided to be prudent and proactive by recognizing this estimate already now. The risk exposure amount increased by SEK 36 billion via an additional Article 3 add-on. The IRB models application process is expected to last into 2024. Basel IV Stage one effects are due in 0.8%, with the buffer above the minimum regulatory requirements at around 340 basis points.
Regarding expected future capital requirements, the countercyclical buffer in Sweden will be raised by a further 100 basis points in the Q2 this year. The capital target range of 100 to 300 basis points remains, and our capital position continues to be strong with the focus on our customers' future.
For session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands for asking a question. Anyone who has a question may press star and one at this time. Our first question comes from the line of Magnus Andersson with ABG. Please go ahead.
Yes, good morning. First on deposits, Anders, you mentioned there that the decline in Sweden was partly due to traumatization. Could you tell us a bit about the competitive situation on deposits in Sweden, if you're also losing anything to competition, or what share is amortization of that decline? Related also to deposits, just of your Baltic deposits, if you could tell us on what share you had zero interest rates in Q4, whether that has changed in Q1. The second one just on lending, I know that on your Swedish CRE book, you have the lowest quarterly growth rate now since Q3 2021, if there is any deliberate decision behind this or if it's just by coincidence. Thank you.
Well, should I start before I give the floor to you, Anders? When it comes to property management exposure, we have an exposure of SEK 293 billion, and that is the lowest among the three large Swedish banks. That exposure is in line with our strategy and also in line with our risk appetite. Looking forward, we have a cautious mindset, but we are ready to support our core customers further if it's in line with our strategy, our risk appetite, and leads to well-balanced growth. Anders. Thank you, Magnus. If we start with the deposit situation in Swedish Banking, I think what you see in this quarter is a combination of things. It's paying higher electricity bills and higher living costs. It's extra amortizations.
It's a certain migration from transaction and savings accounts to term savings accounts in Swedbank. We also see some outflows to niche players, that's for sure. It's not something where the volumes are concerning us, but we are following it closely. On the Baltic side. Out of SEK 380 billion of deposits, SEK 330 billion is transaction deposits. We see small signs of migration to some of the savings accounts where we're paying interest, but it's very limited.
Okay. just to clarify then, on the 330 you paid 0 interest rate in Q4?
Correct.
Yeah. You're still doing that as of now?
Correct.
Okay. Thank you very much.
The next question comes from the line of Mats Liljedahl with SEB. Please go ahead.
Yes, good morning, and thank you. A follow-up on Magnus' question here, you discussed the pass-through on rates. Could you share some details on how large was the impact on pass-through in Q4 in terms of, I mean, obviously NII was extremely strong, but how large part or did that impact the P&L in Q4, if you could shed some light on that? PayEx, how should we think about that? Obviously, you stated that it's an important part of the business, but could we expect further adjustments related to PayEx going forward? Yeah, that's it for me. Thanks.
Thank you, Mats. I will not go into the details on pass-through, but what you can see quite clearly is that the uptick in NII is coming on the back of NIM expansion, in particular on the deposit side. To give you some flavor, half of the delta is explained by the Baltic balance sheet, and the other half is explained by the Swedish balance sheet. To conclude, we have successfully applied our pricing strategy during the second half of 2022, which is evident. I've also been quite clear saying that it will become more difficult in the future to maintain that differential in pass-through on lending and deposits. On PayEx, we have written down everything that was above book value.
We will do impairment tests as a regular part of our quarterly report, but that, I think is an important information for you.
Okay, thank you.
The next question comes from the line of Andreas Håkansson with Danske Bank. Please go ahead.
Morning, everyone. Sorry, I'm gonna have to go back to the NII. I guess that's the most important driver at the moment. I mean, Anders, you're saying that it's become more difficult, which we understand, of course. Considering you have SEK 330 billion there in the Baltics that you pay nothing, and we expect ECB rates to move up 100 bits at least from here, you have the equity in Sweden that's placed on the short end. Those are two quite powerful drivers that should materialize this year.
If you look at the Swedish deposit base, if we assume that all future rate hikes will be passed on to clients, which isn't a given, and then you have competition, of course, do you see any reason why we shouldn't take the Q4 NII as a very good starting point and grow that in terms of NII for 2023?
Thank you, Andreas. I think it has been a shift in NII, so I would recommend you to start off with Q4 as a starting point. I agree with you that there are some automatic effects coming from equity. When it comes to the deposit side in Baltic Banking, we have no intention as we speak to change rates, but I expect competition to pick up there as well.
In the Baltics, could you tell us, I don't know, I don't really know, but in Sweden we know that there are niche players that are after deposits, of course. In the Baltics, given that both you and SEB and you're basically the banking system, you have enormous amount of excess deposits. Is it anyone or who would it be that would pay up for deposits? Aren't they so small that you can actually afford to lose a bit or what's the dynamics there?
It's mainly local players who do not have access to the capital markets funding that might be where it might be attractive. You need to find healthy growth in the lending space, and I think that has been fairly subdued compared to history. You're correct, and we are running with a loan-to-deposit ratio close to 60%. From that perspective, it's not so that we will act in any irrational way when it comes to potential volume outflows.
Thanks. On costs, Anders, you were making a specific point of the 40% cost income target being a long-term target over the cycle, however you... Does that mean that you could actually go a bit below or quite a bit below in a couple of years now when rates are as high as you are? Your long-term 15% ROE target, remind us, is that based on 2% interest rates?
It's based on the assumptions that I gave you on the Investor Day when it comes to the rate cycle. I don't have that exactly on the top of my head, Andreas, we Annie is helping me out. In the assumption is that the policy rate from the Riksbank will be 2.25% during this year and 2% next year, the ECB will have a slightly different one. I. Let me give you the details afterwards. When it comes to the cost-income ratio, you are correct. We have for 2 consecutive quarters been below 0.4% already in 2022. That's why I think it is important to have that as a long-term indication of how an efficient retail bank should perform from a cost to income perspective.
You can expect us to have some quarters to be below 40% and maybe some quarters to be above, but the long-term target is 40%.
Thank you. That's fine. That's all for me. Thank you.
The next question comes from the line of Rickard Strand with Nordea. Please go ahead. Mr. Strand, your line is open. You may ask your questions.
Oh, can you hear me? Can you hear me?
Yes.
Yes. Sorry for that. First, question on the costs. If you could, give your updated view on what you expect, in terms of, salary inflation in Sweden and the Baltics, for 2023. Also, in terms of IT spending, if you expect that to more or less grow in line with the general, cost growth for 2023, or if you expect, a pickup or decline from the, from the current, level.
Okay, thank you. What we said in the Investor Day was that we will have a headwind of around SEK 1 billion-SEK 1.2 billion this year coming primarily from salary increases. We are, as you know, not finalized the negotiations in Sweden and in the Baltics, it will come at a later stage. The second important factor is that we see that some of the external providers, the contracts will increase in price, which is primarily IT maintenance related. When it comes to investments into IT development, we will most likely be at the same level as we have been for a couple of years, and that is more about our capacity to deliver rather than our capacity to invest.
Thank you. Over to asset quality, just looked at the stage two provision for property management was up SEK 175 million Q and Q. Just want to hear if you could share some color on if this is primarily due to the as you talked about, the macro assumptions that changed or if it's something more specific for the sector?
Hi, Rickard. That is a combination. It's mostly explained by downgradings of some customers, and that's part of the normal credit risk assessment process. As a consequence, we have seen migrations to stage two. There is also an element of the combined effect of macro adjustments we have done this quarter and also in the past that sort of push, could also push customers over that edge to move into stage two, but that's a smaller part of it.
Okay. The majority is from the downgrading then?
Yes, that's correct.
Yes. Okay. Thank you.
The next question comes from line of Maria Semikhatova with Citibank. Please go ahead.
Yes, hello. Thank you for the presentation. A couple of questions. First of all, on the capital impact, and the IRB overhaul, if you could provide a little bit clarity. We've seen 1.2% hit this quarter, and I believe that previously you guided for 2.1% CET1 impact, and that was related both to IRB and Basel IV before the Pillar 2 offset. Just wanted to check how much we're gonna see of additional impact from here, if you can have a bit more clarity of IRB versus expected Basel IV impact in 2025.
Okay, thank you, Maria. I will start. Then I will hand over to Rolf. What we said in conjunction with the Investor Day is that our best estimate when it comes to future capital requirements from IRB overhaul and Basel IV combined was 130 basis points. What you see this quarter is only IRB overhaul related estimates from us. 130 versus 120. When it comes to impact from Basel IV, it's quite early to say. There will be a number of moving parts as we go along. You will see most likely changes in Pillar 2 add-ons. You will see some additional impact from Basel IV. I would say in light of the 120 that we took this quarter, it's a very limited impact.
maybe, Rolf, you can fill in.
About the Article 3 add on this quarter. This is should be understood and is our best assessment today of the full impact on REA overall on the risk exposure amount. That's what you have on the table.
Just to clarify this calibration in the Baltics, that was expected, right? That was part of your guidance overall impact.
Yes, that was part of the overall impact we communicated on Investor Day.
Understood. Then on the margin and strong impact in the Q4 , I appreciate your comments. Maybe more... Couple of things, if you could shed some light. First of all, if there is any lag effect on the, on the loan portfolio of already, announced pricing but that hasn't filtered through yet. Then, you mentioned there is a shift from savings to term deposits in Sweden. Could you disclose what, proportion is, on term deposits among households in Sweden?
There is always. As you know, if we start with Baltic Banking, the liability side is immediately repriced if there are any changes to that. On the asset side, most of the loans are linked to 6-month STIBOR, which means that they will gradually roll in. Then you have the place, the liquidity excess, which is placed with ECB, which is obviously repricing more faster. On the Swedish side, there is always an element of rolling in when we change primarily mortgage prices. We have on the 3-month side, it's rolling in with one-third approximately every month. Then you have the fixed part of the book, which is rolling in gradually over the years to come.
When it comes to your second question, it was SEK 15 billion in the quarter. I think that the term deposit volumes in Sweden today in Swedish Banking is around SEK 45 billion-SEK 50 billion out of a quite substantial deposit base, which is, I don't know the numbers on the top of my head, but it's, I would say, SEK 400 billion-SEK 500 billion. It's still limited. But you clearly see that people are... When they have excess liquidity, they place it on the term. More specifically, the 3 months has been the most popular one.
Okay, thank you very much.
The next question comes from the line of Sofie Peterzens with J.P. Morgan. Please go ahead.
Yeah, hi. Here is Sophie from J.P. Morgan. Just going back to the kind of NII, you guide that the rate sensitivities are lower a year going forward, most likely, just given the pass-through will narrow. If I look at your fact, the rate sensitivity guidance is broadly unchanged. I was just wondering, like, how should I think about NII growth for 2023? If I annualize the Q4 level, I get to over 30% NII growth in 2023. How much more do you think you can kind of reprice upwards your mortgage rate? It sounds like there is a little bit more deposit pressure. How should one think about the NII kind of progression throughout 2023?
Has NII peaked, or is it fair to assume that there is still more NII growth to come? That would be my first question.
Thank you, Sofie. Yes, the sensitivity that we provide you with the underlying assumptions are broadly unchanged quarter-over-quarter. What I also said is that the higher the policy rates go, the more difficult it will be to widen the differential between lending and deposits when it comes to pass-through. We have been very transparent to you, both in the Investor Day and in the fact book. I will not guide you further on that one. You can easily see on our website what we are paying on our deposit accounts. You can see the average rates on mortgages and the list prices on mortgages. Now it's really for you, Sofie, to s- with that information, make your best estimate.
Do you think it's fair to assume that, when it comes to net interest income, the best is behind us or kind of should we expect net interest income to grow further?
Sofie, I don't think you should expect a delta of 31% going forward. What I said when Andreas was asking the question is that the a good starting point for you would be the Q4 level.
Okay. Okay. Let's, I'll work with that. My second question would be around kind of the potential kind of Euro spine. It just seems that you're almost low-balling your capital position in the Q4 . You did the goodwill write down, you did the software write down, you have much more macro or credit migration adjustments compared to your peers that have resorted so far. You did a quite big IRB overhaul that one of your peers said will have a limited impact. You also took the bold takes that your peer didn't take anything.
kind of, should we take this as a sign that the AML issues starts to come to an end, and potentially for the U.S. regulator, you want to kind of have a lever capital position? These items are totally unrelated?
Well, I think you answered it lately. It is totally unrelated. We do our best judgment the whole time of where we are in the business cycle. We do the provisions that the model tell us, and we've done an extra because we are careful and we follow the rules. That's important. Moving over to the different subject, namely that the U.S. authorities, and you know, I've been telling you that when I was a new CEO, I called around and flew around to meet the European colleagues that have been in a similar situation. They told me that the process like this usually take 3 to 5 years. We have talked to the U.S. authorities now about our historical shortcomings for a little bit more than 3 years. That means that that side of the window is open.
Can I promise that it will be closed within two years? No, of course not. It's in the hands of the U.S. authorities. We fully cooperate, and we answer all incoming questions and the investigations are in different phases. As we always communicate, we cannot estimate whether we will get any fine. If we do get the fine, we cannot estimate any size of that potential fine.
Okay. That's very clear. Thank you.
The next question comes from the line of Nicolas McBeath with DNB. Please go ahead.
Thanks. First a question on loan growth outlook, please? Loan growth in Sweden is coming down quite sharply, in particular in the household segment. Your assumption of 3%-4% annual growth for households that you communicated in the CMD, is that still a valid assumption in your view? Related to that, if loan growth stays low, like it has in recent months, at least, do you target to grow your market share in that type of scenarios? You still kind of achieve some loan growth, or would you be content with keeping your loan book flat if that's the market development?
Thank you, Nicolas. I think that it's very difficult for me to give you a forecast on the development of loans. As you correctly said, we had an assumption on the Investor Day. That was built upon the assumption that the economy's inflation will come down. You will see that the price drops in houses in Sweden will level out, and there will be a more, sort of, more clarity, and then we will see people coming back. I still think it is valid, but I don't have a crystal ball on that one. When it comes to fighting for market share, in particular in the Swedish mortgage space, with very low transaction volumes, we are prioritizing price discipline over gaining market share.
Having said that, we are also actively working with our prioritized customers to ensure that they stay with the bank.
Yeah, thanks. That's clear. A question, please, on, yeah, related to your profitability targets and your, and, yeah, I guess also coming back to the cost income target. I think the performance you have now in Q4, your, I think, adjusting for the one-off your ROE was around 17% and, yeah, cost income fairly below 40%. That gives you kind of a luxury problem how you can drive improvements from here. Could you say something about how you think that your business plan that you communicated at Investor Day is going to drive improved financial performance over the next three years to 2020 to 2025? Is this, yeah, basically as good as it gets from a financial performance point of view? How do you think about that?
Well, I think the key point is let's not focus on one quarter. We want to reach a sustainable, 15% return on equity. The way we do that, we were very clear in the Investor Day when we talked about how we will grow our income by working with, our customers to increase the share of wallet use with prioritized customers, to have a full, the best full service offering, and then keep control of cost, making sure that we have low, credit losses and not keep more capital necessary. That is something that I said, at the end of the investor call. I said that we will get back roughly a year from we had it in December, roughly a year later, and we will report on that.
Now we're executing on that strategy, and that is what you saw during the quarter.
Okay, thank you.
The next question comes from the line of Riccardo Rovere with Mediobanca. Please go ahead.
Thanks. Thanks for taking my questions. One clarification. Couple of clarifications. Do I understand correctly that in the Baltics, on the transaction account, which I, if I understand it correctly, is about SEK 330 billion, it paid nothing in a quarter? Just want to be sure I understood it correctly. If this is the case, do you still pay nothing on transaction accounts or in Sweden too, if that is the case? That's just clarification. The question I have is, when I look at your fact book, in, when you provide the breakdown of NII, I note there is around SEK 600 million contribution from derivatives in the liability side in a quarter. Was wondering whether that is somehow a one-off or sustainable or what's driving that.
The other clarification I wanted to have, if I may, is the Article 3, the SEK 36 billion, I understand correctly when I say that this should absorb the impact of the IRB models overall currently under the scrutiny of the Swedish FSA. Do I get it right? Thanks.
Thank you, Riccardo. When it comes to your first question, we are paying 0 on transaction accounts in the Baltics and in Sweden currently. On your second question, I don't have that on the top of my head, Riccardo, so I need to get back on that specific one. Maybe Annie has something, otherwise, I will hand over to Rolf to answer your IRB overhaul question.
Yes, it's correct, as you state. It's our best assumption today of the full impact of that approval process.
Thanks. Very, very clear. Thank you.
Sorry, just to... On the Risk Exposure Amount, that is.
Operator, could we do one more question? We were a bit lengthy, especially me. Let's do one more, and then we'll wrap this thing up.
Sure. The next and last question comes from the line of Omar Keenan with Credit Suisse. Please go ahead.
Good morning, everybody. Congratulations on a good set of numbers. I just had a couple of questions also on net interest income trends. I thought it was quite interesting that Swedbank's NII trends are up 31% Q on Q, significantly outperformed one of your peers that reported last week, which was up 9% Q on Q. I wonder whether you can comment on whether you think your particular business and income and customer cohorts mix was benefiting you more than peers in the current environment. I wonder whether that is the case in terms of households versus corporates, but also specifically how you think your customer cohort exposures in households might allow you to extract more deposit margin than peers.
On a related question, your peer also commented last week that the idea that interest rates won't go up on transaction accounts can't be taken for granted anymore. Would you agree with that? Or do you think that given your particular business mix, that dynamic could stay favorable for some time? Thank you.
Oops. Thank you, Omar. If you have probably to remind me if I forget some of your questions, but if we start with your first one. If you look at our balance sheet, and that was a point that I was trying to make during the Investor Day, we have very little relatively when it comes to deposit. SEK 300 billion out of SEK 1,300 billion is market rate connected, which is typically with larger corporations. The other are transaction deposits or savings deposits. If you look at the Baltic Banking balance sheet, it is even more dynamic than the Swedish Banking, since you have an automatic repricing on the asset side while we are still setting the price on the liability side.
I think that if you look at the balance sheet composition of Swedbank and compare that to the competitor that you are relating to, you will find the answer to your question. On the, on the second one, we have said that we have no plans at this point to pay on transaction accounts. What I also said is that when we're looking forward, it becomes increasingly difficult for us to keep up the differential between in pass through between lending and deposits. One should never say never, but at this point, we do not have a plan to pay up on that. Did you have a third question? I don't remember that one. You need to repeat it.
No, no. Those were great answers. Thank you very much. I think the last element was, you know, even after accounting for mix differences in terms of the corporate deposit pricing, for example, that you highlighted, I think even if we look at the household saving rates in Sweden, it looks like Swedbank is extracting even more deposit margin on a like for like product mix versus SEB. I was wondering whether, you know, that, you know, what were the drivers of that? Do you think, you know, your particular customer cohorts within the retail bank, you know, have different behaviors, for example, than your peers?
That was a difficult one. I wouldn't go that far. There might be differences in our customer base. I think again that when you look at the delta in Q4, half of the delta is related to the Baltic balance sheet, where we have the largest balance sheet of all banks in that region. Thank you, Anders, and thank you, everybody, for listening to this call. Thank you all for being shareholders in Swedbank. We are extremely proud of that. As you can see on the slide, I think we've really underlined that a sustainable bank is a profitable bank. In 2023, we will take Swedbank forward in the strategic direction towards Swedbank 15/25.
Looking forward to speaking with you in conjunction with the quarterly reports and other times. Thank you all. Bye-bye.