Ladies and gentlemen, welcome to the Swedbank Full Year Report 2014. Today, I'm pleased to present Mr. Michael Wolf, President and CEO. For the first part of this call, participants will be in listen-only mode, and afterwards, a question- and- answer session. Mr. Michael Wolf, please begin.
Good morning, and thanks for attending this call. Despite the uncertainty in the global macro, our four home market stands out to, like, countries that are performing extremely well in this, in this environment. Very much thanks to strong domestic consumption, and in Sweden, a strong property sector on the back of a quite significant urbanization trend. During the quarter, the picture of our competitiveness continues to confirm itself. We see a high client activity in the Swedish business, both in the private and the corporate side. We're benefiting from the economy, which is growing in the property sector, in, in the areas where we have strong competence, like the savings area, payments, and cards area. Our market share on mortgages are back on back book market share levels, i.e., 25%-26%.
We are taking market share on corporate lending, mainly in the property sector, and in the savings area, we see decent inflow of deposits, and in the asset management area, our market share, including sales of external funds, reached 22%, so we're very pleased with that. If I look at our competitiveness, I think it's built on three cornerstones, good cost control, low risk management, giving us a strong funding position, and thirdly, our investments into the digital area are, are things that are, are also benefiting our position. If we look at the digital area, we see an extremely strong development, both in Sweden and the Baltics. If we look at Sweden, we have today 3.7 million internet bank clients, 2 million mobile bank clients.
In Sweden, there are 2 million users of Swish, whereof 40% of those clients are Swedbank or Sparbanken’s clients. We have also invested in the corporate area on digital payments like Babs Micro and Swish for corporates, which enables smaller businesses to go from cash-based sort of transactions to digital transactions. Of the 10,000 corporate clients that have connected to Swish, 8,800 are Swedbank or Sparbanken’s customers. As a consequence of the digitalization in the payments area, we see cash transactions in the branch dropping with 18% during the year, and the ATMs, there we see a drop of 8%. On top of that, customer satisfaction are quite significantly higher in the digital area compared to the sort of analog world. 9% of our digital clients are pleased or very pleased with our services.
Another positive benefit of this is that we free up time in our branch offices for more proactive client meetings, and the number of advisory meetings during 2014 increased with 4%. If we look at the business area, large corporates and institutions, also there, we continue to benefit from a strong position in corporate property sector. We led the IPO of Entra in Norway, and we're also leaders of two preference shares issues by Hemfosa and Akelius during the quarter. Turning to capitalization, we have strong buffers for more difficult times, which are confirmed by our own and external stress tests.
Our buffer is 190 basis points versus the minimum requirements from the SFSA, and we need that due to continuous uncertainty on the regulatory arena, i.e., we judge our capital position to be strong, but no excess capital due to the uncertainty on the capital side. If you look at the environment and changes in the environment, which we have had extra focus on during 2014, then I would like to mention two areas. Of course, Russia and Ukraine's implicit effects on the Baltic economies, then the oil price fall and its effects on shipping and offshore. But as I can conclude in the quarter, there is no effect on the asset quality side due to these uncertainties so far.
When it comes to the property sector in Sweden, the need for new housing starts in the urban areas is more and more acute. To fix that problem, Sweden needs to make major investments in infrastructure to create more land plots that are close to these urban centers. The price development needs to come down, and the new capital rules that aim to make mortgages more expensive, everything else equal, is not enough as a measure. Finally, I'm pleased to announce that the board will propose a dividend of SEK 11.35 at the AGM. With that, I hand over to Göran.
Thank you, Mikael. First of all, I would like to say that I'm very pleased with the result in this quarter. I think it confirms in numbers, really, very much the hard work that we are doing in becoming more relevant with clients. We are seeing better volumes. We have also worked very hard, internally with the repricing the larger capital base that the bank has continued to grow as a result of regulation, and that has also been done nicely, I think, in the bank. It's, it's a bit of contradiction, hiking prices for clients and at the same time being relevant and wanting them to choose you, but I think we are managing them, that balancing act very well.
On top of that, I think we've been setting out an ambitious plan on the cost side. I think this quarter proves, and also we feel good about that going forward, the ability to deliver on that cost plan. So the underlying result is actually very much confirming the road that we are trying to walk. Moving on to the various business areas and giving you the highlight of the quarter and a little bit feeling for what is in store in the future. Starting with the Swedish retail operation, the Swedish banking division, we have seen pressure on mortgage margins or on deposit margins, of course, as a result of the low interest rate environment. It has been mitigated by continued repricing of mortgage loans. Margins in the quarter has been fairly static.
As we are going in the quarter with, we're ending the quarter with basically the same margins that we started the quarter, but we still have positive effects on NII in the quarter. We also continue to benefit from the increasing volumes in the business area on NII, and we also generate volumes in the quarters. We have almost SEK 20 billion of credit growth in primarily the mortgage market. Commission income continue to develop very nicely according to growth path both in terms of asset management and also relating to card transactions and payment commission fees. So basically, very happy with that.
Looking at the future, I think we will continue to work with efficiency here, since the retail is, like Mickey was alluding to, change by the digitalization, and we will also strive for a higher degree of optimization in the back end as a result of new e-solutions. It's a long-term program aimed really to improve efficiency over time. We will also continue to strive for higher repricing of the capital. The capital cost is still not fully compensated for, we believe, in this business area. And that can also be reflected by the falling return on equity that you can see in the quarter, as a result of the capital allocation now being more implemented, when we have allocated out capital from treasury department.
Moving on to Baltic banking, I think stability is the word, which is very nice in a changing political and economic environment. I think we are very pleased to see that all our stress tests around the Baltics hasn't shown up in any asset deterioration. Anders will come into that further, but also the economic activity is holding up very well, which is good to see. Lithuania has joined the EMU as of year-end, and we did see a spike in deposits gathering in Lithuania as a result of trust in the banking system increased. Other than that, I would say that the business area continued to be well-placed for a better economic environment around itself and be well-placed for growing at that point in time.
Lastly, coming to Large Corporates and Institutions. Here, market volatility has been higher in the quarter. We have also seen a widening of credit spreads and more effects from low interest rate environment. Volume has been good. We are up SEK 14 billion in volumes in the quarter, primarily relating to real estate transactions and high activity in a very strong real estate market. It's good to see that we can capitalize on that. The trading result as such, relating to fixed income trading and FX, has been somewhat slower in the quarter. It's been a difficult quarter from that perspective, and third quarter was also a rather slow quarter, while the first half of this year was significantly stronger. But as we all know, there are seasonal and volatility in that area.
And then, lastly, I just want to point to the fact that the falling oil prices are changing the environment around us. Of course, it will increase the risk in the portfolio. Anders will come more into that, but it will also mean a changed client needs. Clients have a higher, higher degree of restoring, repairing balance sheets in their corporate sector and take on less leverage, and restructure the part of the balance sheet. So it will be more equity-related transactions going forward, and I think we are in a very good position in our Norwegian business to capitalize on that from a business perspective. And then Anders will come further into the risk part. If I summarize this for the group, we have strong customer activity.
We have SEK 38 billion of credit growth, seven billion of that is from exchange translation, but it's summarizing actually a year where the loan book has grown with 110 billion, which is 9%, 8% excluding Öresund,. And this will be, of course, a good tailwind for us in NII going into the next year. Margin development for the group, as you know, has been mixed, with the deposits margin and the low interest rate environment making it more difficult on that side, while the repricing, as I mentioned, on mortgages primarily, but also on corporate lending are continuing, and we think should continue. In treasury, we've seen a significant weaker result in this quarter compared to the third quarter.
It's important to remember then that the third quarter was very strong in NGL, and that we have a volatility in that line. The reason for this volatility is, one of the reasons is that we've done significantly more buybacks, in this quarter that deteriorates, NGL. We have also witnessed, widening credit spreads that affects our liquidity portfolio, and we get valuation effects, in the treasury area. Cost control on the group, very good. As I said early on, we are basically, if we, exclude the acquisition of Öresund,, we are on the same cost levels as we were, in 2013. We are very pleased with that. We have had increased effects and a couple of, cost drivers that were unexpectedly, and we've been able to mitigate that.
I'm particularly pleased to see that we didn't have any year-end effect in the quarterly numbers, and I think we are on plan to deliver on our cost targets going forward. Lastly, just explaining for you a little bit more in detail, the capital, I think, the capital has been affected by REA increasing the volumes, and that has been partly mitigated by a higher degree of collateralization in our lending volumes that reduces the LGD effect. And also, we have a model change in the Baltics, where we have moved to internal model that has released some REA as well, that mitigates the REA increase that comes from the volumes.
We have also taken a dividend from the insurance companies by the end of the year in order to be able to calculate that in the capital base. And we have also seen a positive effect on IAS 19, as inflation expectation has dramatically been reduced in the fourth quarter, that has affected that calculation quite significantly. All it concluding that we are at 21.2, a very strong and healthy position to be in. As Mikael said, we don't see us having any excess capital at this point in time. The growth is actually a little bit stronger than we had previously guided for. We have also still a lot of regulatory risks outstanding that we would like to get further clarification on. With that, I think I hand over to Anders.
Okay. Thank you very much, Göran. As already mentioned, the continued change in the economic and political environment imposes both business opportunities, but also heightened risks, which I will come back to. However, let me start with summarizing the quarter. Cumulative loan losses net in 2014 ended up with SEK 419 million, which is equivalent to 3 basis points loss level. In Q4, we experienced credit losses of SEK 254 million, mainly stemming from a number of exposures in Swedish banking and one single exposure in LC&I. Baltic banking continued to show reversals, but as previously stated, at a lower pace. There are no underlying signs of deterioration in the portfolio.
Impaired loans continued to decrease in the quarter and now amounts to SEK 6.2 billion, which is forty-seven basis points of loans to general public. Further, sales have continued in Ektornet, although at a slower pace, and the remaining volumes amount to SEK 769 million, mainly in Latvia, and only SEK 50 million remains in Ukraine. In Russia, we see a deterioration in credit quality, and we have taken impairments of SEK 289 million in the quarter. The good news are that we only have SEK 500 million left in that country. Then turning to some of the focus areas, and let me start off with the shipping offshore, and the falling oil prices. The portfolio is largely denominated in US dollar.
It has been stable around $3.5 billion-$4 billion since 2010, so the increase you see in Q4 is related to FX effects. The fall in oil prices impacts this broad sector a bit differently. 40% of the portfolio is impacted positively or neutrally. 60%, which is mainly oil and offshore business, is negatively impacted. However, when we look at the portfolio, we have lent money to companies with strong financials. We have focused on good collateral and conservative loan- to- values, and there are strong owners that we know well, and most of them are listed companies, i.e., they have access to the capital markets. We have run a number of stress tests on the portfolio.
Two of them has been under the assumption of an oil price of $60 and $40, respectively, over a longer period of time, i.e., it's not a V-shaped assumption, it's a flat curve for a fairly long time. The conclusion from those stress tests are that the impact in the short term is limited in terms of defaults and loan losses. But if it continues, further down the road, we will obviously see problems in the sector, and with that comes, increased defaults and loan losses, for the banks being in that market. We are working closely with the customers. We see that the markets believe in a gradual increase in oil prices, but we work under the assumptions that it will stay on a low level for a fairly long time.
Then moving to another area, which is, Baltic banking and the impact from Russia, Ukraine, and the, weaker Russian economy. As both Göran and Michael said, we have seen so far limited impact on our portfolio. If we dig a bit down into the portfolio, we can see that, our estimate is that around SEK 2.5 billion of exposure to customers that have a direct relationship to, to Russia. We have followed those customers closely since this started early this year, and we have been working actively with them, and they have been working actively. And what we can see is, a completely different leverage in the Baltic corporate system compared to the last Russian export, crisis in 2008 and 2009.
However, if this situation continues or worsens, there will be negative impacts on the Baltic corporates. Thank you.
With that, we open up for Q&As.
Ladies and gentlemen, if you'd like to ask a question, please press zero-one on your telephone keypad. That's zero-one. Our first question comes from Mr. Peter Wallin from Handelsbanken. Please go ahead.
Thank you, and, good morning. I would like to start off with a question relating to, your very strong capital position, but also the fact that you're, you're reiterating that you're, you're not seeing yourself as having excess capital today. Should we interpret that as, as yourself thinking that having a buffer of around 200 basis points or 90 basis points over the regulatory current, requirements is, is a reasonable buffer also ahead?
I mean, before we know whatever will happen on corporate risk weights, this is broadly what I think is good to have, mainly due to capital uncertainty. As you know, from stress tests and other things, our risk in the balance sheet could carry much less capital, but we have a regulatory environment that we need also to manage. So, with that in mind, I think we'll have a much more fruitful discussion around the issue of capital at the end of the year when we have more data on the table.
We have also seen a pretty nice credit demand that we have benefited from during the year, and there will be some credit demand also next year, which is hard to gauge exactly what level it will be, but we feel that we want to participate. So I think we have a prudency here that is, is, is good in light of the uncertainty.
If, Göran, if I just to add there, if we, we've seen, two peers, one with no buffer and another one with buffer, and, I think by the end of the day, you need a buffer, even when you have regulatory clarity. So where, where it's more likely to be sort of, with, with the buffer, of at least, at least sort of size, the size that SEB has talked about, rather than being buffer free.
Okay, great. Thank you. And then continuing on that topic, also in terms of if we assume that we will have a much greater capital requirement clarity at the end of this year. If you at that point in time would conclude that you actually do have some excess capital, I mean, how, what would your expected timeframe be to start, like, adjusting that capital base to like the target level?
That is a question we would love to take when that situation occurs.
Okay. Thank you for that. And then just a final question on your very strong volume performance, especially on corporate lending. So what is the competitive environment there? And could, I mean, in terms of margin outlook, considering that the underlying market is not growing that strongly and you're clearly gaining share, is that by being price aggressive or are any other factors contributing to your success?
I think we have become competitive, thanks to low funding costs, are a bit advanced. Of course, coming into next year, we will try to increase margins, and also reflect that we are in a low interest rate environment, and we see some quantitative easing coming from ECB. Look at our origination standards to adjust if necessary. So, I mean, we have a positive dilemma here, and I do hope that we can increase margins.
Okay, great. Thanks very much.
Our next question comes from Mr. Peter Kessiakoff from Carnegie. Please go ahead.
Yes, thank you. Hi, Peter Kessiakoff from Carnegie. Just on the retail division and on mortgage margins. First of all, as you mentioned, return on equity within retail, it came down to roughly 20% after having been above 25%. And you also mentioned that you will most likely focus somewhat more on the margins and on the retail side to reprice further. Do you have any more clarity on how much you would like to reprice? And is the ambition to make the retail division go back to an ROE of 25% or above? That's my first question.
I mean, as you all know, the mortgage market is extremely competitive, and I think it will continue to be. But bearing in mind the low interest rate environment and the pressure on deposits, there might hopefully be a push towards higher margins. So we'll see how the competitive landscape pans out, but it would, in my book, be quite natural that we saw some further margin expansion next year.
And on that, I mean, looking in Q4, you've had a market share of new lending that has been in line or slightly above your share of the back book. Does this mean that you have felt that you've been very competitive on pricing, and that there is room for you to focus more on the margins and perhaps focus somewhat less on your market share on new lending? So assume it goes down to 20%, and you instead increase margins. Would that be something that you would see as positive?
I mean, we're, of course, monitoring our market position, but I think the market is where it is, and there is no big takers of new volumes to gain market share out there, and then we should trade around our back book market share. And if the market changes, we have to reflect on that situation, but we don't want to be front running and price for it at any cost. I mean, margins are too important in this environment to protect.
Okay. And then just last question on the mortgage side. You have this transparency push that the FSA is coming with and then are implementing in March, where you're supposed to show the average mortgage rate that you've offered customers or given customers the last month. Do you have any comments on how you will tackle this, or what kind of effect you would think this will have on margins and the mortgage market?
I mean, we actually favor transparency, and I do believe that pricing across the risk curve will be more customary going forward than in the past. So I think the long-term benefit of transparency is that we get a better diversification on the risk curve on the mortgage business.
Okay, but then will this change the way that you act in any way? Will you increase transparency further, or?
No, we will follow the sort of regulation around transparency. And hopefully, as I said, you will see my much more diversified pricing on mortgages in the Swedish market as a consequence.
Okay. Then, moving over to commission income, just looking at asset management custody fees in Q4, it was down quarter-over-quarter. Volumes were up, but we know that you'd lowered the fund fees during the middle of Q4, but also during the last days of December. Is the lowered fund fees the main reason for why asset management and custody fees were down quarter-over-quarter? And what do you think? What should we expect into Q1, given the lowered fund fees that came during the end of December?
Göran here. I think that is correct, that the lowering of the fees are the main reason. The drivers of the fund fees is partly the zero rate environment, especially on the sort of money market funds, et cetera. But also there is a, of course, in a zero return environment for interest rates, there is pressure on margins in general in asset management industry. I think that will continue to prevail, and that is part of our planning as well. So I don't think we, by any reason, are surprised by this evolution.
... Do you have any comments on what, what the net effect is into Q1 or?
No, we don't give guidance on that margin or development. It will be impossible, more how we plan and how we see the evolution going forward.
Okay. I hear you. And then I guess just, the last question is just going over to the treasury. The, the results there, you had a bigger negative, NGL, at least compared to what I expected. And you continued to talk about levels in treasury of total income being around, in 2015, being around the, the 2013 level. Where should we expect the main negative, there? Is it on, on the NGL or is it, on, on the NII?
No, I think we've talked about weak treasury results for a long period of time, and then that has been delayed due to lowering of interest rates. I think it becomes more the risk of weaker treasury result becomes more higher, of course, in a zero rate environment. The predominant effect of that will appear in the NGL item.
Okay. And I guess just one, one last question on some clarification. On, on, in LC&I, you mentioned that, lower funding costs and IRB approval had made you very much, well, made you more competitive, and that you would perhaps focus more on margins, going forward. Was, was that margins on the real estate sector, or was it, the, the corporate side in, in a broader basis?
I think it's really one effect is repricing due to capital use, and the other one is relating to demand, and that you could say the demand is very strong in real estate. So, I think there's a good case, as Mikael was talking about, balancing your market share against your price. And then you could say in the oil sector, it will be higher margins due to higher risk. So there are a little bit of different drivers in different segments.
Okay, thank you very much.
Our next question comes from Mr. Magnus Andersson from ABG. Please go ahead.
Yes, good morning. A couple of questions. First of all, a follow-up on the treasury related income question that we've talked about—been talking about several times before. Just if interest rates will stay at the current levels, what do you think the impact would be in 2016 on 2015? I guess positions would continue to roll off so that you will get the negative impact year- on- year there as well.
16 over 15 will be more difficult to predict because you have so many other moving parts. It's not just a roll-off of sort of interest rate risk. But I can say that in 15 over 14, we expect the impact to be up to SEK 1 billion, depending on what happens in the market. And then, if you assume that nothing else were to occur, and you go into 16, there will be a further negative impact, but to a lesser, much lesser extent. But from a planning perspective, it becomes almost irrelevant because there are so many things that will happen between now and then that will impact both your behavior and how you steer and so forth.
Okay, thank you. And secondly, just could you quantify the impact of the buybacks of covered bonds, the SEK 16 billion you made in the quarter, and also the valuation effect from the widening of the credit spreads?
We never do that, Magnus, because in the end, the more detailed sort of quantification we do, we try to guide more on a broader spectrum for you, because there are so many moving parts, so it becomes impossible for us. We don't do that.
Yeah, okay. And then on the repricing, you clearly talking about that you would like to see higher margins in the retail segment. Just, what are the areas you find to be most mispriced, considering the capital requirements today?
I think the mortgage side is definitely the most mispriced, big part of the portfolios from a RAROC or risk-adjusted return point of view. So that's clearly the area that we are focusing on. And we will strive for higher margins there, and that should be positive for NII going into 2015. As well as a very strong volume development and a very competitive situation with our clients, I think will drive NII in 2015 as well.
And then finally, on this IAS 19 impact, you had a net positive of SEK 1.1 billion. An important thing throughout the year has been this adjustment of inflation assumption. Is your inflation assumption in line with the actual rate inflation within the group as it is right now?
I think we have done two things. We have moderated our salary assumptions in the model because we have a run-off portfolio since we're going to define the contribution rather than define benefits, and that will lead to lower salary expectations over time. That's one thing. The other thing is that we earlier on changed to using market instruments for gauging the inflation expectations. So you could say that when you review our IAS 19 debt going forward, it becomes more important where the real interest rates are going rather than where nominal interest rates are going, which we felt was more correct in an environment that's going from sort of high inflation environment to low inflation environment.
Oh, okay. Thank you very much.
Our next question comes from Mr. Masih Yazdi from SEB. Please go ahead.
Morning, this is Masih Yazdi from SEB. A couple of questions. The first one on credit growth. I seem to recall when you decided for your 75% payout rate a couple of years ago, you said that with that payout ratio, you could grow your balance sheet about 5% annually. And now in 2014, it's growing by 9%, and the sort of the reason why your cap ratio still goes up is falling risk weights. How do you view that going 2015? Do you think you could sort of potentially grow your balance sheet by as much, and that you'll sort of see that offsetting factor following risk weights? Or should we expect your lending growth to sort of come down to closer to that percent? Thank you.
I think your analysis is correct. I think we cannot grow our balance sheet with 9% over time. And I think that's a nice position to be in, to be relevant with your clients. So I think there is a good case for what Michael was talking about, raising prices. The important thing is that you don't extend your risk in this, which I don't think we are doing. But a low inflation environment, you need to review that risk parameter all the time. At the same time, there is also that our, you could say, corporate DNA is more geared towards a very strong real estate market and domestic economy in Sweden. So we have less exposure to the industrial sector and the export-oriented economy than some of our peers are having.
And therefore, I think we, by automatic, are getting a little bit higher growth rate in there. But, coming back to this issue, I think we all agree that you can't grow on property price increases. It's about finding new housing stock in this market, and we would like to continue to grow with that. And you could say, of course, that's a good growth prospect for Swedbank, since we have such a huge population growth, and we actually have a huge deficit of housing. But it needs to be calibrated. A long answer. Sorry.
A good answer. Thank you. I'll stop there.
Our next question comes from Mr. Rickard Henze from Nordea. Please go ahead.
Good morning, guys. Rickard from Nordea Markets. A couple of follow-up questions. Göran, when you said that you expect the results from treasury that could decline up to SEK 1 billion in 2015 compared to 2014, were you referring to the NII then, or to the combination of the NGL and NII, please?
I was referring to the total treasury result, and I said that, the absolute vast majority of that will come in NGL.
Okay, perfect. Secondly, on the mortgage margins, I was a bit confused about what you said during your presentation, that the margins were flat in the end of the quarter compared to the beginning, but it was still positive contribution to the NII. Can you elaborate a bit more in terms of frontbook and backbook margins? And as well as you also mentioned, you think that the return on equity risk adjusted is a bit low in this segment. What is the adjusted risk, sorry, the adjusted return on equity for this kind of product, approximately?
I just wanted to say that the NII in the quarter, we got help from repricing of mortgages that were done in the third quarter. We didn't see any further expansion of new lending in the margins in the quarter, but I think there are good tentative signs in the beginning of this year that we see further expansion of margins. And I think we will not guide you on exactly what kind of rate lock or so we have on the portfolio, but we can say that it needs to improve the return and especially compared to other capital-intensive products. The mortgage portfolio has gone from being extremely and nicely profitable to not being so profitable.
And basically, if you look at the return on equity on the different business areas, you see the swing now on back of allocating out for the floor of 25%. So, if you go a year or two back, there was no discussion where the last penny would go to which business area. Now, there is more competitive situation for retail, and if they want to be that outlier in the organization, they need to think about that issue.
All right, thank you. Finally, on the lending growth, it's been primarily driven by property management. Property management was up 9% quarter-over-quarter and 24% year-over-year. It's quite impressive growth ratios. Can you talk a bit about what has driven this? Are you being more price aggressive than the others in the market, and what do you expect going forward?
I mean, this is the competitive edge of Swedbank. We have always been strong in the property sector, and look at what LCI did in the quarter, the IPO Entra, the Hemfosa and Akelius. So, we stand out in that marketplace, and we have quite a lot of competence that makes us be able to pull deals like that off.
... generally speaking, if you look at the Swedish economy, it's domestic consumption and, and the property sector that drives the economy. Yes, we have a competitive advantage with low funding costs. We got IRB into play, but we also improved our collateralization during the year. So it's not coming on back of risk. But bearing in mind the volume growth we had and, and the market share pickup, we can during 2015, work more on margins than in 2014.
All right, thank you very much.
Our next question comes from Mr. Omar Keenan from Deutsche Bank. Please go ahead.
Good morning. Thanks very much for taking the questions. I just had a question on interest rate sensitivity. In your fact book, you said that the sensitivity is SEK 3.2 billion for 100 pips, whereas last quarter it was SEK 2.7 billion. One of your peers kind of earlier talked about sensitivity of SEK 2 billion going to SEK 3 billion in the quarter, and 75% of retail deposits paying nothing. So just wondering, could you kind of just elaborate a little bit of why the sensitivity is SEK 3.2 billion? And perhaps just give a bit of color around what proportion of the SEK 416 billion deposits in the Swedish banking business now have, so you pay, you pay nothing on the deposits.
Finally, could you kind of help us understand, you know, what impact negative rates could potentially have on margins in retail? Thank you.
First of all, I would like to say, of course, that negative rates will have a large impact on the profitability in the retail sector. We are not, though, that convinced that it's a policy measure that is actually effective, just for the reason that the banking system is quite poor of transforming that into changed client behavior. And I think there are evidence of that in banking systems that actually have negative rates. But the impact in itself, I think, and we will most likely come back with an updated figure or in that we have in the fact book. I don't have it offhand, but it's work being done on that.
That the impact that what you referred to, SEK 3.2 billion, will be a higher number, of course, going from zero rates down, since your repricing ability is basically being significantly deteriorating, especially for households. I think depending on what kind of negative rates you have, you do have a repricing ability in the corporate sector, of course. But on your retail deposit base, I think there is difficulties in repricing, actually, and therefore, the impact will be higher than the SEK 3.2 billion.
But that will also be one of the main reasons why we don't really feel that if you want to pursue quantitative easing, and the banks is not really giving the clients the negative rates, and then there might be compensation on lending rates, it actually becomes a contractionary policy instrument, not an expansionary policy instrument. So, our feeling is that there are many other instruments relating to currency weakness that are much more efficient if you want to pursue quantitative easing.
Having said that, I think we feel that the Swedish economy is in a sweet spot, like Michael said in the beginning, and it is the inflation number in itself that poses the problem, while the actual development of the economy is improving, I would say, and also now with a weakening Swedish krona.
Yeah, great. Thank you very much. And just kind of on the point on what proportion of the retail deposits now effectively kind of pay zero, and so what proportions still pay something?
I don't have that number at hand. I will try to see to it that we get some information on this later on.
No, great. Thanks very much.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. I, actually, I think we've gone through almost everything, but could I just ask you a very short follow-up on your... That one charge you took in LC&I. Could you tell us any sectors or what country it's coming from?
This is Anders. It's within the manufacturing sector, and it's a Swedish exposure.
Is it a country exposure you had problems with before, or is it something new in the quarter?
No, we've seen it coming for a while.
Okay.
It's an add-on.
Thank you. Mm-hmm.
Mm-hmm.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody, and thanks for taking the question. Just, I have two, three questions from my side. On NII and hedging treasury department, I would suppose. So, sorry, NII keeps going up. Average rates have gone down, so I suppose you're hedging against the falling rates. Now, if rates remain where they are, and it's reasonable to say so, because this graph is saying so, is it fair to assume that the level of NII in the group treasury will stay as it is? This is my first question. Second question I have is, you know, the spread on issues of covered bonds are falling across the whole of Europe. Nordic banks do rely a lot on covered bonds.
Would you be prepared maybe to pre-fund a little bit of an image] and a little bit the maturity of your funding, sizing the opportunity of the current level of spreads, which are kind of unprecedented, maybe giving up a little bit right now, but lengthening the maturities going forward? The third question I have is on the dividends. Consensus was going for 11.5. You are proposing 11.35, so you are falling short of 0.15 SEK. That multiplied by the number of shares is literally kind of SEK 170 million. It is literally nothing on your risk-weighted assets. If my numbers are not wrong, it's kind of 5.5 basis points.
So I struggle to understand, what is the reason behind not matching the market expectations on such an important topic when it was costing you so, you know, basically a few basis points of the dividend? What is making you so concerned that you need to preserve, depleting the equity by 5 basis points or maybe 10 basis points when you have a capital ratio above 21%? And, and the final question I have is on the Baltics and oil services. I know it's a difficult question, but if you had to throw a kind of ballpark, what would be a reasonable for you, worst case scenario, on the back of Russia and oil price? Thank you.
Thanks for asking those questions. If I take the dividend question, I think it's very clearly articulated by the bank that we have a dividend policy of 75%, and we adhere to that. It's a simple answer, and it's most predictable for everyone.
Now, I will try to answer your first question. I think we, I think we talked about the major part of the impact in treasury would come in NGL. So I think the only thing I will say is that you will look at the stability in the NII line on treasury in there. With regards to pre-fund due to low credit spreads, I think that's something people have asked us all along the sort of decline of interest rates and the compression of credit margins. It's always for us, I think, it's balancing act risk against profitability, and I think we are in a good risk corner now. I don't think we need to be more conservative from here. We have a lot of capital.
We also have a very prudent funding strategy and funding plan. So I think we will keep that as it is. So I and the NSFR is around 100, so I don't expect us really to alter that funding strategy significantly in any significant way. Your last case question was about how, what is the tail risk of the Baltic banking? I think our stress test shows that it needs to be a very, very significant happening in the Baltics for us to have a significant tail risk. But maybe, Anders, you would like to comment?
Yeah, I mean, first of all, as we said, it's a limited amount that is exposed to directly related to Russia and trade. And if you look at the export numbers from the Baltics to Russia, they are quite inflated by a huge chunk of re-export, which is not really adding value to the Baltic economy. So the underlying dependency on Russia is lower than the figures might indicate. What I said is that our estimate is that it will be a limited impact. When it comes to the oil sector, I think it is far too early to say anything about that. Our customers are reacting and responding to the change, to market conditions, and we are acting together with them.
Okay. Okay, thank you very much. If I just a quick follow-up. Given that write-backs in the Baltics are basically over, they're drying up. If you had to give us a kind of normalized cost of credit for that division going forward, would you feel comfortable to give a number here?
We have never guided on cost of credit or credit impairments because the volatility of that in single exposures can be quite high. So I think you have... I think what we've tried to convey is that we feel very confident about the asset quality in the Baltics. You must remember that there has not been any new lending, basically, in these three countries in the past five years, and everything was stressed from a PD perspective much more severe going back to 2009 and 2010. So it's very difficult to see significant losses in them.
Okay, thank you.
Our next question comes from Mr. Antoine Hucher from UBS. Please go ahead.
Thank you very much, and good morning to all. Just two follow-up questions, please. One is, on capital. Once we get better visibility on various regulatory initiatives, down the road in 2015, what would be the main factors which you would consider when setting up management buffer?
... involve the required, regulatory capital demand? And the second question, please, sorry to come back to the same, but again, now on treasury. Can you give us an indication of, how many, bond buybacks, do you expect, or can you expect to do in 2015 versus the volumes that you have seen in 2014? Thank you.
I mean, this capital issue is, as you already alluded to, I mean, the buffer, as we mentioned, is broadly sort of a correct level. I think you need to have some capacity to grow. You need to have capacity to take swings in volatile items like IFRS accounting for pensions. But the main issue that creates uncertainty is still future capital rules. So that's why we act like we do this quarter, and at the end of the day, we'll know so much more come later this year, that we will have a much more reasonable debate around the different sort of components of that. So allow us to come back later this year on this issue, and more clarity will be in place.
On the treasury buybacks, I think over the years, it won't be any different, 15 over 14. But, as you know, there are volatility between quarters in that, but over the years, we—no, no, no change, really.
That's very clear. Thank you.
Now, our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes. Hi, Jan Wolter, Credit Suisse. Just a couple of questions. And the first, the board decided not to set a capital target after all. What, what is the key uncertainty that needs to be resolved in order for the bank to set a new Core Tier 1 and a new total capital target as well? And second question, just around the cost target of SEK 16 billion in 2016. Are the cost efficiency measures back or front-loaded? Either you foresee a steeper fall in 2016, or should we expect a more gradual fall in costs starting in, in 2015? Thank you.
Hi, Jan? Sorry for not being clear on the capital issue on this call, but it's a regulatory question that is the main driver for the uncertainty.
Yes, but what kind of regulation? Sorry to interrupt. But what kind of regulation are you looking at as the more problematic one, the one where you need more clarity in order to set a target? Thank you.
The standardized approach on corporate risk weights, if that comes into play.
Okay, thank you.
As you know, that could lead to other changes in what the SFSA has established. You never know, so there is a lot of uncertainty there.
On the cost side, I think the, over the two years, it's slightly, slightly backended. And the reason for that is that we are converting, you know, we bought Sparbanken Öresund, and we need to transform all of their clients on our platform. And before you can value realize completely, and that will happen sort of rather, to a larger extent, 2016 than 2015. But for 2015, we expect to be, so the, the. But it's not, in 2016, all of the money will come. It will come gradually, but with a higher degree in 2016, and in 2015 we will be below SEK 17 billion in cost.
Okay, then. Thank you for your help.
Thanks.
Our next question is from Mr. Adrian Cighi from RBC. Please go ahead.
Good morning, and thank you for taking my question. One follow-up question on mortgages, please. National statistics point to a substantial year-on-year decline in the volume of housing transactions in both November and December of last year. Do you see that translating in loan volume impact this year, or do you see that as a blip that should recover this year?
I think that there is, as you confirm, lower volumes, coming late the year. And if you see the sort of supply on the major housing sites, that confirms the picture. I mean, you have a tax system in Sweden that locks property owners in, so that could definitely be one of the reasons. And then secondly, there is some uncertainty on the buying side, what the effect of a new mortgage amortization plan would mean and entail. So, every time you have changes around sort of amortization, you get a little bit of uncertainty, which affects the market. So, let that come into play, and we'll be a better judge of total volume going into 2015.
Thank you.
There are no further questions on the telephone.