Ladies and gentlemen, welcome to the year-end results 2013 conference call. Today, I'm pleased to present Mr. Michael Wolf, President and CEO. For the first part of this call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Mr. Michael Wolf, please begin.
Thanks, and good morning, and we do appreciate that you participate on this result presentation. Let's start with the macro. The world economy shows some more positive signs in the last quarter. At the same time, the recovery is very fragile. Structural reform is on its way, but there is still a lot to do in many economies. And the big question is, of course, what happens when the central banks withdraw their quantitative easing programs and interest rates might turn up again? This uncertainty continues to hamper credit demand. The situation in our four home markets are much more stable. In Sweden, we have benefited from this in the fourth quarter through increased business volumes in all business areas. In the Baltics, domestic consumption drives growth, and the higher activity level is visible in our commission income line, where we had a 14% year-over-year improvement.
Financially, 2013 was a good year, but we are not satisfied with the cost development. We have underestimated how quickly we can capture the effects of the internal efficiency programs that aims to reduce the complexity in the bank. We intensify our ambition in this area and guide cost levels to be flat in 2014 over 2013. The aim with our significant transformation of the bank is to increase the accessibility for our customers in all channels, and to increase the local presence and decision mandates in our branch network. During 2013, we have reduced the number of active products with approximately 30% from 1,100 to 800.
We have gained almost 400,000 new mobile bank customers, and over 300,000 customer has joined the payment method Swish, which is 40% of the market. That shows that our customers are very keen to digitalize themselves and find more efficient ways to execute their transactions. And all this is good, but the financial effect is still not as visible as we had hoped for, and we'll continue our effort in this area throughout 2014. In the Swedish retail business, we increased the numbering of staff in the client-facing area. At the same time, as we try to reduce central resources. We have also provided each strong branch with a survey on customer satisfaction to support their efforts in this area. This quarter was strong in terms of new credit, both mortgage-related and corporate lending.
In the Baltics, we are starting to see the benefits of our multi-channel strategy. Customer satisfaction are on good levels, and we have scale advantages to benefit from if and when the growth in credit comes. Credit demand remains weak, repricing has been successful, and domestic demand supports our ancillary business in terms of good commission income. Within the LC&I area, our focus is showing both financially and in terms of new customer, increased customer satisfaction. We have strengthened our position in Sweden, and we see more and more ancillary business within this business segment. Our Norwegian franchise is making strong progress, thanks to our strong balance sheet, in combination with our much appreciated advisory competence. If you look at capital, quarter one raises to 18.3% during the quarter, but due to the uncertainty around new capital regulation, we, we get...
Until we get more clarity, we cannot announce our new capital target. As you know, we've been rather vocal around the challenges in the Swedish housing market, i.e., the lack of new housing starts in the major cities. This hampers growth and job creation, especially for young people. We do want to participate in the financing of new housing starts, but too harsh capital rule might hamper this. In light of the above, policymakers need to be careful so that they, the new capital rules do not endanger the new housing starts that are so desperately needed. Finally, the board of directors, in line with our dividend policy, has resolved to make the dividend for 2013 to be SEK 10.10, an increase of 20 öre compared to last year. With that, I hand over to Göran, who will guide you through the numbers.
Thank you, Michael. I will quickly go through the highlights of the result, financials, before I hand over to Anders for asset quality, and then we can open up quickly for questions. If I turn to the six regions, Swedish Banking, the result continues to be stable. I think overall in this quarter, we have had a much stronger loan growth than we have seen previously, and that's evident in Swedish Banking, both on the corporate sector, but also that we gradually are regaining our natural market share on mortgages. Margins on mortgages are stable. We have seen pressure on deposit margins as a result of lower interest rates. And at the same time, we've seen a very strong commission income relating to better stock market activity, really.
The area continue to have a solid asset quality in general. So all in all, a very stable result. Moving ahead to LC&I, I think this is a business area that continues to improve. We are very pleased with the return numbers and the transformation that we have pointed to earlier. In the quarter are a little bit better due to circumstances. Corporate finance fees, particularly in Norway, are stronger, and we continue to see good development on the loan book from a risk-adjusted point of view, and there is credit demand also in the quarter, which is very good. Our third business area, Baltic Banking, is similar to LC&I, I think, is well-positioned. We do see good activity in general in these economies, given the macro environment around them. That's evident in commission income.
We have very good operational efficiency. We continue to have recoveries relating to the legacy portfolio, and Anders will touch a little bit more on that. And we do reprice our lending book, the weak part of the lending book, that supports the NII, even though we have deposit margin pressure. What we continue to lack is the volume growth and credit growth in the economy in general, so still rather slow on that area. Summarizing this on group level, I think we have a strong quarter from a revenue point of view. We are beating our expectation, and we do see good volume development. We're happy to see that our NII is stable, and we continue to benefit from a slightly improving economy through stronger commission income.
So in general, I think we're very happy with the income side of the story. If we then turn on to costs, there is a lot of traffic in the cost relating to a restructuring charge. We have also had higher cost relating to a variable pay program as a result of the share price going up. So, there is some cost items there that are one-off nature, but in general, there is an underlying cost pressure in the organization. Part of that is, of course, relating to that economy is generally improving, and that we want our business area to be more offensive and to take clients, do more client-related business. But we do miss out on our efficiency measures that we should support a very good income cost ratio over time.
So we are not overall pleased with this development. And asset quality-wise, credit impairments are something that Anders will touch on. And in the quarter, we do have a slightly higher tax charge relating to tax situation in Estonia, also relating back to Lehman credits and double taxation treatment. We do another assessment now than we did previously, and we also have losses in Ukraine, Russia, that will become non-tax deductible for us. So, and in general, I think we shouldn't be too worried about that because it's cleaning up the legacy part of the book in general. Moving on to more guiding on cost, and I think we will continue to keep the flat costs as the target for next year.
It's all about transforming the bank to a different reality outside of us, and we do want to become more client-oriented, improve our market position in a number of segments. That will take money and cost resources, and we expect that. It will also entail IT development costs in order to be more relevant in certain aspects. IT development is also heavily burdened by regulatory aspects that is pushed on all banks. So these two sort of cost items will continue to rise. We will mitigate that through continuing to taking out costs in Ektornet. That has still been a heavy cost burden for 2013. We will continue to reduce staff functions in general, and get costs out of staff functions and resources more closer to the revenues in general, in supporting the decentralized business model.
The last item is that we need to speed up our effort in working across different business areas, understanding our legacy problems on IT, in order to become more efficient on the straight-through processing and future IT structure, really. That is the biggest challenge in the cost area. But we feel confident that we will reach our flat cost target for 2014. Moving on to capital, I think the RWA movement is really reflecting a stronger business environment that we have seen higher credit volumes that drives RWA up. Other than that, we do continue to have positive rating migration in the Swedish book and in the Baltic book to a minor extent. We also have some negative effects due to FX, FX in the quarter.
Michael mentioned, capital. We continue to have very uncertain regulatory issues on capital. It is, though, very clear that, with the higher capital requirements, there will be most likely a 25% risk weighting for our mortgages in Sweden. That will hurt us. We do expect to see some countercyclical buffers, but there are still uncertainties with regards to how we should support the Pillar Two process with capital. We also have uncertainties on what constitutes a buffer for the bank and what is hard limits. That's still very unclear. So I think the conclusion we are drawing from all this is that there will be more capital needed in the banks. And as Michael says, what we have seen being excess capital is being eroded, but we do not have any problems meeting this higher regulatory capital demand, really. With that, I think I hand to you, Anders.
Thank you, Göran. Moving on to asset quality, Q4 is a continuation of previous quarters, with low credit impairments, ending up with reversal of SEK 32 million, and impaired loans decreasing with SEK 1.7 billion. If we look at Baltic Banking, we report net recoveries of SEK 177 million in the quarter, as expected, at a lower recovery pace compared to last year. Also, as anticipated, the inflow of impaired loans and credit impairments in the Baltic Banking, from the portfolio, not stemming from the crisis, continues to be on a very low level. Which means we expect continued low credit impairments in the portfolio, but also smaller recoveries going forward.
If we look at impaired loans in the Baltics, they have continued to decrease with SEK 1.3 billion in Q4, now totaling SEK 5 billion, and we aim at getting rid of the legacy portfolio during this year. Moving to Sweden, Swedish Banking and LC&I portfolios continue to show good resilience. Credit impairments ended at low levels, SEK 145 million in the quarter. As previously mentioned, low levels like this implicates a certain degree of volatility between the quarters, both in terms of credit impairments, but also impaired loans. Moving over to Ektornet, which is now integrated with FR&R under risk in 2014. Still, 2013 was a very successful year in Ektornet.
There were sales in Q4 of SEK 700 million, and total during the year of SEK 2.4 billion, which means that the remaining part is SEK 1.8 billion, and we anticipate that to be sold during this year. In Q4, we had impairments of SEK 277 million in Ektornet, primarily stemming from assets in a very unstable and turbulent Ukraine, and to a large Lehman-related assets in the US.
Thanks, Anders. Then we open up for Q&A.
If you'd like to ask a question, please press zero one on your telephone keypad. Our first question comes from Mr. Paweł Wyszyński from Nordea. Please go ahead.
Yes, hello. Three questions from my side. First one on costs. I'm wondering what kind of cost level we should use for the flat cost target for 2014. The second question is on NII from treasury. What should we expect there? Because each quarter we have a talk about this, and there are lots of headwinds, but still the level remains fairly unchanged. And the last question is on loan losses for 2014. Should we still expect the recoveries in the Baltics?
On the first one, I think we talked about flat cost. I think we should SEK 16.6 around that, plus minus. I mean, it's always difficult to gauge in the end of the year where you come in, so that's where we're aiming. NII, I think, I mean, we've been for a number of quarters been we had a long period of tailwind on NII as we transformed repricing and improved funding, and then a couple of quarters ago, we became more conservative on that. I think we continue to have a bit of tailwind in funding area, because we refinance ourselves better than the back book on funding, so to say.
We also, with higher capital requirements, should expect margins to go up as more capital are put, putting in place there, and we see small anecdotal evidence of that. But on the other hand, we have headwinds as well, I think, relating to what we talked about in treasury, that we have gained money on the lower interest rates, and that will sort of be more difficult at some point in time to repeat. And also that we see sort of deposit margin pressure as a result of lower short-term interest rates. So all in all there, I think if you go forward, I think NII, one reflection I have is that NII will be more dependent on volume and business. So it, it. The normality in one sense, that the swings are less than they were previously.
If we talk about recoveries in the Baltics during this year, I mean, the legacy portfolio is quite rapidly decreasing, which automatically means that you should expect smaller recoveries this year.
But still recoveries, I guess?
Smaller recoveries this year, yes.
Okay.
In the Baltics, yeah.
In the Baltics, yeah.
All right, thank you. Our next question is from Mr. Omar Keenan from Deutsche Bank. Please go ahead.
Good morning, and thanks so much for taking the questions. My first question is just on risk weights and the relationship with the Countercyclical Buffer. Firstly, how quickly do you expect regulators to move ahead with the 25% risk weight decision? Do you have any sense of timeline as to whether that comes through? And I just wanted to ask your opinion as to what do you think the impact on higher risk weights would be on the Countercyclical Buffer? We saw in Norway that with higher risk weights, you got to 1% level on the Countercyclical Buffer, and while the Financial Stability Report implied a level of about 2%, would you expect something lower than that? And then secondly, I've just got a question on costs.
Sorry if it was answered already in the last question, but I just wanted to double-check what the flat cost target for 2014 relates to. Is it the reported figure of SEK 16.6 billion, or is it the same basis that you've used in the past, which excludes variable fees and saving, saving banks fees, which I think were put on about SEK 15.5 billion? Thanks.
On the risk weighting, I think we don't know materially more than you do. So I don't think we have any news to say there. I think the SFSA are working very hard to come up with more clarity on this issue. And I think they, of course, they look upon it as a total change. I think they think about risk weights and countercyclical buffer, buffers. What will that have effect sort of together? And then they, since it's all about reducing the speed of debt accumulation in the household sector, of course, they... I would assume they want to keep some dry powder if the effects are not adequate. So I can't really guide you there. On the cost side, I think we are guiding, including the variable components, and we actually did that already for 2013. So, it's a comparable figure with this year, with also the uncertainty of variable components.
Okay. And could I just ask a quick follow-up question on costs? The costs related to Ektornet, I think, of roughly SEK 400 million. How quickly do you expect this will fall out?
That's, no, I, I think you can calculate in your at least, the total cost for next year should be at least SEK 200 million less than it is for this year, because we have already sold so much this year, and then it will now gradually come off. So that will be a tailwind on the cost, cost line for us.
Great, thanks very much. It's clear.
Our next question comes from Mr. Peter Kjellklo from Carnegie. Please go ahead.
Yes. Hi, thanks. Two or perhaps three questions from me, and, since I like to be a copycat, I'm gonna ask about costs as well, and margins. Just first of all, on the cost side there, I think Anders mentioned the legacy portfolio to be fully unwind in 2014. Does that also mean Ektornet, which has roughly SEK 300 million of costs, left? Also on the margin side, on NII, John, I think you mentioned that on a NII should be more dependent on volumes, going forward. How do you think, about repricing in Sweden, if we get 25% mortgage risk weights? And how would you perhaps tackle that? So those two questions, please.
I think, regarding cost on the Ektornet, I think the previous caller was asking, and I think we're slightly south of SEK 400 million in cost this year, and it should be at least SEK 200 million less next year. Then there will be... So the cost side is a year later than the assets, so to say, because it takes time to come out. So, the full dismantling of Ektornet will come in 2015, you could say, but the cost effect will be substantial in 2014. At least SEK 200 million, I would say. Margins, they are repricing. No, I think our philosophy is, of course, that the more capital that are being put on banks are there for a purpose to steer the indebtedness level through higher prices.
I think, a few of our regulators are very clearly talking about that. So that's the prerequisites we think, of course. So we will. But we have tried that a bit, as you know, in the autumn, not very successful. So I would like you to ask that question to our peers rather than to us.
Okay. And just for just clarification there, do you mean that within Ektornet, that you will have sold all assets during 2014, or will you still have some in 2015?
I think we will continue to sell at a very good speed. There will probably be a tail ending up into 2015 as well, but that we-- It's already now, I, I would say, from group perspective, quite insignificant. And if you think about-... Ektornet, we will, we will, we won't report Ektornet as a standalone business area even because actions are so small, and the cost effect will be positive for 2014. But there will be a tail, because there will always be some land plots, smaller apartments and so forth that stays with us. But from your perspective, I think it will be insignificant.
Okay. Thank you.
Our next question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning, Chintan Joshi from Nomura. I've got three questions. The first one is on treasury NII. In Q3, we were discussing a SEK 500 million-SEK 1 billion drag on the NII from treasury. I mean, obviously, this depends on how Jonas and his team perform next year. Just wanted to see if you're still comfortable with guiding that similar number down for NII next year. And also, just wanted to check how much is that driven by the basis swap mark-to-market gains that we've had over the last few quarters. And then I've got two more. Shall I do them one by one?
Yeah, yeah, let's start with this one. I'm not gonna venture into too detailed explanations here. I think when we talked about half a billion, half to a full billion of NII drag, we said everything being pari passu down with the market rates. Then, of course, there's volatility, and you expect to make money as well, I think we've stated. I think the drag on the profit in treasury has not worsened since last time. The picture is very similar to what we talked about last time. So, it's not more than a billion, but it all depends, of course, what happens in the market as well. So we have headwind on the market risk side of it, but we benefit, we continue to benefit on the funding side.
Okay. Thanks for that. Second, on capital, obviously, we don't know where levels will ultimately settle, but if I just wanted to check, on the upper end, if I take your 12% minimum, take the full, countercyclical buffer and the mortgage risk weights, I get close to 19%. I mean, should we treat that as your maximum? And then if you're above that, we can expect you to pay that out, or is it still very fluid?
Well, Chintan, it's fluid, but you can't argue against your calculation either. So let's see where the regulator comes in. And this is the uncertainty that we hope the regulator will be able to address within the next couple of months. So we are on the same side as you are on this. We're lacking finality on their conclusions.
Understood.
You want to add anything?
No, I think if you're really a devil's advocate, you can say that there will be hardcore equity against Pillar Two, so it will be more than 20%. So I think it's just wait and see again.
Okay. And finally, on mortgage margin repricing, obviously, you tried to increase margins in the quarter and didn't work out very well. You're saying we should check with our peers. Does that mean that Swedbank will no longer be the first mover on mortgage margin repricing? Like, do you need to necessarily see one of your peers take the first move now?
I think you should look at it that we have, since quite a while, said that we want a clear tilt towards customer satisfaction. We have decent profitability levels. We do think fundamentally that the regulator wanted us to reprice, we haven't changed opinion there, but we, we need to have a good balance between, earnings, and, and customer satisfaction. There is a fundamental steering issue in the increased capital that hopefully over time, will also affect, in-depth level. So it's, it's, it's a balance act, but we are very keen to, to protect the risk of our customers and ourselves. But, at this juncture, customer satisfaction weighs heavier.
Understood. Thank you, gentlemen.
Our next question comes from Mr. Matthew Clark from Nomura. Please go ahead.
Go od morning. 2 questions, please. First one, it looks like you're planning to issue quite a lot more senior unsecured in 2014. Could you perhaps say what impact you expect that to have on net interest income, if any, compared to the fourth quarter level? And also, where that will take your net stable funding ratio by the end of the year. And then secondly, just wanted to check whether your attempt to reprice the mortgage book in the fourth quarter had any impact on net interest income during the quarter, either positive or negative, that won't recur in coming quarters as that was unwound? Thanks.
I don't think we have any changed funding plans at all. It's very much steady business as previous. So the previous guidance on that is basically where we are. And the only thing I'm saying is that we are issuing on better levels on average than we've issued in the past, sort of. So that's the answer to question one. On question two, the impact of us raising and then backtracking was no. That's completely non-visible on NII, but quite a bit of customer reaction, I would say, on the mortgage side.
Do you mean in terms of volume, or? ...Understood. Thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. If we can just come back to the net interest income. You know, you've, I think, explained what happened and how you what you intend to do on the mortgage side, but you also had some deposit repricing in Q4. Is that largely reflected in numbers? Is there more you can do there? And then I guess the one thing we haven't really talked about is on the corporate side, just to get the full picture on the margin outlook.
On the margin outlook for corporates in general, I think... I do think it's margins are not expanding due to more capital since regulation is not clear. I also think that most Swedish banks are in a very healthy position. So if anything, I think the competitive environment is heating up a bit on the better clients. So I do think that for all Swedish bank, volume will be more important to see coming through. And the good thing is that we see that. And this quarter, it's the highest volume growth I've seen in Swedbank, and part of it was, of course, relating due to the fact it was year-end, but I think that was very encouraging to see. Deposits margins, I think it's more or less fully reflected sort of in the speed. Now, it will be some small effect going into January, February. So should the decrease been a month earlier, the effect would have been slightly higher in the quarter, but it's not material from my perspective.
Okay, thank you very much.
Our next question comes from Mr. Alvaro Serrano from Morgan Stanley. Please go ahead.
Yeah, I think most of my questions have been answered, but just in when you—sorry to insist on this, on the mortgage front book versus back book, it does seem like things are getting less bad. You're mentioning now 5 basis points-10 basis points, front book lower than the back book. When do you expect the front book, given your pricing expectations, when do you expect the front book to be at the level or above the back book levels?
That's an impossible question to answer because it's about when do we see regulation and how will peers react? I think we have had that difficulties reading, both regulated and peers. So I'm... We can just observe that the pressure is ending, and if anything, there's a slight sort of positive, but a very, very small one there. So I think I stop there.
Mm. But when you... My understanding was that when rates were cut by the Riksbank, most banks sort of transferred to clients lower rates, but not in the amount of 25 basis points, but more like 15 basis points. Would that not implicitly drive some improvement in front book margins early 2014?
I think you can't really think that all margin changes comes when the repo rates are announced, because there's a continuous movement on Stibor and funding costs and so forth. So the connectivity to repo rates is becoming less and less. So, and I don't think banks have, at least we don't have a strategy to sort of do margin changes in conjunction with repo rates, particularly.
So you don't think that will change anything for now?
No.
Okay. Thank you.
Our next question comes from Magnus Andersson from ABG. Please go ahead.
Yes, good morning. Most of our—all my questions have been answered already, but just if I could follow up on the Baltics, you mentioned that you see a continued repricing there. If it's progressing as you expect, and whether competitors are following through, and if there are any geographic differences between the markets there. And for how long you think you will be able to reprice the loan book in the Baltics? Because you have quite a nice string of NIIs now for three quarters in a row there. Thanks.
Well, progress is good, and I think we have a really strong position in the Baltics. Our earnings capacity, return numbers, the size of the operation has been protected throughout the crisis, and I think that gives us a lot of, sort of positive, abilities going forward, if and when credit demand really becomes significant in these countries, and that we're still waiting for. So, as far as we see it, being able to reprice the weakest part of the portfolio is a strong signal that the market is rebounding solidly throughout, and there is no differences between the countries.
Okay. And do you see competition following through?
It's hard to say. I mean, there is a mixed signal on how competitors behave in this market, but it doesn't seem to affect our market position. And, technically, as I alluded to, it shows that the whole economy is improving throughout.
You could say some competitors- I think there are anecdotal evidence they're following through, but not all. We will-- It's too early to tell, really, on all that place.
Okay, thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yeah, good morning, everyone. A few questions, please, from my side. The first one, on risk-weighted assets. Obviously, you've had a bit of a pickup in RWA on Basel II this quarter, and obviously, you're talking a lot more now about volume coming through as a supporting factor for NII. So a question, please, on the outlook for risk-weighted assets. Should we basically assume that you have the advanced IRB approval waiting in the wings? And, but apart from that, underlying RWA now grows more or less in line with volume growth, or do you have any sort of other mitigation plans that you're working on this year? The second question, please, on this target capital range, which you're clearly waiting for more regulatory clarity before committing to.
Just to please, help us on, on exactly what areas of regulation you are still waiting to hear more about. Obviously, there's the risk weights, the countercyclical discussion you've referenced already. Are there any other discussions you think that are emerging that we should be aware of? I noticed some discussion of sort of specific Pillar Two A buffers by bank, maybe on top of, of what already is in the mortgage risk weights discussions. Do you think there's something else that we need to put in to this orange bar on slide eight and the other side? And thirdly, maybe if we could try a PNL line other than NII and costs.
If you could just talk a little bit around fee and commission income, which I think for a few quarters in a row is positively surprised, and obviously helped by buoyant markets and asset management. But if you could just help us to think about what, what kind of a level would of growth would make you happy, all else equal, pari passu for fourteen, given all that you're working on, on improving customer profitability. Thank you.
Good questions. Should I start with the last one? I mean, generally speaking, we don't have... I mean, we want to grow with our customers, i.e., in line with GDP. And of course, if the franchise continues to evolve, we should be able to also acquire new customers in a slightly increased speed. But if you look at the commission income and break it down, I have talked about the Baltics, where high local domestic consumption drives a lot of activity, and that is so visible in the numbers. What I also want to highlight is LC&I's persistent strategy to use its balance sheet to gain access to more and more ancillary business. And that has been evident in Norway, it has been evident in Sweden.
Hopefully, that trend continues, that we remain relevant, and customer surveys are indicating that we are increasing in sort of our acceptance level out there step by step. In Sweden, you have to look at GDP, and take it from there. The focus is definitely on more, bigger share of wallet with the existing customers. I can't guide you more than that.
If we take the RWA side there, I think, the big transformation is, of course, behind us, especially after we get the IRB approval there. There could be some dynamic effects. I mean, I think the organization has, during the past year, really learned to work more on risk-adjusted return targets, and from that perspective, capital is such a more an important denominator now. So, we can see some positive dynamic effects as that sort of gets deeper and deeper into the organization. The procyclicality of the whole regulatory system is evident, and you can say, Baltics, I think, is overcapitalized from a procyclicality point of view. So I do expect PD migrations to release capital there.
So I think we can grow volumes quite handsomely without tying up too much capital, actually, points to a huge weakness in the system, I think. And then you could say Ektornet and small volumes in Russia is something that will, by the end of the day, will leave the balance sheet, but that's small amounts. So that's the flavor. We don't have anything big up in our sleeves, and there are no model changes that is relevant for us. On the regulation, you ask what is still out there. I just wrote down a couple of things there. The Pillar Two process is still uncertain.
I think also the final of the resolution, what will be buffer and hard, and how will that sort of affect the steering of the bank is, of course, a very, very important issue. And perhaps the ones that are not very clear to us in our mindset in on the if, will there be floors on corporate risk weights for Swedish banks by the end of the day as well, in some sort, considering how low risk weights are in Sweden? But I, I'm not too certain on that one, and it's at least far further out in time, and you can't really point to an in-depth situation in the corporate sector either. So I question more from this one. A lot of uncertainty.
Okay, thank you.
Our next question comes from Mr. Håkon Fure from DNB. Please go ahead.
Yeah, hi. Good morning to you... You state in the report that you're seeing margin pressure on new loans to large companies. I was wondering, does this reflect the international banks becoming more aggressive, or is it rather the other Swedish banks becoming more volume focused? And in connection with that, do you see a similar pressure on SME lending? Thanks.
Hi, this is Michael . We do see more activity from foreign banks, that's a definite. So it's a combination of the both two things actually. It's also us Swedish banks trying to compete about the business in order to drive ancillary. So I think it's both worlds.
On the SME side, I think the picture is not very different, really.
Okay. So you're seeing margin pressure on the SME lending as well?
Yeah, I could say in general, I think there is some good clients, all banks are wanting to do business.
Okay, thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. Two questions from my side. First one is on capital distribution. In line with expectations, I guess you didn't distribute more than the 75%, given that we don't have the visibility on future capital rules. But what if you would have received IRB approval by the end of last year, so you would actually had about 200 bips more of core capital? Would that have made you more, or would that have increased your ability to pay out more than 75%? Second question on NII, if you now say that volume is gonna be the key driver, and I think in the past, you always talked about nowadays, we should be thinking about Swedbank volume growth in line with nominal GDP, roughly. Is that still what you're looking for? Or what would be your expectations for volume growth in 2014? Thank you.
If we start with the last one, I don't think we expect sort of, any more than GDP, of course, but, for driving our NII, the volume component becomes more important. And that's also where we want to be seeing more activity on taking clients and improving market position. On your first question, it's speculation. And, with the uncertainty on regulation, I don't think we could, sort of have another statement, whether or not we have the IRB advanced.
Does that then mean that if we now get IRB advanced in, let's say, end of the quarter or something like that, so your quarter one goes up by 200 basis points, we shouldn't expect that that's gonna then all of a sudden lead to a new buyback program at AGM or anything like that?
Andreas, I think what we have throughout the last year been very adamant about is that we want a firm sort of language from the regulator in all aspects. There are so many moving parts, and in that situation, we want to weigh that. And if we get IRB advanced, it's a big positive in all aspects. It's gonna make our business more competitive, et cetera, et cetera. But on the capital issue, we need also clarity from the regulator before we can make any calls.
Thanks, very clear. Thank you.
Our next question comes from Mr. Carlo Dig randi from HSBC. Please go ahead.
Yes, good morning, Carlo de Grande from HSBC. If I can insist on two points. The first one is on fees and commission, on the back of what my colleague just said. I was wondering if you think that you will have any power there to increase repricing during the course of the year and therefore come again with some positive surprises, aside from volume growth. This definitely was a feature of your result. And secondly, on cost, you said at the beginning of the presentations that the management team is not happy about the cost, and you plan flat cost. The question is, is it flat cost on a like-for-like basis, i.e., we should remove the variable plus the one-off that you just produced? Also, if you can provide a little bit more color on how this flat cost will be achieved? Thank you very much.
I think on cost, we are guiding towards SEK 16.6, around that, on a total cost basis for next year, for this year, 2014. So, so it's including the variable components. Your repricing question, I didn't really get. Was that relating to lending or commission income?
Fees and commission income, so whatever is non-interest income-related banking services.
I think if I think relating to the corporate sector, I don't think we have any margin pressure on the other, really. There is quite good pricing power. If you take the profit pools that relates to the private sector in Sweden, I think there is margin pressure. If you think about the Baltics, I think we have a good pricing position.
Thank you.
Our next question comes from Mrs. Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi, here is Sofie Peterzens from JP Morgan. Thanks very much for the questions. Just very quickly, on core tier one, I... or the target, I realize that you can't give a hard target, but can you give a range that if you currently have a 15%, Basel III core equity tier one target, should we expect that to go, let's say, from 16%-20% or 16%-25%? Or what kind of level or range do, should we kind of expect going forward? And secondly, you also talked about winning more mortgages and volume growth. But could you just discuss how kind of winning more mortgages and also potentially raising mortgage margins, how that kind of ties together?
And lastly, could you also discuss or just comment around how much more, tangible impairments we should expect for 2014 coming from Russia and Ukraine and, any other portfolios in Ektornet? Thank you.
I can start with the last one. I think you should expect less sort of tangible impairments relating to Ektornet for 2014 than you had in 2013 and 2012, because we've been selling so much. And then you should also bear in mind that the ones where it's a profit, it ends up in the normal statement under other income, other income, actually. So it's not the impairment it shows one side of it, just. But that should be tailing off as the portfolio is tailing off so dramatically. Quarter one target, you said this is gonna be 20 or 25.
No, I was more asking about the range. What do you think is kind of a range that we should expect? Do you think up to 20%, up to 25%, or what kind of range should we think of?
I don't think anyone is talking about the 25% level. I think, if I just make a broad band there, I would say 16, 17, up to 22. That's a big range for you to work with. Do whatever you want with it. I think we just have to wait and see.
And then on mortgage margin versus new business, what we can see in the last quarter is that we have a step-by-step improved market position in terms of new sales without any more, more, mortgage margin pressure. And what will be around the corner is hard to predict. It depends on where the whole market moves on that one. So, so the last quarter was a quarter where we increased market share without margin pressure.
Great. Thank you very much.
Thanks.
Our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes, good morning, all. Jan Wolter, Credit Suisse. Two questions from my side. Did the board ask for a buyback mandate this year? Remind me if you do this, that in the Q4 or closer to the AGM. I know you have one, since last year, which expires now. So that's the first question. And then you talked earlier about this fall in NII and treasury, depending on the deposit hedge rolling off. I think you touched upon that earlier on the call, Göran. In practice, will that now roll over that deposit hedge and be invested in lower yielding instruments? Or what, in practice, would you expect the bank to do? Thank you.
Jan, you're very spot on. We actually didn't inform in the report about those two issues. And yes, we intend to seek our traditional mandates both for CoCos and share buyback. But in light of what we have talked about capital so far in this discussion, it's mandate that we need to have, if and when we get clarity, but we don't see any usage of it at present.
Jan, you were referring to deposit hedge. I don't think we have any particular deposit hedge as such. But we do take market risk in our treasury area, and it could be, and that is in the liquidity portfolio, and it's also in the banking book, so to say. I do. How we extend the long- and short-term maturities, and that depending on what we think on the markets, I don't think we guide on it. I do expect my treasury department to make money on volatility.
Okay, many thanks for that.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning. Good morning to everybody, and thanks for the questions. I have three questions from my side. First of all, it's not clear to me, are you guiding to loan growth in 2014, more or less similar to nominal GDP? I'm not sure I got it correctly. And secondly, in the same, the same topic, given that the government is putting a lot of efforts on macro-prudential action to reduce the debt in the country, where is this growth coming from on the retail side? Where is it supposed to come from? And on the corporate side, given that you are charging basically nothing, I would suppose that the corporate situation is very healthy in Sweden, and I would suppose corporations are cash rich.
So why in an economy that is growing okay, but nothing spectacular, where is the growth coming from, supposed to come from, also on the corporate side? And second, another question I have is on the leverage ratio. It's a matter of discussion, it's part of the uncertainty on the regulatory side, and what is the Basel III leverage ratio at the end of the year? Last question from my side: Where do you see the company, the bank, in 24 months? Is it gonna be like a cash cow that as it is today?
Thanks for those questions. I mean, we are actually talking about the macro that is very uncertain, and we don't expect credit demand to be very-... What we have talked about when we have talked about GDP is our long-term growth ambitions, and that we don't believe that we can be a bank growing faster than GDP. We want to have a prudent risk profile. So it's more an expression of that than a growth guidance in terms of credits, credits. The last question is where would we be 24 months out?
I think our clear ambition is to be a bank that has increased its customer satisfaction, mainly in the Swedish area, where we, through the transformation of the bank, should be more capable of managing our vast client base of 4 million household clients and 300,000 corporate clients through the digital channels. So that they feel that they have the right tools, the right service levels, et cetera, et cetera. At the same time, up our ability to deal with customers in the upper segment through the branch offices, where actual relationships will be the key driver for business growth.
Okay. And on leverage ratio, if I may?
On the leverage ratio, I think it's 4.33, Basel III measure in the at the year-end. And I don't think I do have anything to contribute on leverage ratio. We don't have any more knowledge than you have on that from a regulatory perspective. If I just could comment, Micke, there on where the bank is on 24 months, it's a fantastic return in this bank. And considering the risk reduction during the 5 years that's passed us, I do think from a risk-adjusted point of view, it's the best ever result that you do have. It's an extreme stability of earnings, and we worked very hard to reduce volatility in earnings, and that has been achieved to a very high degree.
I think there is a little risk that the regulators are becoming too proactive to use the banks to build more houses in Sweden. And by doing that, they can actually drive the risk-taking out of the banking system. By putting too high regulation on the banks, it becomes unprofitable to take risks or very expensive to take risks in banks. And that's a risk for the regulator, I do think.
Okay, thank you very much. Thanks.
Our next question comes from Mr. Kristofer Plavnieks from Barclays. Please go ahead.
Good morning. They've been answered . Thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous Research. Please go ahead.
Hi, Jacob. Thanks for the question. Can I just ask on the first of all, on your market share, you seem to be still running the flow less than the stock. That may have improved a little bit recently, but what is the main problem? Is it pricing, or is it customer satisfaction, or what, where do you see the issue of basically not keeping up with competitors on new clients? And secondly, I wanted to ask, when you say foreign banks are coming back into the market, are they coming back in force in terms of opening branches or participating in corporate and M&A activities and competing for fee business? Or is it more, more just lending relationships that, or, or sort of, going for the large corporate loan commitments? And just lastly, do you have any comments on your issuance of AT1 securities? Thank you.
Thanks for the good questions. Now, I mean, we don't want to buy customers, and we're very pleased with how the market share development progresses. So, I think that's the simple answer on the first question. Foreign banks, I mean, they want to be part of the M&A activity here, and then they have to extend their balance sheet, and have that presence. So it's not through increased branch offices or anything. It's the very traditional way of coming into consider business through using the lending book. I don't think it is at the levels prior to the crisis. It's just that they are returning back. On the last question, Göran.
AT1, I think we are still in the same mode as earlier. We want clarity on regulation. I don't think it makes any sense to us to front-run regulation in order to be first mover. We, the more clear it becomes, the better pricing we should achieve by the end of the day.
Okay. Thank you very much.
Our next question goes to Mr. Jacob Beckman from Danske Bank. Please go ahead.
Yes, thank you. Good morning. One question remaining from, from my side. You're saying that mortgage margins were stable. At the same time, you see pressure on the cost of margins and that NII should be more volume-driven going forward. When a 25% risk-weighted floor coming in, how much more do you think you need to increase margins? I think you increased it some during the interest rate cut in Sweden in December, but how much more, compared to the 25 basis points that you tried previously, do you think will remain? Thanks.
That's gonna be dependent on where the competitors are moving, as we have alluded to throughout this call. We tried, it didn't work out. Structurally, the regulator wants repricing to get a change behavior, but the market determines that, as seen, as Göran has also alluded to any margin changes in the quarter, it's been flattish.
Okay, thank you. And do you expect that development to be the same in the coming quarters?
Depends on what our peers do.
Okay, thank you.
Our next question comes from Mr. Ronit Ghose from Citigroup. Please go ahead.
Hi, yeah, it's Ronit from Citi. Just a couple of small questions. First of all, on the NSFR, still better than your peers, but it's gone down 2 points, quarter and quarter. Can you just give us a little bit more color on what happened in terms of the calculation, why it's gone down to 89? Secondly, on the trading line, just looking at the footnotes on note 7, looks like a very big delta on fair value on loans. Is there something I missed there? If you could add some color on that, that would be great. And thirdly, and finally, just a big picture question, going back to, actually, Riccardo's question on loan growth.
I hear what you say about loan growth, but given that the regulators being or the policymakers being quite concerned about residential and housing loan growth, I'm just wondering, what kind of volume growth do you feel that the policymakers would be comfortable with, comfortable with, without pushing up further countercyclical buffers? Thank you.
I mean, we have seen a significant drop in loan growth the last five years, from close to 10% per annum, down to slightly north of 5 or around 5-ish. If that comes down to GDP, I think they are very pleased. It's the house price development that they will be monitoring. And the, the biggest mitigating factor they can introduce is new housing starts. And Mr. Borg has been very clear that he will monitor this question on a biannual basis. So he has a few more policy tools in his, in his toolkit that, that he might then use if he don't see the right development. So I think policymakers and regulators are on top of this issue and see the, the seriousness in it, but wants to take it step by step.
On your NSFR question, I think there is between quarters a great deal of volatility, depending on how you end up on the maturity structure there. So you shouldn't read anything into that one. And it is correct that we are better positioned on that parameter than some of our peers. Your question about the result fair value option there, I'm not on top of that one here. I think you need to call Gregori, and we can deal with it on a bilateral basis.
Okay, sure, I'll follow up on that one.
Yeah.
But just, just to go back on loan growth. You're saying that loan growth in line with nominal GDP is something Mr. Borg, regulators, policymakers are gonna be happy with?
That, I mean, that's our assumption, that they want it to come down to that level. But it's... They're more looking at house price development than... And of course, there's a correlation with loan growth, but house price correlation, price increases is what they want to avoid from this point.
Yeah, I think that's very important to the... I mean, if we see continuous property prices going up without a new stock being created, it creates a problem in the end. So if the loan growth as such is not the problem, on the contrary, I mean, we would be happy to loan 100 billion SEK more to a bigger stock of properties in the Stockholm area. That would be extremely beneficial for the growth picture of Stockholm and productivity of Stockholm and so forth. So I don't think you should it's about property prices and stimulating output.
Got it. Great. Can I just have a quick follow-up on the other expenses line item? You may have talked about it already. The jump in IT expenses in Q4, there's a reference to accelerated depreciation in the text. Is there some one-off there on a product or a project that would recur?
There is a lot of small one-offs. In the Baltic, there was a changed depreciation, I think we mentioned it in the... Regarding to leasing. Also, we closed Bart, which was a system-related thing, that was a one-off. And then there's normally a great deal of seasonality on IT development, that, the spending intensifies in the fourth quarter when everyone wants to close their books. This year around, it was a bit bigger than anticipated.
And then we also closed the EU project in Latvia, which was a big factor.
Of course. Great. Thank you.
Our last question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Yeah, I had a follow-up question, but Ronnie has just asked it, so I'm happy with it.
There are no further questions on the telephone.
So once again, thanks for being so active. We really appreciate this opportunity to debate our quarterly results in detail with all of you. Look forward to having you next quarter.