Ladies and gentlemen, welcome to the Swedbank Year-End Results Conference Call 2012. 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.
Thank you, and thank you for making this call. Of course, we are very proud with the year 2012 from a financial point of view. We have worked extremely hard to reach a profitability that not only makes us resistant to a worsening economy, but also allows us to invest in the future, and it's more specifically in service and accessibility and advisory capacity in the frontline. The entire organization has delivered throughout on the cost side, and this has enabled us to adjust to the new regulatory environment. I think that is a very important sort of achievement through the year. We have also, despite the uncertain economic environment, increased our revenues and done good on repricing, even if we believe there is more to be done on the SME sector and corporate sector in general in Sweden.
LC&I performs stellarly and has increased the customer content in their business. And if you look at the Baltic banking, they have had a tougher environment due to lower interest rates, but we'll have to continue to focus on costs going forward. The work to reduce the risk level in the bank continued and should have positive benefits going forward. And the stellar performance has also allowed us to allocate SEK 750 million to the profit-sharing system, Eken, in the bank, which will give a Swedish employee, in average, 1.25 monthly salaries, and the Baltic employees, 2.5 monthly salaries in average.
Overall, I feel that we are very well positioned for the future, and that has also enabled the board to increase the dividend policy from 50% of net profit to 75%, and they have recommended the AGM to agree to a dividend of SEK 9 and EUR 9 per share. I see this as a sign of strength in these times. Despite this increase in the dividend policy, we continued to build our Core Tier 1 capital base in the quarter, from 17.3 in Q3 to 17.4 in Q4. We will continue to build capital, although at a slower pace going forward. I feel that we have a strong competitive position. We can be with our customers going forward.
We're investing in the front line, and after Göran has gone through the financials, I will talk slightly more about 2013. Please, Göran.
Thank you, Michael. Putting more numbers on what Michael was saying then, starting with our retail division, we continue to have a very stable income generation there. We have seen, of course, pressure on the deposit margins as STIBOR is coming down, but we've been able to mitigate almost the full impact of that through continued repricing to the new regulatory regime, really. Positive in the quarter as well is that we have seen a little bit higher sales activity in Robur and also higher provision or commissions relating to asset management in general. And the asset quality continues to be very solid, and Håkan will come back to that later on. The division that we are seeing the most progress, I think, over the last number of quarters, I think, is LC&I.
I think it's good to see that they continue to build the client-driven part of the income, both through what they do on from a trading point of view in FX, debt, capital markets, and so forth, but also in the loan book, we are continuing to expand the margins, and the risk-adjusted result looks very solid. Activity has, in general, been a bit higher here in the fourth quarter, as you know, as the risk appetite has increased in the financial market, which has been good. We continue, though, to sort of not reaching the return hurdles that we want out of our equity and investment banking business. Partly, of course, that is a structural phenomenon, but also cyclical, and we are continuing to work with that.
Credit impairment-wise, we have had one larger credit impairment of SEK 110 million in this quarter, but the return numbers are positively developing, and the cost control is really lowering the break-even level. So I think in general, we have increased the customer share and decreased the break-even level, so we are in a very well-placed position for a better market environment, if that would be materialized. Turning to the Baltics, I think that is the environment that is the most the toughest for us. We are at the bottom, sort of, of the credit expansion or the credit development in this cycle, where we have said that during 2013, we expect credit growth to resume. We think that is still valid.
But of course, the NII has been negatively impacted by the declining deposit margins. In this quarter, we have also had a one-off effect, Lithuania, relating to a penalty fee. Seasonally, the quarter has been a bit higher on cost. On the other hand, we have had a little bit higher recoveries in the quarter than we have had during the prior quarters. But all in all, I think we are meeting a rather slow environment that we need to think about how we can mitigate on productivity and efficiency measures going forward, really. Summarizing this on group level, and adding on sort of the treasury effect and the tax position, of course, the very good quarterly increase in result is driven by one-off effects.
We have a SEK 300 million one-off effect in treasury, relating to a buyout of a T2 instrument. We also have a pure reclassification of income between net gains and losses and NII in treasury, where the NII has increased by SEK 78 million, and we have seen almost the equivalent decrease in net gains and losses, that sort of inflates the numbers a bit in NII terms in treasury, it's important to remember. And then we have, of course, the tax gain that is booked in the fourth quarter. Overall, though, I think it's quite good to see that even though we have headwind on deposit margins, both in the Baltics and in retail, primarily, we are able to mitigate that through repricing on the lending book.
So the quarterly change and on the underlying NII development is stable, which is good considering the declining interest rates. Cost is seasonally higher in the fourth quarter, very much bang on what we expected it to be. So it's not an uptick of any structure that you see in the quarter. And of course, we are extremely happy with being able to deliver almost SEK 1.5 billion in cost savings during a year, 8%. That has enabled us really to lift the profitability to the levels that we are sort of aiming for.
Turning a little bit to next year and the thinking around the resource allocation within the bank, the cost picture, I think overall, we are saying that the cost for 2013 will be equivalent to the cost in 2012, more or less. It will not be higher. If anything, it can err on the lower side, but that will, of course, depend on the macro economic development as well going further, what we will see coming ahead. Within that cost, there is, of course, a lot of traffic or changes between areas. And what Michael is pointing to is that we do have investments that we want to do in order to sharpen our product offering, both in terms of number of people actually in our regions, meeting clients physically.
So we are employing people there, and we will also look to invest in our digital channels, being an iPhone, iPad or internet banking office, to make the using of it more friendly and more automated, so it becomes more of a straight-through processing. That we would put more resources in, and hopefully, we will bond more with the clients by offering them more in terms of services and product deliverance. And the money we intend to invest in this part, we need to finance somehow, and that will be financed through reducing our presence in Russia and Ukraine. We will continue to do that. And we will continue to ramp down the Ektornet that have had its peak year in 2012.
As you know, we have costs of around SEK 600 million in 2012 for Ektornet that we aim to ramp down next year quite significantly. Then further on, we will look for other areas of improvement as well. We have talked about reducing the complexity and the number of products that we give clients and making it more straight-through processing. There, we aim to see efficiency gains as well. But in essence, the exactness on where we will end up in costs will be more dictated by the macro rather than by the centrally set target in the realization of also of a more decentralized way of governing the business. Lastly, a few words about capital. We have previously talked about a capital target of Core TIer 1, around 13.5, 14.5.
I think, we haven't really gotten any more, regulatory clarity, so, there are still uncertainty on if, the Pillar 2 on risk rates will be a Core T 1 demand or a total capital demand. So in essence, we have widened the span for, for capital targets to 13%-15%. The point is that we have... In an environment where you see a rather subdued credit demand and you have a very high profitability, you accumulate capital very quickly. And looking at the picture here, you can see really how that Swedbank has, in the last... five years almost accumulated SEK 40 billion worth of capital in protection to a balance sheet that has become smaller.
And, with that, we think that we are coming to an end point where there is actually becoming unproductive for all stakeholders to have more capital. So we are already now in a full Basel III, including the effects of IAS 19, we are at 15.4% in quarter one, which is above our target. And there is in light of that, the board has decided to change the dividend policy and propose a higher dividend to the AGM in order to really slow down the speed of capital accumulation going forward. With that, I think I hand over to Håkan for risk.
Thank you. Looking at asset quality, the fourth quarter has been a good quarter with lower credit impairments than expected. We have seen some signs of improvements on a European and a global level in the economy, but it's too early to say if and when there will be an impact from that in the Swedish environment. We still don't see any impact on impaired loans and credit impairments from the somewhat weaker economy. The increase in credit impairments compared to last quarter in Sweden is mostly due to one large corporate client within LC&I that is no longer in the balance sheet. Thanks to the early and proactive approach we have when problems arise, we manage to solve them together with the clients. And given the very low levels we have, we cannot really expect much lower credit impairments.
Looking at the early indicators, it's still uncertain if and when we will see whether credit impairments will start to increase in Sweden. The Baltic countries continue to show a positive economic growth, though at a slightly lower pace this quarter. This quarter, we show the highest net recoveries this year. The main reason is that we, thanks to the recovering economy, managed to end the year concluding a few larger restructurings successfully. We have also done some reallocations on mortgage portfolio provisioning levels between the countries, meaning a reduction in Estonia, and an increase of provisions in Latvia. The workout portfolio from the crisis in the Baltic countries has decreased rapidly, and working out the remaining portfolio will most likely give little opportunities for continued write backs going forward with the current real estate price levels.
On the other hand, the inflow from impaired loans and credit impairments from the portfolio not stemming from the crisis, is currently almost nonexistent. In Ukraine, we have impairments of SEK 117 million in the quarter. Roughly half is due to creating a collective provision in the SME sector, and the other half is due to a correction of provisioning levels of a couple of exposures in FR&R. The market is still very uncertain, and further impairments in 2013 cannot be excluded. However, our net portfolio has decreased to SEK 1.6 billion, and we expect impairments in 2013 to be significantly lower compared to 2012. Looking to impaired loans, they continue to decrease in this quarter due to reducing the crisis portfolio in the Baltic countries and Ukraine.
The impaired loans in the non-crisis portfolio have been stable on very low levels in all our four home markets, also this quarter.
Thank you, Håkan. Let's then turn to 2013 and our focus during this year. I mean, critical for us is to remain remain focused on profitability as it allows us to invest in, in customer experience, customer service, and customer accessibility. The customer satisfaction measures that we have seen lately is plainly too low for us to be satisfied, and we want to be a bank that is in the forefront, that allows our customers to get easy and, and usable access to our services. Therefore, I'm very pleased with the development during 2012 when it comes to our digital channels. In total, we have 3.5 million internet bank customers in Sweden and 1.7 million active internet bank customers in the Baltics.
We have 1.4 mobile bank customers in Sweden and some hundred thousand active customers in the Baltics. If you look at the number of logins that the Swedish internet bank, internet bank, and mobile customers have done in 2012, the number was a staggering 475 million logins, whereof 210 million were in the mobile bank. So it's a channel that is moving in acceptance level quite significantly. 10% of all private individuals security transactions were done over the mobile bank in 2012, up from 3% in 2011. All of this enables us to transform the bank and move a larger part of the customer base into the channels, including the telephone bank.
And that part of the bank would also have a profitability and customer responsibility for those customers. That in itself enables the branch network to focus on spontaneous meetings with customers, but also more relationship-driven meetings. And we are employing 120 new advisors, both corporate and private advisors, to address the affluent and the SME segment. If we look at our focus areas, 2012, we said that we need to move ahead in the mid-corporate segment and private banking, and we have done well there. This year, we're gonna focus on the affluent and the SME segment. So we feel comfortable that we are investing in the right areas, and that we are enhancing our ability to deliver towards the customer base. I'm also very happy with the involvement of large corporates and institutions.
They have increased the client content in their earnings, they have less volatility, they have reduced costs, and also there, our selective customer strategy is paying off, and I feel that our competitive situation there is improving as we move on into 2013. If we look at the Baltics, they have a very stable business. They have adjusted nicely to the environment, but the environment is still tough, and they have to work with the tough space also next year. But if you look at the economic activity and provision income, it looks quite good. It's the interest income that is under pressure due to the low Eurozone rates. So the focus for 2013 is, of course, our earnings capacity and investment into an improved customer experience with Swedbank. So with that, I hand over for Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you very much. Just two questions. First, on net interest income, you highlight that part of the increased quarter-on-quarter came from treasury and is, I guess, unusually high or not sustainable. Can you just talk about how much of that? I mean, was Q3 a more normal level that we should see going forward, and is this a gradual phase out that we should expect? And then maybe related to that, just thinking about net interest income trends for 2013 as a whole, you clearly have been successful in asset repricing in 2012, but I guess the second half of the year saw significantly lower short-term rates. Given the growth assumptions you make, do you think you can maintain a positive growth in NII throughout 2013 versus last year?
Then just very quickly, a second question. I think earlier in 2012, we talked about contingent capital, and I think you've alluded that it's a possibility. I mean, do you have any more clarity on that, on whether we should expect issuance in 2013 or whether this is a later issue?
Okay, three questions. Starting off with the first one, I think, this quarter in treasury, as I mentioned, we have a sort of just a translation effect of SEK 78 million that boosts NII. That you should, of course, just take away. The second impact is, of course, that we make extra money in NII in treasury due to the fact that the interest rates are going down, so it becomes a natural hedge towards the deposit margin decline. I think, going forward, we expect the sort of NII to come down in the region of SEK 100 million-SEK 150 million, if you think about STIBOR remaining where it is, for the next quarter. And then it becomes more difficult to project NII in treasury going forward because it's so many assumptions on where interest rates are going.
But there will be a slow... If you assume everything, ceteris paribus, there will be a slow decline with perhaps SEK 50 million more in the coming quarters after Q1. So that sort of is the best guidance I can do at the moment for treasury NII. The underlying NII, so looking at sort of the client-driven activity, deposits and lending, I think if you assume that interest rates remain where they are, I think we are stating two things. We don't expect a lot of volume growth to drive revenue in the planning assumption. If it materializes and we are becoming more relevant in a more expansion market, it will be a bonus. But we do intend to expand NII going forward on repricing, as we think that repricing still has leg to do during 2013.
The last question, I really no further news since the regulatory aspects and the resolution regime is not very clear. Once we have clarity on the resolution regime, I think we can start to map in on more continuing capital. I think we are in a very good position, really, since we have the most of the best quality of capital, sort of, so we can really dictate where we want to come in there. I don't know if you want to add anything, Jonas?
No, nothing.
Perfect. Thank you very much.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning, everyone, Nick Davey from UBS. A couple of questions, please, from my side. The first, on capital, please. In your ICAAP, you hit a trough, quarter one ratio of 10.9%, when adjusting for Basel III. And I just wanted to get your thoughts really clearly from a solvency perspective. That's a very resilient place to be, and as you point out, in the Riksbank studies and financial stability reports you screen very strongly. But more interested really in your thoughts on the absolute level of capital. What your assessment is really about the regulatory response, were you to fall through a 12% quarter one in the stress scenario, what sort of interference you're banking on?
Therefore, how comfortable you are to continue in a position where, in a stress situation, you might fall below this regulatory 12% minimum. Second piece, if you could just give us an update on your RWA efficiency measures. I noticed in the appendix of your slides, you're still talking around the corporate book and various areas of the large corporate business where you think you've got more RWA efficiency ahead. If you could spell a few more details of that out for 2013. Thank you.
Hi, Nick. The first question, I mean, it's a difficult one because it's so unclear what's gonna happen under twelve, et cetera, et cetera. At the end of the day, if you look at the risk reduction in the bank that also continued this year, it should most definitely spill over in an ICAAP that is not as stressed next time around as it was last time around. But we will have to do that exercise, and it should be done by mid-year, and then we'll communicate around it. But that's not an unlikely scenario to have, unless we get a detrimental downturn in the economy that changes all the prerequisites that we're working with. But with the knowledge we have today, that's a likely outcome.
The big debate around capital regime is whether Pillar 2 will be total capital or quarter one capital. If you look at the legislation, they are pretty clear that CRD IV is stating that Pillar 2 issues should go against total capital and not Core Tier 1 capital. While if you look at the SFSA's paper, they're more alluding to that it would go to quarter one, and that's why we're ranging the 13-15. Then the next big question is, what happens if you go below 12? I mean, there are some signals that the measures might be softer than we earlier anticipated, but it's not very clear yet.
So we will have to come back in due time and be more clear on our measure, our reading of the final wordings of the new regulation. And I can't really give you more guidance than that.
I think, Nick, it's Jonas here. I think it's worth mentioning as well that the actual scenario impact from the ICAAP last year was 165 basis points on the quarter one. To take the starting point where we are today, we actually bottom out at around 14 full Basel III ratio. It, quite a lot has happened in the last year as well.
But the important thing is that... What we're saying is that the regulatory uncertainty has actually increased-
Mm-hmm.
To some degree, but has the middle point gone up or down? And I think we are guiding for roughly the same middle point as previously. But if you ask me on the margin, the tendency, of course, to come down somewhat, I would say, in general, from a regulatory aspect. On RWA, I mean, in the quarter, Håkan can fill in on this, we have filed for the IRB Advanced, and that is, of course, a very good that we continue to have that in front of us, and we do expect further LGD and PD impact out of that process. You can compare to some of our peers in there, but we are also sort of waiting for... We need to agree with the Finansinspektionen on that in the end.
Yeah, I think we, we guided, that the total impact of the project, including, the advanced, would be in the range of SEK 40 billion-SEK 50 billion, in Q2 reporting. We stayed on that level despite some positive effects in Q3. Now that we have finalized the work and sent in the application and been able to fine-tune the calculations, we, we conclude that we, we continue to stay with the SEK 40 billion-SEK 50 billion guidance, on the remaining work, where there are still some work to do outside IRB Advanced, but of course, the major impact will come from, from, when we get approval on the IRB Advanced. Okay, so a further SEK 40 billion-SEK 50 billion from here. And any time, time horizon on that, on that process?
Yeah, well, unfortunately, it's the FSA who is now running the process. The regulatory requirement is to have an approval within six months before... Sorry, after, sort of the application is fully received. But since they are deciding when the application is fully received, it's difficult to say. So we will have to wait until we get further clarity from FSA on that.
Okay, that's very clear. So broadly speaking, you'd be able to offset future Basel III and IFRS 9 from those RWA measures?
Yeah, we will come back on that issue going forward. I think what we're stating now is, IRB Advanced is a bonus on top that we can utilize for sort of... It's important for us, of course, not to differ significantly from clients, because then we lose the transactions if we price sort of credit risks significantly different because we have different models from same clients. But it will be a bonus for us going forward from a capital perspective.
Okay.
... the for the helpful answers.
Thanks.
Our next question comes from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi. I had a question on your profitability targets. You have the target of a 15% return on equity, and for 2012, you are now at 16.7%. We hear one of your peers said this morning that they're going to reach a 15% return on equity with a normalized interest rate environment. When will you give us an update on where you are compared today to your target? But also, could you give us a flavor, if you would have a normalized interest rate environment, how much would that impact your profitability? Thanks.
Thanks for that question. If you look at the 16.7, that was the fourth quarter return on equity. If you take away the tax effect, it's around 15%. So yes, in the quarter, we meet the target. On the yearly basis, we are at 14.4. And we want to deliver 15 at any sort of given environment. That's our ambition.
Could you give us an update on what would 100 be by your short rate due to your net interest income, so we can do the numbers ourselves?
I think we have that in the fact book, very clearly stated, sort of the interest rate sensitivity. It's in the magnitude SEK 1.5 billion-SEK 2 billion on every 100 basis points, in there. But I think it, it's like, guiding, if we make SEK 2 billion more in income, how much would your target be down? So I mean, the environment is what it is.
Yeah, sure.
We live here and now.
Yeah. I agree. Thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi, Sir. Jacob from Autonomous. Just two questions. Firstly, on the mortgage margins, there were some announcements from SEB that they were cutting mortgage pricing for a big chunk of Swedish clients. And I just wanted to see if you are responding or if you're seeing anything in the market or your market shares on the front book from those initiatives. And secondly, on the dividend payment and the payout ratio policy, have you received any kind of feedback from politicians or regulators on this target? And were they informed prior to you raising your payout ratio? Thank you.
I mean, any changes in the mortgage market takes three to four months to come through in the numbers, so I couldn't comment on that. But if you look at our margins, they have been stable throughout 2012, when it comes to new lending. Of course, fixing periods that has fallen due, as i.e. longer, have been raised to the new margin level that was established during 2012. If you look at our contacts with the regulator, of course, we meet them frequently, and we talk about our performance, our risk levels, and our capital targets. So that has been part of the normal business contact with them, and no specific feedback from that.
But they were aware of the 75% payout ratio prior to you setting it?
Yes.
Okay. Thank you.
Our next question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Hi, good morning. Thanks very much for taking the questions. My first question is on costs. Firstly, just looking at your outlook, the language seems to be that you're looking to keep costs flat, total costs flat, year-on-year. Whereas before, I think, the focus was on excluding variable compensation, the savings banks fee. So I was just wondering if that's a purposeful change in language, and whether you could add any more color on that. And then secondly, just a quick question on the Baltics. I would have assumed that the fourth quarter would have been the trough for Baltic NII, rather than the and instead of the third quarter.
So I was just wondering how you see things playing out the rest of the year. Perhaps it's a little bit early to expect volume outlook coming back, but with deposit margins at the floor and more coming through in terms of asset margins and volumes potentially picking up in perhaps 12 months time, then should we get more... I guess, what's your NII outlook for that division? Thanks.
Starting with the Baltic, I think, yes, we are at the trough. The question is really about, how long will we be at the trough, and what will be the, once things, grow a little bit faster, how much, how big speed will you see in that? I think we are quite uncertain of that, given the macro, macro outlook in general. I think the message today is, yeah, even if we think we are at the trough and things will improve, we might have some more efficiency, work to do anyhow. That is sort of the communication. So that's the Baltic. If we talk more on the cost side, cost in general, I think we're trying to say a couple of things.
One is, we reduced cost with 8% last year, even though we actually set aside more money on variable pay. So underlying it even more, and that is quite an achievement. We need to stabilize all work processes and so forth, and it's quite uncertain environment we are living in. We don't know if we need to do more on costs if the macro turns out much worse than expected. So we leave that question a bit open. At the moment, we feel sort of the profitability that we have returned towards now and the cost level we have now, we're very happy with. Within that number, there is a lot of traffic.
Of course, there are cost reducing activities that Mickey was talking about that we need to do in terms of Ektornet, in terms of the product complexity and rationalization, and so forth. But there are also a lot of things we want to invest in, in order to sell more products to more clients within the existing home markets. So we want to be more sharpen up our product offering, and we need to learn the organization not to compete on price instinctively, but to compete on service level, loyalty, and also having a superior product, and that we want to put money behind.
Okay, that's great. Thank you very much.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning. Good morning to everybody. Just one question. When you depict your scenarios on payouts, returns, and so on, what kind of level of rate do you have in mind for the next, let's say, foreseeable future? And then another question, I just wanted to better understand previous clarification on the impact of advanced on corporate. Is the SEK 40 billion-SEK 50 billion you were talking about just related to that? I'm not sure I got it completely. Thank you.
I mean, if we look at the payout ratio, this is the payout ratio for the foreseeable future, as we deem the credit demand to be low. Despite this payout ratio, we can, with unchanged sort of effects on IRB Advanced, et cetera, et cetera, not counting them in, grow our credit book with 4%. And as you know, we still have some positives from the IRB Advanced. So, I mean, we are in a position where we have a very robust balance sheet and the capacity to support our customer base, but we don't see that level of credit demand right now. So, I mean, I feel comfortable with this payout ratio, and I don't think we'll revisit it in the near future.
What level of rates do you have in mind for the next, let's say, foreseeable future? And then another question, I just wanted to better understand previous clarification on the impact of advanced on corporate. Is the 40-50 billion... What level of rates do you have in mind for the next, let's say, foreseeable future? And then another question, I just wanted to better understand previous clarification on the impact of advanced on corporate. Is the SEK 40 billion-SEK 50 billion you were talking about just related to that? I'm not sure I got it completely. Thank you.
I mean, if we look at the payout ratio, this is the payout ratio for the foreseeable future, as we deem the credit demand to be low. And despite this payout ratio, we can, with unchanged sort of effects on IRB Advanced, et cetera, et cetera, not counting them in, grow our credit book with 4%. And as you know, we still have some positives from the IRB Advanced. So, I mean, we are in a position where we have a very robust balance sheet and the capacity to support our customer base, but we don't see that level of credit demand right now. So I mean, I feel comfortable with this payout ratio, and I don't think we'll revisit in the near future.
On the SEK 40 billion-SEK 50 billion is a combination risk-weighted assets decrease. It's a combination of a number of smaller projects that we are running, where we have seen some positive effects during 2012, and they will continue in 2013. But the major impact is when we are getting approval of the IRB Advanced application.
Okay, thank you. Just to be clear, on the level of rates that you have in mind for the foreseeable future, the level of short-term rates. I'm not sure.
Sorry, we are planning for low interest rate environment for the foreseeable future.
Basically, the current ones?
Yeah.
Okay. Thank you very much.
Our next question comes from Mr. Jan Wolter from Deutsche Bank. Please go ahead.
Yes, good morning, Jan Wolter here, Deutsche Bank. Two quick questions. First, how important is it to you to maintain the nominal dividend level? So let's assume that profits fall by 10% or something this year or next year. Will the dividend fall with that, that with a similar amount? Is that the first question. The second one is, how important is it for you to get back to, say, 25%-30% market share in new mortgages, or don't you think in that way at all nowadays? Thank you.
Okay, I take the second question, and Johan will take the first one. I mean, for us, over time, of course, we want to be a large player in the Swedish mortgage market, but we also want to have a responsible-
... as long as we don't see an increase in new production of apartments and housing in Sweden, we feel that it's not the best of business decisions to lend more money to existing housing. It's rather we want to inspire politicians to deregulate and build more housings, and we need that dearly in the big cities. And we will come back on market share. I'm quite convinced on that step by step. But I think we have had a prudent way of looking at it up to now. And of course, over the years, it will be slightly more important to look at volume and market share than just risk. But mind you, we have four vintages of low participation in a market that has increased debt levels in Sweden.
So I'm very comfortable with our strategy and our tactics, and time will be our friend on this one. You can't have these sort of abnormal movements in market share for the longer haul. Things will revert to mean over time.
If I just adding on that, Mikael, I think it's of the new origination that we are doing, we have significantly better LTV quality, so that's very good to see. We, we model our sort of income generation capacity against our capital position going forward. And I think important there to state here is, of course, since we are raising the dividend policy quite a bit, is that we want to achieve, because we think our business model and asset quality, we want to achieve a position where we have the lowest funding cost. We cannot obtain that position if we don't safeguard an extremely good capital position.
That is the sort of overall objective from a funding capital position, to be able to fund yourself cheaply, be the most relevant player in the market. You can choose your clients to a higher degree. It will take years for us to come to that position, but let us, one step at a time. It's all... That has, of course, been an aspect in not sort of having a too aggressive capital policy, repatriation or dividend policy. We think we are on very, very safe grounds in, on, on this aspect.
Thanks. Just, just to be clear, what I'm asking is really if your nominal dividend level right now proposed SEK 9.9, that could be 10% lower if profits fall 10% year-on-year. So you're not strict on keeping the nominal dividend level. That is not important to you in your policy?
Absolutely.
If that's the way investors should read you.
Absolutely.
Okay.
You are correct.
Okay, thank you.
The important thing is to continue to strive for what I just said.
Very clear. Thank you.
Our next question comes from Ms. Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie Peterzens from JP Morgan. I, I was wondering if you could just, talk a little bit about your funding costs and how you see them develop over the next, year or so, and also how much of the, kind of, a little bit more expensive 2008 and 2009 funding you still have on your book? And then I was wondering if you maybe also could talk a little bit about your mobile customers that bank over your iPhone and iPad applications. How much, or, or what's the difference in, revenues for a mobile phone banking customer compared to a traditional branch customer? Thank you.
If I start with the funding costs, if you look at the fact that you find the mix between senior and covered, on the senior side, we currently have an average back book cost of around 155, 160 basis points over STIBOR. On the covered side, it's roughly 80 basis points over back book. Sorry, over STIBOR on the back book. If you look at new origination, if we were to do a say five year deal today, on the covered side, we would print that at 35, between 35 and 40, perhaps, mixed between Swedish and euros. And if we look at the senior side, it's 50, 60 basis points higher than that. So we're clearly sort of replacing expensive funding with cheaper funding.
Then the question obviously is, I mean, in our internal pricing system, we let that flow straight out to the business. And so the question is, to what extent this will benefit Swedbank AB and shareholders, or whether that will benefit clients, that's another question. But on the isolated funding cost, that's how it looks today.
Good. Thanks, Jonas.
If we look at the iPad, the mobile bank, the internet bank, and also the telephone bank, what we see is that customers use that because it's convenient, it's easy access, they have control over their economy because it's real time, and they transact not only payments, but also securities transactions quite easily over those new devices. I believe that those devices will not only benefit the many customers that only have a transaction relationship with us, but also the more affluent customers show that those channels are an important tool for managing their financial statements and financial transactions.
... The key here is to make these channels a profit center, so that they see this customer base, and feel that they have full responsibility for their earnings over time. And that would then enable the branch network to spend more time on customers that you need to have a deeper relationship with in order to understand the risk and help them expand their business. So that, that's the sort of driver of the reorganization, but it's also supported by the actual behavior of our customer base.
Okay, thank you very much.
A reminder, that if you'd like to ask a question to the speakers, please press zero-one on your telephone keypad. We have a question from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. Can I explore a little bit more, where asset margins could increase in 2013? And secondly, Jonas, you mentioned spreads in the wholesale market are quite attractive at the moment. How are you thinking about prefunding, aggressively in Q1, Q2? Thank you.
Yeah. Hi, Chintan. Göran here. The first question, then Jonas can elaborate on the second. Yeah, asset margins, I mean, of course, it's always difficult to know where the sort of new sales margins ends up. It is because it depends what, what peers and competitors are doing as well. But I think we, we have certain areas within the bank that have been better and, and certain areas that have not been as successful in repricing. So we do think there are still activity ongoing in terms of repricing. And then there is, of course, a maturity ladder where you, you just cannot reprice until things matures. And my feeling is that, sort of, in general, the banking system is sort of restoring back its profitability.
So I think the general, competitive environment, everyone is focusing on this issue, and that will continue to support our activities in that. And we clearly are pointing towards areas where we feel we see underperformance to start to come into more performance alike. We are not going to quantify this. We just highlight that we continue to emphasize on that being an important business driver.
That should be on mortgages and corporate side. There is a scope on both sides to generally have some improvement.
I think in general, I think the reprice there, mortgage new sales margin have been, in general, very stable this year. And, I do think, and I think I've said that, and Micke said it many times, that, the repricing is much more centrally driven there from banks, while the corporate, exposure, which actually consumes 75% of the capital, is a more lengthy process. So, in general, we are looking for the corporate ones to contribute more going forward than the mortgage side. That's fair to say, I think.
Okay.
On the prefunding side, Chintan, I think we—I mean, we have in previous years had a tilt towards the first half of the year in our annual funding plans. We have a little bit of that this year, but not at all as much as we've had in the past. I think we feel quite a lot more comfortable with both our position and the market situation now when we plan our funding than we did only a year ago. But it will actually be a little bit more of sort of a coincidence also when we update programs and come to the market in that respect. So I think you, you're still right, but it's not because we're very concerned about the future.
That's not the reason for the prefunding, really. It's more that it happens to be that we update now both our U.S. programs, and we're also looking at the Euro market.
Okay, thank you. If I may ask one more. The cost income ratio for the group is around 46%. In the past, you've indicated, kind of, trying to trend towards Handelsbanken, so have a lower cost income ratio, but the cost guidance doesn't imply that. It seems to be more revenue-driven from here on. I just wanted to think about longer-term thoughts, not just 2013, but if you take a three-year view, what are the opportunities that you may have versus your inability to stop investment programs because you can't let infrastructure go old? Thank you.
I think on the cost income ratio, I think our view is that cost efficiency will be a factor in competitiveness. And that's, I mean, we should have the most cost-efficient bank. And our customer base is very apt to use digital channels and new technology, which will help us transform the branch network over time. We have a product complexity that we want to address. So for us, competitive cost base will be extremely important to maintain and develop. Yeah, I think we said that it's quite difficult to steer on an absolute level on that because it's so much macro in it.
And therefore, we sort of try to get the feeling in the organization, why shouldn't we be able, with such a broad base of clients, that should be sort of cost per client or per transaction should be very low, why shouldn't we aim for the number one position there over time? So that ambition still remains. Even if, even if we now talk about flat costs, it's not a contradiction. Then I think if you look beneath the flat cost measurement, of course, we are reducing costs in Russia, Ukraine, Ektornet, which is a drag on the P&L, and we want to input costs that produces revenue. So, it's about improving the mix there, of things that we actually think is sustainable and, increases the return, the return and the EPS growth over time.
Russia, Ukraine, and Ektornet is clearly just a cost burden for us, that's a legacy that we want to sort of wrap up, earliest possible way.
Yeah, and it becomes income drag.
Yeah.
Thank you. Have a good day.
Thank you.
Our next question comes from Ms. Claire Kane from RBC. Please go ahead.
Hi there, it's Claire Kane from RBC. Just another follow-up on the long-term payout ratio. I guess you're at 15.4 now, and that includes, as far as I know, the SEK 40 billion -SEK 50 billion RWA mitigation, which you expect for the second half of this year. If by the end of the year, you've got that approval, you're kind of around the 16%. Now, what stage do you start to kind of bring in buyback programs to get down within your target range? And then my second question, please, is the repricing of the SME market. I mean, you've spoken for some time about the need for that to move forward and the reluctance of yourselves and other players to lose market share in the near term.
What catalyst do you think is going to drive that now, given most of your peer group are where they need to be really on capital, so capital is not really driving it. Do you think there will be now a further renewed focus on profitability on that sector? Thank you.
Thanks for those two questions. If I start with the capital, I mean, we want to be a bank that has robust buffers for whatever scenarios might play out, and so that is a consequence of risk reduction activity and other things. Then it's also important not to be overcapitalized. So that balance act is gonna be judged at any given time, and we want to be on the safe side, but also not feature that we are overcapitalized. So I can't guide you more than that because there are so many uncertainties. So we'll revisit the question once a year, and of course, once we have regulatory clarity, we'll also address that from that point of view.
On the RWA thing there, in the 15.2, we have not included the SEK 40 billion-SEK 50 billion on, reduction relating to call it modeling and so forth. That is on top. Having said that, of course, there is an ongoing discussion about leverage ratio, risk weight floors, and so forth, that we need to be aware and monitor. But from our point of view, of course, it feels good to know that we are on the high end on corporate risk weightings because we haven't introduced IRB Advanced. But let's also think about how the regulatory aspects will play out on that particular point, going forward.
If you compare us with certain peers, you can see that if you think the credit quality is almost sort of the same things because we operate in the same market, there are huge capital differences relating to the modeling in there still to come. But we don't really know how the regulatory aspects will play out, and correctly so. There is no SME approach; it's SME.
Repricing on SME?
Yeah.
I mean, it's not a negative that Nordea raises their capital targets to 15%, 13. So, I mean, it shows that there is some repricing to meet the new capital regulation in the marketplace, and it has taken place in the mortgage area, it has taken place in the large corporate area, and it has been slower in the SME sector. But it's a competitive environment out there, and it's a business that many banks wants to have on their books. So you have to sort of say that you have an ambition, and you have to work diligently on it. At the end of the day, it's critical for bank to price risk correctly to get the sound and sustainable economy. So, that's our sort of vantage point on this one.
Thank you.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Yes, thank you for taking my further question. Just a kind of general one. Before setting a guidance of 75% payout ratio, which is clearly a very high one and don't get beyond we like it. Have you ever thought about another, a different way to use the huge capital that you generate quarter after quarter?
I mean, we are very happy with our four home markets and our position there, and we think that we can exploit that further. There are market segments and geographical segments that we want to expand in. It's a low-risk strategy. It's showing good returns as we speak, and that's where our focus is. And there's so much more to be done in our existing home market. So, management will do its utmost to take the benefits from the position of strength that we have put ourselves in.
Yes, very clear. Thank you very much.
There are no further questions. Please go ahead, Mr. Michael Wolf.
Once again, thank you for attending, and thanks for asking so many good questions. Thank you, and look forward to meeting you at the next quarterly results presentation.