Ladies and gentlemen, welcome to the Swedbank Year-End Report 2011 conference call. We are pleased to present Mr. Michael Wolf, President and CEO. 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.
Good morning, and thanks for attending our fourth quarter results presentation. As we put 2011 behind us, we conclude the critical transformation of Swedbank in terms of establishing a financial strength that will give us a competitive advantage going forward. We have built the necessary capitalization, funding structure, and liquidity buffers, not only to ensure our resilience to external shocks, but also to meet tomorrow's demands on banks from regulators. Riksbank confirms our financial strength in their latest stability report, and we were one of the few banks that S&P upgraded during the autumn. In 2009, we articulated that our aim was to reestablish Swedbank as a traditional retail bank in its four home markets. A business model built on local decision making and close relationships with customers and the local communities.
We did also establish that our purpose was to promote the sound and sustainable financial situation for the many households and enterprises. Our focus and our purpose have directed us to reduce the risk in the bank over three years, and our asset quality is today improved significantly. We have welcomed the new regulatory environment as we fundamentally believe it will benefit the society. It will make shareholders and not taxpayers responsible for future possible losses in the sector. Therefore, it should drive better risk-based pricing and more sound leverage ratios. This risk transformation is sound as it will help mitigate unwanted and unsound cross-subsidies. But we need to accept that it comes with a significant cost for the banks. These costs will have to be shared by all stakeholders. Our return on equity is on historical low levels, despite the boost from Lehman one-off income.
The economic uncertainty, and thereby the lower economic activity that we see, will be mitigated by increased cost focus in the bank. As we announced late last year, we have taken a restructuring charge of SEK 330 million. We do also see other opportunities for cost savings and synergies, and our aim is to reduce the underlying cost with SEK 1 billion in 2012. We have also taken significant steps to align pay in the bank. Eken, our profit sharing program, aims to support better cooperation internally and be a carrier for cost and risk focus. The individual bonuses declined to SEK 230 million in 2011. In 2012, we will reduce the number of participants in the individual variable pay program with a third. Margin increases are not compensating the additional cost for being compliant with the new regulation.
The whole debate around this can only be dealt with through openness. To conclude, we enter 2012 from a position of strength financially, and this allows us to put our entire focus on customer relations and improving our operational efficiency. With that, I hand over to Göran.
Okay, thank you, Michael. Well, I think if we look at the quarterly results, we have already provided the details to the market on that we took a goodwill write down in the quarter as a direct consequence of the new capital regime announced by the Financial Inspection of SEK 1.9 billion. We have also announced that we are in the quarter booking a restructuring charge relating to redundancies of staff during the fourth quarter and also for the first half of this year over SEK 330 million, relating to 600 persons. If we look then at the underlying result, I think overall, it's a very stable result. We have a slight increase in income.
Most of that is relating actually to better capital markets activity and better income in that part, but also we have seen some positive valuation effects on group treasury. We have a number of one-offs, though, appearing in the different lines, and we have provided analysts with an email specifying the number of one-offs after the disclosure in order to understand this better. But if we look at the net interest income, we are affected by a positive one-off of Lehman Brothers of SEK 200 million. At the same time, we have actually booked two times 50 and negative one-offs, one in the Baltic banking arena, and one in group treasury. So the net positive effect on NII or one-off is SEK 100 million.
Net commission income is negatively affected quarter-over-quarter by lower corporate finance finance incomes, which are still struggling in a difficult environment in the fourth quarter. But we have also seen somewhat less income relating to asset management and also payment provisions in the retail business area. And as I mentioned earlier on, in net gains and losses, we have an increase, mostly relating to valuation effects in the treasury, but also better results and client-driven activity in Large Corporates and Institutions. Looking at the cost development, excluding the restructuring charge, I think it's very much in line with what we projected to have in the fourth quarter. We have a small seasonal effect of SEK 200 million between the fourth and the third quarter that we normally see.
Otherwise, I think costs have developed more or less according to plan. Moving ahead and looking forward, I think, of course, as Michael has stated earlier here, that cost will be a focus area for us, and we intend to reduce our cost base with SEK 1 billion. So if we have a 17.9 billion cost base in 2011, and we exclude the one-offs that are in there due to restructuring charges and also take out the variable pay, we are at the cost base of roughly 17.1 billion, that we intend to reduce down towards the 16 billion mark. That is the sort of target and the ambition of management during 2012. And then, of course, we will continue to focus on being capital efficient.
I think one of the achievements in Swedbank is, of course, to be capital efficient, and we can see proof of that, that we have a very significant upward move in quarter one, in this quarter as well, with 15.7 in quarter one, which is very good to see. Turning to funding, I think there is not too much to actually talk about there. We had a quarter with very high maturities. We have SEK 90 billion of maturities, and we continued to fund ourselves with SEK 44 billion of long-term issuance. We did increase the collateralization in the covered pool to 29%, and we continue to have a very strong liquidity reserve, and there's been good demand for our short-term paper, much as a result of the problems in Europe.
I think the main focus for us now going forward here will be, of course, to continue to the funding activities, but they will come at a much slower pace since our prolongation of the liability side in the maturity structure terms is finished. We are today; we have an NSFR of 94%, and we really feel that we have prolonged the maturity structure and therefore also the maturities are coming at a much slower pace. And at the same time, we have actually increased the liquidity buffers. So, from that perspective, the whole liability side of the bank and the funding risk and liquidity risk have greatly been reduced.
One of the main ambitions now going forward is, of course, to be, to, put the effort of being recognized for that by debt investors and actually having lower funding cost as a result of being a much more secure place for, for the debt investor. Then turning to regulatory compliance, I think, as Michael said, we have worked with so, firstly ourselves, really, to, to make the necessary buffers in the bank, and we have, as I stated, prolonged the maturity structure. We have really built a good liquidity reserve.
We have also built a good capital buffer, and even with the latest capital target or a regime coming from the Financial Inspection now, that even though they were a bit higher than we anticipated first, it is very good to see that we are fully compliant as it looks right now. So we are well ahead in being compliant to a new regulatory framework, but that will gradually come into place 2013, 2015, and with regards to term structure in 2018. And then, of course, that means that it's a significantly reduced risk, and we would like, as I stated earlier, to get paid for that in terms of debt investors and funding costs.
And of course, also the financial impact of this transition is more or less in the P&L statement today already. So we have taken the cost now for this liquidity and research and the prolongation of the maturity structure, which is very good, which puts us in a very good relative position in being able really to be competitive with clients. There it is, yeah, sorry. Lastly, just a few words around capital then. The board has taken a decision to withdraw the earlier capital targets of 10% and 13% as a consequence of the new regime, and they will revert with new capital target as we get the legislation that becomes clearer for us.
In the meantime, though, the management's belief is that we will, with the current proposal on the table, we will aim to have a capital target around quarter one of 13.5%-14.5%, including our risk buffers, full Basel III. In the meantime, we will operate and steer the business towards that. The board has decided to continue with the dividend policy of 50% of net profit. While other kinds of capital repatriation are on hold, awaiting really a clear regulatory legislation, so we have a clear picture on that. Then lastly, we will go to the AGM for a mandate for the board to issue convertible debt instruments.
With that, I mean, being able to be an early adopter of the market for CoCos as and when we see that regulatory become clearer. With that, Håkan.
Thank you, Göran. Despite the global turmoil during 2011, we have seen a positive year from a risk perspective. The trend in credit quality we've seen in the previous quarters has continued with decreasing the impaired loans and improving credit quality. Recoveries for the full year 2011 is a bit more than SEK 1.9 billion. Looking at Q4, we're reporting SEK 174 million in recoveries, which is a bit lower than previous quarters. It is mostly two reasons behind. We've done renewed reviews of the mortgage portfolios in Latvia and Ukraine, and that is portfolios we mentioned also in quarter three. The risks have increased, and the sensitivities to further downturn is higher, so we have added collective provisions of a bit more than SEK 200 million for the portfolios, respectively.
We've also seen a slight increase of impairments in Swedish retail, but, still from very low levels. We have continued our reviews of the credit portfolio in order to, as early as possible, identify clients with potential problems. In general, the new inflow is low, and those becoming problem loans are well known and identified as risk loans already earlier. Looking to risk-weighted assets, the risk-weighted assets have decreased by SEK 49 billion during 2011 and SEK 4.7 billion in quarter four. There are many positive contributions to this. We have a limited growth of exposure at default compared to volume growth, primarily due to the new volumes have lower risks, and volumes with higher risks have decreased. Migration and other credit effects come from clients being upgraded, but also improvements in the rating systems and active work to have correct and timely registration in our systems.
In market risk, the biggest impact is the Estonia euro entry, which decreased the risk-weighted assets by SEK 8 billion. Moving over to 2012, given the economic uncertainty, it's extremely difficult to have an opinion on how risks will develop. Even if there are some positive signals, the problems in Europe are far from solved, and there has been many downward adjustments of the growth prospects. Real estate prices in Sweden have fallen back somewhat, 2011. Generally, we think that is positive, and most likely that may continue, but we see no evidence for a more drastic downturn. Altogether, we expect credit impairment in Sweden to be higher in 2012 compared to the very low numbers we've seen for the full year, 2011.
The Baltic countries have seen a strong recovery 2011, with growth numbers exceeding 5% in all three countries. Even if growth estimates are coming down 2012, we currently estimate that all three countries will have a positive economic development also for 2012. Our current estimate is that we are well provided for the credit risk we have outside Sweden.
Thanks, Håkan. Just to conclude then, our starting point in 2012 is strong. Our balance sheet is well positioned for the new environment, despite the prevailing uncertainties. We now have the resources to support our clients and help them build their businesses, and we'll continue our efforts to decentralize decision-making in the organization, and through more collaboration internally between business areas and staff functions, we intend to ensure that we free up even more time for relationship building activities. With that, I hand over to the moderator and open 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. Peter Grabe from Handelsbanken. Please go ahead.
Thank you. Yeah, two just technical questions and then an additional third, if I may. Firstly, the basis swap, if you can just give us a figure of the basis swap impact in Q4. Secondly, in LC&I, if you can guide us as to how much was trading related and how much was corporate banking related. And then third question relates to the new capitalization target or ambition or whatever you wanna call it, 13.5%-14.5%. Can you also or do you actually add on also an ROE target on top of this?
If we take your first question... The basis of its effect is roughly SEK 150 million. Improvement in large corporate and institution is, I would say, roughly, if I say SEK 100 million relating to the market trading division and SEK 50 million relating to improved NII in the loan book. With regards to a return return target, the return target of 15% is, of course, still the ambition of the management.
Okay, thanks.
Our next question comes from Mr. Chintan Joshi from Nomura. Please go ahead.
Hi, good morning. I've got two questions on NII, and then on funding. On NII, I see that you have some senior unsecured debt coming up for refinancing in 2012, looking at your slide, 2012, looking at your slides. I was just wondering if you could give us some indication of where the front book pricing is relative to the senior unsecured that is maturing. And the second question on NII is, with regards to your liquidity buffers, they've fallen quarter-over-quarter, but somewhere in your report, you mentioned that you are holding buffers for the maturing government guaranteed debt.
I'm just trying to think about how much impact, or rather, negative impact is coming on your NII from this, and how we should think about these buffers going away, and therefore, the negative NII impact going away, in 2012, once you repay the maturing government guaranteed debt. I'll come back on funding.
With regards to, the senior, I mean, the, the government guaranteed debt, mostly that is maturing, coming in March and April this year. And, I think we are-- we don't, particularly intend to, to sort of substitute that, that with senior funding. We're, we have plenty of, space and liquidity, or in also in the covered pool, really to, to substitute that. And I think we have guided the market for that. We have a roughly an uplift of 100 basis points, currently on that one going forward. Then with regards to your... You asked the question, really, what the, the, the, what's your cost for carrying the liquidity up until that maturity, and then you have a substitution effect, of 100 basis points. Now I'm looking at Jonas here.
What would you say is the cost for carrying that sort of liquidity? I haven't really that in my mind.
I think there are many moving parts here. I mean, sorry for talking around.
Jonas just lost his voice. Chintan, I think I have to come back on that one. It's a cost associated with it, but I haven't calculated it, and I don't have it in my head.
Okay. And, then on funding, your overcollateralization levels improved this quarter. Could you explain what is behind that, and also whether the pool includes the impact of the recent fall in the house prices?
I mean, we have a slight effect in the pool of declining house prices, but it's very minor so far, because you have a lot of safety buffers in the pool when you measure price levels. So that's one aspect. The pool has increased partly also because we have, of course, input new collaterals in the pool. We are working very extensively. We have a number of internal projects in extending the pool, really. And gradually, we are inserting more collaterals into the pool. But it's also an effect of the fact that of the SEK 44 billion of long-term funding, we did SEK 7 billion in senior private placement, and we have also increased deposits during the quarter, more than we actually increased lending volume.
It's a lot of moving parts that makes it increase up there.
Would you like to guide us on how much increase should we expect in the pool from what you're inputting into as new collateral?
I think earlier we have talked about 20 to 50 billion, but now we have done parts of that. So I think it's 10 to 30 billion still to come over a period of time. It's a time-consuming effort, though, since it entails changing, doing a lot of IT development, in order to capture all relevant pool assets.
Many thanks. Many thanks.
Our next question comes from Mr. Masih Yazdi from Credit Suisse. Please go ahead.
Hi, good morning. A couple cost questions on your new cost targets. Could you give us a bit more flavor around that? Where is the reduction coming from? Is that cutting staff in Sweden or is in the Baltics? And also, what kind of underlying cost development are you assuming you're gonna have in Ektornet, given those, that new cost target? Thanks.
I think for the cost target, I think, if we just divide it between Sweden and the rest, there is more tilted towards Sweden this time, than it has been previously, of course. But there are, there are a number of elements, towards the cost targets, I would say. One is, of course, adapt to changing and slower environment, and that goes especially for large corporates and the institutions that have already started early summertime last year in sort of adapting the cost base to a new changed, business environment. Then we have, we continue to want to sort of reduce our ambition, particularly in the retail arena in Russia and Ukraine, where we will release costs going forward as well. And that's more a strategic choice that we've done a couple of years back.
Then I would say also that we have seen a rather pronounced cost increases in some group stock units, much of that relating to the cost of handling the crisis during 2009 and 2010. And that cost, we are now, of course, trying to drive down in FR&R and credit and support. And the fourth element towards it is really that we have created an area called Global Business Support, with the ambition to have more efficient processes and streamline the processes more. And, of course, they have a cost target as well in trying to prove that we can improve the operational efficiency in them.
Can you comment on Ektornet? The customer.
Ektornet, I think, actually will peak cost-wise around Q1, Q2. I think we will have roughly SEK 100 million more in cost in Ektornet for 2012 than for 2011, if I'm following sort of my base assumptions. Since we are still repossessing assets and, but particular sort of taking care of the granular assets in Latvia, it's a costly, costly exercise.
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. Three quick questions, if I may. The first, please, on your discussions of Swedish asset quality. Clearly, there's been a pickup in loan losses in Q4. You put that down in the report to few corporate commitments. Could you please just talk a bit about your observations as to, let's say, which segments that's coming through in? Also, in your appendix slides, your presentation, you talk about monthly house prices down 7% in December. Does that surprise you? Does that filter in at all in your asset quality guidance? The second question, please, to Jonas, if he can, on the guidance for net interest income in group treasury to be trending towards nil over time.
If he can, or if someone could please just explain the drivers of that. Should we just be thinking about the replacement cost of the government-guaranteed funding, or are there other impacts in there? And therefore, what would be the timings of those reversals, please? And then certainly and finally, please, if I can just come back on the CoCo debate. It strikes me that your regulator seems to have been pretty clear about his preference for core equity. What is it that leads you to believe that CoCos would have a role to play in the Swedish capital structure? Thank you.
Starting with the asset quality in Sweden, yes, there is a slight increase in quarter four, but from very low levels. There are a couple of clients, but also some small clients contributing to that. We don't really see, as I mentioned, any trends in this. These are previously known clients with higher risks that turns into problem loans, and there are no specific sectors or other trends that can be seen in this. So, overall, it's more on an individual basis, on risk clients that are already known.
To add to that, I mean, we saw in the quarter positive rating migration, so, the overall book is very robust. So, I mean, Sweden has up till now fared extremely well, and as Håkan is alluding to it, from known sources and not any new watchlist items. With that, I hand over to you, Jonas, and the NII and CoCo issue.
Yeah. On the NII for the government guarantee, I mean, it's split in two parts. One is that when we issue these bonds, we pay investors around about, sort of slot 90 basis points on average. On top of that, we pay the fee to the government. So if you look at the government fee, which is what we're sort of keeping on a group treasury level, that fee was. I can give you the exact numbers here. In 2011, that was SEK 1.16 billion. And for 2012, we expect it to be SEK 365 million, and for 2013, SEK 240 million. So I think that is sort of the number with which you will see the treasury NII improve over the coming years.
And that's also, if you deduct that, you see that we're ranging around the zero mark overall. On the CoCo issue, I mean, we're not particularly saying that we will replace equity with CoCos. What we're saying is that we want to be prepared for what might come when we know the new regulatory regime. So let's see and wait until we know more exactly what we will do with that mandate, if we get it.
Okay. Thank you.
Our next question is from Mr. Andreas Håkansson from Exane. Please go ahead.
Yes, hi, Andreas Håkansson from Exane BNP Paribas. Could I just ask you to elaborate a little bit about the performance in the Baltics? We saw that NII was coming down a bit in the quarter. We saw that volumes continued down, costs are going up, and we heard from SEB that they don't believe in further reversals. But could you tell us what's your outlook for 2012?
Well, I think overall, I think the result in the Baltics is very stable, to be quite honest, and we expect that to continue. We think that the book will stop shrinking. We thought that would happen already this year in 2011, and I think if it hadn't been for the sort of economic turmoil in the second half, it would have turned already. So that is quite, I think, quite good. They will, of course, also work with costs as everyone else, so they will be part of achieving sort of a more operational efficiency. For on the impairment side, I would say that overall, we feel very comfortable, provided on the overall book, and especially the corporate side of it.
If there is one area that has been problematic for it, it's been sort of the mortgage side in Latvia, but that is very and curtailed in size-wise. And then, of course, great differences between the countries. Estonia being very, very much solid and moving in the right direction and closing up on Sweden and Finland, while Latvia being the laggard from all aspects, really. But in general, I'm sort of cautiously optimistic, depending on the economic environment in Europe, of course, but that the Baltic is on a long-term growth traction.
But do you expect that we'll get reversals also during 2012?
I think you can. The reversal story in the Baltics, there are possibilities for that, if the base case of the economies remains. But you also need to, we need to see that, what happens sort of with the overall economic environment.
Okay, thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous Research. Please go ahead.
Hi, Jacob from Autonomous. I just, just a couple of questions on the risk weights. You talk about the mortgage risk weights increasing, as in line with the proposals. Do you have some kind of timing and a scale of that increase in mind? And secondly, on the corporate risk weights, I assume you're talking about the transitions to advanced AIRB. And do you have any kind of guidance for the timing there or the scale of those changes? Thank you.
I think, mortgages risk weights on the co- on the, we are awaiting more clear guidance that has been announced from the Financial Inspection, and hopefully we have that as soon as possible, really. So it, it's long awaited, really. We have guided earlier the, that we will have an quarter one impact of 100 to 150 basis points, depending on sort of what the new regulatory regime will bring us.
We have, I mean, basically steered on higher risk weights inclusively for a long time. For us, this is not the transformation, it's more a confirmation of what we think is sound and wanted.
Yeah. On corporate risk weights, we mentioned in quarter three, we have two projects, one in SME and also the IRB Advanced. The application for the SMEs, we send it in just before Christmas, so hopefully we will get approval from FSA during this year. When it comes to IRB Advanced, we will send in the application this year, but we don't expect to get approval from that during 2012, rather 2013.
Okay. Thank you.
Our next question comes from Ms. Claire Kane from Royal Bank of Canada. Please go ahead.
Oh, good morning. Can I just follow up on some of those capital questions? So you're now at 14.7 on Basel III. Does that include the IAS 19 impact? If so, what is that in basis points terms? And then also, d id you say the 100 to 150 basis points range is the sensitivity to the mortgage floors? And if not, what is that? And also then, if you look at where you are now on your range of 13.5 to 14.5, what can we expect for the dividend payout going forward? I mean, will, once you get the outlook, will you give us a formal guidance? And can we then assume that the dividends will grow to keep that ratio stable? Thank you.
The IAS 19 impact is 40 basis points, as it looks right now. On the risk weights on the mortgages, I think, if I got my memory right here, if we were to have a floor of 10%, which would mean that the average risk weight for us would go to 12, that would mean 130 basis points. So from that, you can model really more exact the impact. I mean, we are with the profit-generating capacity that we are having, the capital position at the starting point here at 15.7, the board have yesterday decided to keep the dividend policy of 50% of the net profit. So that is what you should be sort of counting on.
But we are also clear that we will not distribute further capital until we have full clarity on the regulatory requirements.
Apart from the dividend policy, yes.
Okay. Can I just clarify, the 40 basis with the 130, can we take them off the, the Basel III or 14.7 to give you a pro forma of 13%? Would that be fair?
Yes. Yes, that is what you should be doing, but then you should also take into consideration that we expect an improvement of IRB advanced and the SME portfolio that Håkan was talking about.
Okay, thank you.
Our next question comes from Mr. Hampus Brodén from SEB. Please go ahead.
Yes, hello. I was just wondering if you would be able to elaborate a bit on your return target using the assumption that rates won't go up?
I can start, Hampus, and then I guess Göran has some, added comments. If you look at, our results, bearing in mind that we are now in compliance with all new regulations, meaning that we have taken all costs to move to that position, you see us, showing pretty historically low return numbers, at 12.2. And then bearing in mind that we are helped with the SEK 900 million one-off from Lehman. So there is, in my book, a necessity to come up on returns if we want to compete with other industries in the capital markets for money going forward. So it, it's always, competition that sets the actual return numbers, and this is just our target over time to, with the knowledge we have today. So that's the sort of logic behind it.
I think our business model is favoring a favoring model in this environment and this regulatory regime. So bear in mind that we think it's a sensible target to strive for. Göran?
Would you say that there's an increase in rates implied in the target?
No, no, it's not, I would say, Hampus. I think, I mean, we are returning 12.2 today. We are saying that we feel that that is low in a historic consideration. We want to strive for higher return, therefore, we are working with all stakeholders in this, and we are reducing costs as an effect, as a way, viable way forward. But of course, we are also looking to get to sort of gain momentum on repricing that client activity. A client has to be a part of this cost as well. There is a lot of focus on mortgages there in Sweden, but I think it's important to remember that in the banking system, three quarters of the capital actually goes against the corporate exposures.
So, the repricing of corporate loans will continue to be a main theme in the Swedish banking market for 2012, definitely. So, I mean, there are a number of ways to improve the 12.2 further from here. And then we have some tailwind that we have the funding situation improving, partly as a result of government guarantee falling off, but then also we expect to get more paid from sort of lower funding costs in general, that when we are sort of getting recognized for being fully compliant with all buffers. And we don't see any new costs for the NII of the buffers, because we are finished there. So we don't see any new costs appearing for the regulatory framework.
All right. Very clear. Thank you.
Our next question comes from Mr. Jan Wolter from Deutsche Bank. Please go ahead.
Yes, morning, Jan Wolter here, Deutsche. Just a follow-up question here. You recently issued senior for the first time in a while, and do you foresee the cost for further issuance of that will offset the gain that we can get from refinancing government-wrapped debt in your balance sheet? Thank you.
No, not really, Jan. I think, looking at where we issue senior and when we have issued senior, during the last year, it's been on a clearly lower level than obviously the, the elevated levels in the credit markets that we've seen in the last few months. If they prevail, then the gap will be smaller. But then again, I don't think the market on the asset side is it's priced according to, to costs of funding that are considering the current levels.
Okay, thanks. Follow up, if I may there, just to clarify on the cost side. I think, Göran, you said that you're aiming for SEK 16.1 billion or so in 2012. And on top of that, should we add the variable comp then, or how should we look at it?
It's correct. I'm talking about the underlying costs there, and then, I'm putting the variable aside, since, hopefully, that will be a positive problem for us.
Okay, and the external costs, s hould we add that on top of the 16.1 as well, then?
No, the external is included in the 16.1.
Okay, very clear. Thank you.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just, two quick questions. I mean, first of all, there's clearly a lot of talk about repricing, but at the same time, we read every week in the paper about politicians trying to intervene, and we've seen politicians being successful in that intervention in other areas. What's the risk that the repricing story will derail due to political or media pressure? And then secondly, can you just confirm that the shares you did buy back in 2011 will be canceled at the AGM?
Johan, thanks for asking that question. I mean, we had our Minister of Financial Markets in the news this morning on television, stating that SBAB, the state-owned mortgage company, couldn't go lower on pricing because they are hurting profitability wise. I think that the discussion is becoming more and more correct, and the fact is that the price difference in mortgages today versus the past is mainly due to the increased cost of funding for banks due to the financial situation in Europe and the rest of the world. And margin increases have not been able to compensate the new costs for the new regulatory regime. And I think it's extremely important that we have in all segments, a correct risk-based pricing, otherwise we'll have cross-subsidies that could hurt things over time.
So for me, we're doing rational decisions, and we're trying to price as correctly as possible. And the notion in Sweden is that the repo rate is driving the funding cost of Swedish banks, which used to be the case, but it's not any longer true. And this transformation has not really been grasped by all observers, and we can only deal with this through being open. And Göran has now put a slide on the screen, which he will go through with you.
Well, I mean, it's a lot of talk about the mortgage margins, and I don't know if people can see this, but of course, the price that is hitting the consumer on the mortgage side has risen very substantially since beginning of 2010. And part of that story is, of course, the repo rate hikes, but also the increased credit cost that the Swedish banking system are facing as a result of the European debt crisis. And I think that knowledge is not really wide enough. But here you can see the yellow and the gray area is really sort of our increased funding cost that prior to this financial crisis, we didn't really have.
The blue area is the true gross margin for us, which is there to cover the cost of liquidity that has gone up significantly, but also should cover sort of, cost cover for administration, credit losses, and also generate a profit on top of a higher capital base. So even if it looks like the blue area is similar to sort of pre-crisis levels going back to 2004 and 2003, in reality, it's actually smaller because we haven't really incorporated here, the increased cost for liquidity and capital. So and, and of course, if you look at the banks, we are, we are returning as much as 12.2, in, return on equity. And, in the past 10 years, prior to the crisis, the average return level were around 15% to 20%.
We're being a profit-maximizing company, which we would firstly strive to get back to 15. Then you had a question on cancellation of shares, and yes, we will cancel the shares.
Perfect. Thank you very much.
I remind you that if you'd like to ask a question, please press zero one on your telephone keypad. We have a question from Mr. Omar Keenan from Nomura. Please go ahead.
Hi, good morning. Just a question on the retail division. Can you give us a few comments on your outlook for retail NII for 2012? And what your current expectation is for rates sensitivity impact in 2012? And just on NPL development, if you have a no growth environment in Sweden for 2012, then what kind of increase in NPLs can you expect? And are you expecting further falls in NPLs in the Baltics for 2012? Thank you.
On NII guidance, I don't think we are giving any breakup guidance on business area level. I think that we have it. We stated that we see that we have positive effects coming from funding, but we should also see positive effects coming from repricing, but it becomes difficult to model that. And therefore, we refrain from being more precise than that. But we expect it to improve. The sensitivity to repo rates or I think in the neighborhood of SEK 1.5 billion to 1.8 billion of 100 basis points move either way, depending really on the competitive behavior and so forth, that happens after the hikes or decreases. You can model that yourselves, really on your expectations. And then what can the NPL?
Yeah, as I mentioned, given the uncertainty, it's really extremely difficult to have any view on how risks will develop in itself. What we mentioned is we think we're gonna have a higher credit impairment in Sweden compared to the low levels in 2011. And it is really difficult to give any more guidance than that. Looking to the Baltic countries, the picture is very similar. On the other hand, we are still working with the tail of the crisis, which means that the non-performing loans most likely will go down net. What that means to sort of inflow non-performing loans is as difficult to say as in Sweden.
Okay, thank you very much.
Our next question comes from Ms. Claire Kane from Royal Bank of Canada. Please go ahead.
Oh, hi there. I just had a follow-up question on volumes. Can you talk us through what your outlook for volume growth is in Sweden next year, and who you think are the most competitive in the current markets, and also then in the Baltics, you're cautiously optimistic. Does that mean you think you'll get a turnaround in volumes in 2012? Thanks.
Yeah, like you earlier alluded to, we have a positive outlook on the Baltics. We thought it might already happen this year, but then came the second half with increased uncertainty down in Europe, and that has affected people's willingness to lend, and they continue to amortize. I mean, it's very difficult. We have had a positive momentum in the last quarter, which hopefully will carry into this year in Sweden. We are seeing a decline in the growth rate on mortgage lending overall in Sweden, which we deem is positive. It reduces the risk, and it's a wanted decline after years of double-digit credit growth. So, Sweden needs a calmer credit expansion in the household sector going forward to de-risk everything.
Overall, I think we are in a sweet spot here. We have moved to the new regulatory environment, not everyone else has. That will hopefully be positive for our competitive situation, both 2012 and 2013. But it remains to be executed on, and we can't control what others intend to do. But we have a strong position, and especially financially, which means that we can be there for our customers, and that matters.
Okay, thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning again, everybody. Two follow-up questions, if I may. First, if I could just build on this relatively optimistic outlook on the Baltics. I believe, a year or so ago, you talked about let's say, a post-crisis NPL coverage ratio of 30% to 50% in the region. That sort of guidance seems to have fallen out of your slides. But is that still how you think about the required reserving rate in the Baltic economies post-crisis? And then the second follow-up question, please, if I may, would be on Russia and Ukraine. I noticed that in forthcoming restatements of your business areas, you'll be moving those divisions to group functions. Is there any change in your view of the strategic importance of those geographies? Thank you.
If we take the NPL and the 30% to 50% there, I think what we stated in the build-up, when sort of the impaired loans were accelerating in 2009, we stated that we expected the end loss to be 30% to 50% of what we classified as impaired loans. We haven't really given any sort of through the cycle guidance on what credit losses will be in the Baltics going forward. I think, personally, my own view is a little bit that after such a deep crisis with so many, so much in provisions, you tend to have a period of low credit losses due to the fact that you have over a number of years of time, gradual small write-backs that appears , especially in the corporate book. Against that, you should measure actually, that we have a, rather poor quality and a very undeveloped, mortgage market in Latvia.
On the Russia and Ukraine, what is new there is that we want to exit the retail segment and concentrate on the corporate segment. That's the shift there. They still remain niche markets.
Okay, thank you.
There are no further questions on the telephone this time.
Okay, no more questions. Thank you for attending, and just once again to conclude, financial stability is there. We're complying with the new regulation. The reason we are focusing on cost is that we want to ensure that we bring up our return levels, and we're gonna fight for repricing and other measures on the income side. So we want just to be a stronger, more operationally efficient bank and closer to our customers.