Thank you for standing by, and welcome to the quarterly presentation conference call. At this time, all participants are in listen-only mode. There'll be a presentation followed by question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you this conference is being recorded today, Tuesday, February 8 2011. Now I'd like to hand the conversation to speak today, Michael Wolf. Please go ahead, sir.
Thank you, and good morning. A year ago, we guided for a possible profit for the full year of 2010. We achieved SEK 7.4 billion, and all business areas were profitable in local currency, apart from Ektornet, an improvement year-over-year of SEK 18 billion. The biggest swing factor has been improved credit quality. Baltic Banking is showing a profit of some EUR 10 million in local currency. Retail, despite the rotation from corporate to private lending and a low interest rate environment, continued to deliver a robust result. LCI had its second best year ever, and Robur is back on track. The profit, in combination with our significantly decreased risk level, allowed us to expand the Core Tier 1 to a healthy 13.9%, an improvement of some 400 basis points since Q4 2008.
This gives the board the room to propose a dividend in accordance with our dividend policy for the year 2010. We set out four core priorities last year. In summary, we have achieved our first ambition to be in control of our own destiny. During the last two years, step by step, we built the necessary financial resilience to enable us to move our focus from saving the bank to developing the bank. Customer loyalty and trust is the cornerstone in any business. We have, during the year, started a significant journey in becoming more relationship focused. In retail, we launched segment-specific service concepts, which has proven to drive customer activity and measurably enhance our position as their trusted advisors. We are in branch after branch, adjusting our competencies and resources to ensure that they are well matched with the structure of the customer base.
We are also finding ways to further decrease time spent on transactions in the branches. We have implemented sector teams for large corporate and financial institutions. Moreover, we have enhanced our abilities with the acquisition of Forest Securities in the area of capital markets, a necessity in order to meet new demands and behaviors from our customers. A bank is all about the quality of the asset side of the balance sheet. It needs to stand the test of financial turmoil and economic downturns. We have, during the last 24 months, achieved a reduction, risk reduction of some magnitude, making us resilient for downturns, which translates to a strong loss-absorbing ability. The risk reduction has also ensured that we have hardly any dependencies on unsecured funding. This will give us a competitive advantage relative to our peers over time. The third focus area was earnings.
Even if all business areas are showing black numbers, we have room for improvement. Cost control is vital in a competitive environment. In the Baltics, the balance sheet has shrunk with some SEK 100 billion, with a corresponding toll on income. Hence, we have had to right- size the organization to the new economic reality. With a cost/income ratio of 44% in 2010, we can say that we have achieved the necessary adjustments, and we are best in class in these markets. In Sweden, activity level has been unchanged through the crisis, which has given less room for structural cost adjustments. We are, though, focusing on making the cost base more variable. However, since Q2, we're seeing a rebound in the interest levels, which has supported earnings. The big question mark is when corporate lending will start to pick up.
We are seeing more investment-related credit applications, but still from a low level. Both LCI and Robur contributed with good results. Finally, I want to underline the importance of the improved net commission income, as it indicates that we are becoming stronger in getting ancillary business from our clients. The fourth and last focus area in 2010 was liquidity and capitalization. We have not issued any funding with the help of the state guarantee since late summer of 2009, and in April, we formally left the program. We have lengthened our maturities, improved our survival period and liquidity buffers. We continue to have excellent access to the funding markets and good pricing, despite the fact that we have issued more than SEK 250 billion of funding in 2010. That leads me to the important topic of resilience.
Our good standing in the funding market is a priority, and with the prevailing uncertainties in the global economy and discussions about possible new regulatory changes, we deem it prudent not to go below 13% Q1 before 2013. Long term, with the existing low risk level and our present knowledge about the regulatory changes, our Core Tier 1 should not be below 10%.... In order to manage this in an efficient way, the board has proposed to the AGM to get a mandate to a 10% buyback program in 2011. The board has also proposed a new dividend policy for 2011, increasing the payout ratio to 50% of the net profits. With that, I would like to hand over to Erkki, who will guide you through the financials.
Thank you, Michael. Let me then cover our Q4 performance more in detail. Michael has given a very good run through of the yearly trends, so I will focus more just into the fourth quarter. For the second quarter, now we are reporting increased net interest income. As short-term interest rates are increasing, this is improving our deposit margins. More than one-fifth of our total deposit base is in a low interest expense, expense demand deposits. That part of liabilities is giving the largest boost to earnings in the rising interest rate environment. Another component, lending margins, were improving during the third quarter but became rather flat in Q4. Total cost of our wholesale funding has been slightly increasing over the quarter. This has been triggered by paying down last repo financing in Q3 and due to some widening of our bond spreads.
As the latter has been market-wide development, it will hopefully initiate new move in the mortgage lending margins. Looking by business areas, we had expectedly solid NII growth in retail. Large corporate and institutions had good end of the year. In the Baltic banking, lower deposit costs supported NII. Reported SEK 249 million change in NII is also elevated by one of reclassification of the late payment fees. The effect out of that was SEK 191 million. I think we're entering into 2011 with very good momentum. Short-term SEK rates were increasing over half a point in Q4 and continuing climbing. Euro rates have also started to increase. Although full self-funding cost has moved higher, we are now into redemption of government guaranteed debt with relatively high funding cost. So I would conclude here is that NII outlook is looking good.
Talking about net commission income, I have changed headline from stable from previous quarter to strong commission income. We are reporting our historic second best quarter in this income class. Growth was strongest in credit origination and corporate finance fees. After a slower Q3, also brokerage fees were recovering to earlier levels. I think commission income is the area we have managed quite well. Quality of earnings is high. Stable and growing trend has been good support to our overall earnings through past low interest rate environment. Under generally volatile net gains and losses, we are reporting lower gains with higher proportional quality. Higher quality, I mean, here, is that really the result is business driven and not the valuation effect driven. As mentioned earlier, Large Corporates and Institutions had busy end of the year with good customer activity and successful effects on money market trading.
In Russia, we canceled one large customer deposit, which triggered one-off expense of SEK 120 million. This is part of our right-sizing exercise. We were moving out some of the local currency funding, which we have no use anymore. Largest quarterly change was in treasury area. If we have had tailwinds in previous quarters with funding-related valuation effects, then in Q4, this turned around. We're reporting negative valuation changes of SEK 180 million. About half of that is related to liquidity portfolio and half to full self-funding portfolio. Full year treasury area net gains were nevertheless about SEK 500 million positive. Our expenses in Q4 were seasonally higher. This was triggered by higher IT costs, general admin, and write-down of some formerly capitalized development costs. Year-on-year, our cost base was flat, and this flat position we also want to keep while going forward.
We have a number of efficiency improvement areas initiated and under the work, but there is also fair need to invest into business infrastructure and organizational capabilities. If shape of the earnings should turn down, then we obviously will also reconsider our priorities. I also want to make the note is that we are carrying the rucksack of, over SEK 700 million related to, our restructuring efforts in FR&R and Acturant. And, this part of the cost base obviously should decline as we are, moving on in the, credit cycle. Moving on to the full self-funding, here we can be quite, quite pleased what we have achieved over the past year. We issued a total of SEK 265 billion term funding, which Michael already mentioned, and this was far ahead of our initial plans.
We paid down all of the central bank repos and short-term guaranteed debt. We have also increased our liquidity buffers. Lion's share of this term funding issuance was done in covered bonds, which is our preferred source of wholesale funding. We bought back and, or called SEK 7.2 billion subordinated debt. We have also ongoing permission from FSA to continue with further volumes. In 2011, we have maturing debt in the size of SEK 180 billion, out of which SEK 80 billion is fairly expensive government guaranteed debt. Our wholesale funding profile has improved considerably over the 2010. As maturing government guaranteed debt is replaced mostly with medium and long-term covered bonds, then profile improves further, and we expect total funding costs to decline. Summarizing then financial performance for Q4, we have improved quality and momentum in our income.
Seasonally higher expenses left profit before impairment flat to previous quarter. Further improvements are in the asset quality area. Credit impairments were turning around, and we are reporting SEK 483 million of recoveries. All of our credit markers showed improvements. We did also impair some of our tangible assets as well, a total worth of SEK 406 million. Göran is going to cover that in a second. Operating profit was up 6%, as was also net profit. We are reporting profit of SEK 2.75 billion, higher over the past 10 quarters. Trying to look then forward to 2011, then we are expecting to benefit from continued recovery at our home markets, as well as from increased interest rates. Asset quality should improve further.
We expect slow recovery of corporate credit demand in Sweden, and that lending volumes in the Baltic banking will bottom out during the year. We expect Swedish mortgages to grow in line with nominal GDP growth. Further work with low returning portfolios and maturing state guaranteed funding should give support to the NII. As already said, we intend to keep our expense base flat, excluding variable pay. With current outlook, we expect gradual improvement of our earnings going forward. Here I hand over to Göran.
Okay. Thank you, Erkki. I will divide my presentation into two parts. Firstly, I will just go through a little bit about what happened in the fourth quarter in terms of asset quality, and then I will, in the latter part, I will spend time on the risk profile of the bank and the capitalization. But firstly, a little bit about the highlights, then in the fourth quarter. I think the general theme is that we continue to see an improvement in basically all indicators for credit quality, continue to improve. Impaired loans, 60- days overdue, restructured loans and watchlist declined in all business areas and in all countries, and that was, of course, very promising. So it's a very broad-based recovery gathering speed in general, I would say.
Secondarily, we continue to see a decrease of risk-weighted assets during the quarter of SEK 18 billion. Half of that is relating to shrinking volumes in, primarily, the Eastern European countries. And, of course, with regards to the Baltic countries, that is something we would like to see come to an end. But the other half of this decrease of risk-weighted assets is a positive phenomenon. It's partly us working with capital, but also that we are seeing a positive rating migration in our corporate loan book that is actually releasing capital, which is very good. We continued to see recoveries, very broad-based in the Eastern European portfolio. I will come back to that.
During the quarter, we tightened the lending criteria in Sweden on mortgage lending further, as price increases and credit demand was very, still very brisk. Then looking at credit impairments, they were actually a net recovery of almost SEK 500 million during the quarter. There were very broad-based recoveries in the Eastern European portfolio, all countries except Estonia, most of it relating to Ukraine. At the same time, we had some write-down of tangible assets of SEK 400 million in the quarter, whereof SEK 300 million were related to credits, and half of that were basically relating to Ukraine. So, it fits that picture. Looking at Sweden, still very good credit quality in Sweden.
And if we summarize the year, we're very proud of the, the asset quality that we see in Sweden. Looking ahead, we think it's fair to assume that in a base scenario where a gradual economic improvement continues to see further recoveries in our Eastern European portfolio. Now, turning to capital and risk profile more, starting off with capital. I just wanted to start it off by showing a picture of the capitalization, which I'm sure is not any news to any analyst, but just to put it in a context, Swedbank managed to increase our Core Teir 1 ratio to 13.9% in this quarter, which makes us the second best capitalized bank in Europe, which is, of course, very encouraging.
What to do with an appropriate capitalization for us going forward is, of course, a combination of what, where the regulatory framework takes us. But more importantly, I think it is what we see of the risk profile and the risk in the balance sheet, currently. And there, we have done quite significant work in the past two years. And I just want to show the sort of transformation of the balance sheet, going back from year-end 2008, 2009, and to where we are today, starting with the asset side.
We can see that we have actually managed to have a reduction of risk-weighted assets, all from almost SEK 700 billion to, at year-end, now SEK 541 billion, which is almost a shrinkage of a quarter of the balance sheet from a risk-weighted asset point of view. And the reason for that is well known to everyone, but it's a significant decrease of the Eastern European portfolio that has shrunk with SEK 108 billion during this period. And at the same time, you could say that some of these countries, and especially Estonia, have been upgraded from a risk point of view. So the quality has really improved.
But we have also seen a quite very significant decrease in the corporate lending portfolio with SEK 57 billion, while at the same time, the private mortgage market in Sweden has continued to grow quite steadily with almost SEK 70 billion during the period. So a significant risk reduction on the asset side, and the good story is that we have reduced our need for unsecured funding since the part that has grown will be secured funded. So that's also a positive aspect to bear in mind. Then moving on to the liability side, I think of course, as a consequence of the possible positive development on the asset side, we've been managed, we've been sort of- it's been possible for us to work with the liability side very extensively.
Jonas has during sort of the second rights issue in the autumn of 2009, managed to actually tap the market for SEK 365 billion, which is an extremely high amount, I would say. Very much helped, of course, by the very good development of the Kingdom of Sweden. We need to understand that. But in essence, what we are doing is that we are sort of taking away unwanted and expensive funding sources and replenishing it with cheaper and more stable funding sources. So the actual mismatch and liquidity risk in the balance sheet is significantly becoming reduced here. We have extended the funding, and we have also, during this period, built a very good liquidity buffer.
And coming back to the need for senior unsecured funding, it will be up to management and really what we want to achieve in the corporate lending arena that dictates what kind of matched unsecured funding we have. Lastly, on this slide, I just want to highlight that as the balance is really on the asset side, as it being reduced in risk, we have also, which we tend to forget sometimes, increased the capital with SEK 11 billion through the rights issues done during the crisis. Now, moving on lastly to capital, then very quickly. I think starting off with the regulatory sort of environment, it's still uncertain to some degree where we stand there. Some of the things are known, but not all of them.
The important thing for us, though, is that we stress our asset side, and in doing so, we, we really feel comfortable that, expressing our risk level in terms of the 300 basis points add on from the sort of regulatory minimum, 7%, up to what we perceive as the long-term capital target of being 10%. And that buffer enables us to take credit losses, which are basically in between SEK 50 billion to SEK 70 billion going forward, which should be compared to the provisionings we did during the last crisis in slightly less than SEK 30 billion. So this buffer will withstand the double amount of credit losses, and at the same time, we have significantly reduced the risk on the asset side.
Considering sort of the unclear regulatory framework and also the unclear macro, and also the need that we have to gradually manage the perception about Swedbank, and also to finish off the funding exercise and replenish the loans, the government guaranteed, we will continue to keep another 3% in buffer during this year and next year. But anything above 13%, we today consider to be excess capital for both the short- and long-term business model that we are trying to build. Then moving on to how, what we intend to do with the excess capital. I think what we're trying to say here is really that we don't see any need to further build capital, considering what is happening in the transformation on the risk level on the asset side.
We also see that the profit generating part of the business is increasing, which we take encouraging. And also we think that risk-weighted assets will see, if anything, quite moderate growth going forward. We will, on one hand, expect corporate demand to come back at some point, but we will continue to focus on capital efficiency. So in light of that, we have, and the board yesterday have decided to ask the AGM for a decision to start a buyback program of a maximum 10% of the outstanding shares in order to manage our capitalization during this year. And we intend to do that in a gradual way as we see the quarterly results coming in, and make no sort of distinction between the A shares and the preferential shares.
With that, I would like to hand over to Michaele.
Thanks, Göran. Looking at our priorities for 2011, they are to be executed within the framework of our purpose and values. I'm steering my managers on customer satisfaction, strong cost control, risk-adjusted returns, all within the risk tolerance earlier described by Göran. We will continue to defend our strong market position in the SME segment, in the segment of forestry and farmers, and among the many affluent private individuals. We see opportunities to grow in the areas of mid and large corporate clients, and around private banking. We will continue to focus on savings, and we aim to move forward in the capital markets- related services. I think we are very well positioned to meet the future. With that, I would like to hand over for Q&A.
Thank you, sir. We'll now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. First question comes from Nick Davey at UBS. Please ask your question.
Yes, good morning, everyone. Nick Davey from UBS. Three quick questions from my side, if I can. Firstly, on capital, I realize you, you've tried to give us some color on slide 21 about your thinking, but if I could just ask you to come back to this 13% Core Tier 1 capital level, between now and 2013. Can you do any more fleshing out, really, as to what's driving that three percentage point buffer above the 10% threshold? You seem to have huge buffers between 10% and 7% Core Tier 1 for credit risk.
So could you just talk us through a little bit more, maybe around regulation, which I guess you haven't gone into in much detail there, whether you're assuming Basel III is up-fronted by the time 2013 comes around, or if you're leaving any buffers in there for any changes to risk-weighted assets on Swedish mortgages. If I could just ask you to come back to that topic. The second question is on the group functions P&L, which, as you mentioned, was quite weak in the fourth quarter. Could you please just go into a little bit more detail as to the contributing parts? I know there's been some mark-to-market on basis swaps coming through positively. Should we expect those to unwind in 2011?
But also I think that there are some positive contributions in there still from the hedge in Swedish retail or on Swedish retail deposits. Could you confirm that? Could you confirm if that is or to what extent that is still positively contributing to the P&L, and also whether we should expect that to unwind in 2011? Thirdly and finally, then, if we could just come back on the SEK 180 billion of funding this year. Could you give us a flavor, really. I know the priority, as you've said, is on the covered bond markets. Could you make any comment on geographical spread on covered bond markets? Obviously, basis swaps making things slightly less attractive in Europe and possibly also the U.S.
Could you maybe flesh out a little bit on your thinking around that SEK 180 billion funding need this year? Thank you.
Hi, Göran Bronner. Talking about with the capital there, you were sort of questioning or sort of wanting the reasoning behind the extra buffer of this extra 300 basis points, really. I just can say, really, that there are still very much uncertainty in terms of the macro and with regards to regulatory. I also, when we stress, as you mentioned, the risk weights for private mortgages in Sweden, that if we stress that really harsh and say, we're going to put the whole Swedish mortgage portfolio with the same risk weights and like in the Baltics, which is a really far out stress scenario, we would still not consume that extra buffer. So it gives you a little bit of the magnitude.
Then you can say, "Yeah, but aren't you really conservative at this point in time, given your own risk level?" Yes, perhaps we are, but also there are a lot of stakeholders to a big organization like this, being rating institute, shareholders, bondholders, regulators, and so forth. But we think we work the balance sheet and the risk level in the balance sheet is the 300 basis points, and then we will see how what time will take us.
... All right, it's Erkki. Hi, Nick Davey . I'll go to the Group Functions in particular then to the group treasury and net gains and losses in the fourth quarter. Overall, there are contributing factors, actually about 10, and I will not go into all of them. So I try to group them into some of the themes. Let me start off then with the basis swaps, what you also mentioned. Yes, still out of the basis swaps, there was a positive effect. I thought, I also will not quantify that. Then we had on the negative side a similar size as the basis swaps. We had just an open risk result from the funding portfolio.
Then, liquidity management portfolio of treasury, this is, at total of, mark-down, close to 100 million. But about, about half of that is related to the, to the value chains of the, of the covered bonds in the portfolio. And about half of that actually is related that in the, in the end of the year, we put in place, a different, pricing, mechanism, mechanism for our, different bonds, what we hold. That was done both actually in a treasury as well as also in a, in a trading area. If we, a number of positions previously valued at the mid- prices, then we, opened it up to, for the full compliance reasons to have, bid and ask, prices put in there.
That actually cost the group more than SEK 100 million, 50 of that landed into the treasury liquidity portfolio. Then the remaining part of the drivers, there was a full self-funding effect of particularly the fair value option portfolio, which is still quite sizable there. I realized that I didn't make it perhaps too much more clearer, but we also touched the topic about the hedges. The effect of the hedges has been now running so low already because of the change in interest rates, that for the time being, we can almost ignore that one.
That, it has been, its positive contribution has been really running out, both on the equity as well as on the hedge of the demand deposit side. Nose and tail, this is also the area which is, because interest rates have been increasing, then the interest rates are getting closer to the coupon levels of our benchmark bonds. Secondly, also benchmark bonds have been and are going to be better distributed over the time while going forward. These effects also will be, should become smaller. To end that explanation, we still had a SEK 500 million positive valuation effects in the treasury area.
I would say that the lion part of that we still own to the basis swaps, which are quite wide. So when we are starting to see the markets normalize, and we're starting to see that the basis swaps are starting to close down, we should gradually see some of that SEK 500 million basically disappear.
Should I go through the funding quickly then? I think, I mean, if you look at the maturities we have this year, of the SEK 180 billion, roughly half is in the Swedish covered bond market, where we just roll, quite often prematurely roll, the issues into longer term maturities. I would expect them to be for this year as well, quite undramatic in terms of refinancing. Obviously, the SEK 80 billion of government guaranteed is the one that takes a bit of planning. I think partly that started already last year, if you consider that we issued SEK 265 billion of term funding compared to SEK 137 billion of maturities.
You know, whether you call that building up liquidity buffers or pre-funding maturities for 2011, it's, I think, it's probably a combination of both. When we look at the covered bond market, I mean, we still have plenty of room in our covered pool, and we see that having a widespread geographical presence, we don't necessarily mind the diversification effect in terms of liquidity risk. We've seen in previous crisis that the markets closest to home are the ones, the most resilient. But in terms of being able to issue in the size you want and need at all times, it is an important aspect. So we will, during this year, enter the U.S. market as well.
As for basis swaps, I think, you know, our main concern at the moment is the fact that we still are quality 10 basis points ahead of our best competitors in terms of funding spreads. And that's SEK 500 million of NII, which we have as a sort of competitive disadvantage at the moment, and that we need to close over time. That's our main priority. And then I think the largest players in Sweden have pretty much the same funding mix. So from a competitive perspective, that is not a big deal. I think we're working quite actively and successfully with the basis swaps as well.
You have issued SEK 30 billion in January, so we're off to a good start.
Exactly.
Perfect. Thanks, everyone, for the very clear answers.
Next question comes from Hampus Broden of SEB. Please ask your question.
Yes. Thank you. Hi, everyone. I was just wondering if you could perhaps elaborate a bit on the potential for variable rates, variable salaries to move in 2011, since you stated this is the only part of your cost base, which you foresee could go up, basically.
I mean, with improved performance, we will also probably pay more variable next year than this year. We had a pretty modest 2010 in terms of variable pay.
... bearing in mind where we came from. So, that will follow the profit trend, and we will announce the 2011 in due course before the AGM.
All right, but, but variable salaries, could they be multiples of what they are today, or is it going to increase by more like percentage points of?
You will have more facts as we announce it in the near future. We need to go with the announcement before the eighteenth of February to keep the deadline for the AGM, and there you will have all the facts. But, depends on your view on P&L.
Of course. Thank you very much. Might I just add another unrelated question then on the Basel III Core Tier 1 ratio, what your sense is that you what kind of Core Tier 1 ratio you would have in a Basel III framework?
The delta is, around about 50 basis points.
Okay, thanks.
Next question comes from Fritjof Bernt of Pareto Securities. Please ask your question.
Yes, just two questions, if I may. As you state here, you will maintain this Core Tier 1 capital ratio of at least 13%. And, if you strip off those 50 basis points for the Basel III, you're down to around 13.5%. And if I understood you, Göran, correctly, you will try to fine-tune this, regarding your dividend share buybacks. Or could you just say some more, some more clarity on regarding your, the time frame for that? Of course, that will depend on volume and RWA growth, too. My second question is, regarding credit impairments. And if you look by sector, you can see that the biggest rise was regarding shipping, which is not a big part of your portfolio. But if you could just say some more regarding those losses.
Is that any special segments or anything particular in Göran regarding Q4? Thank you.
With regards to the buyback program, I think we can just say that we will firstly, we have to wait for the approval of the AGM to have a buyback program. Then I think we have a quarterly report, and at that time, we know a lot more about the capitalization. And from there on, we will sort of deem what is appropriate in order sort of to manage, considering what is available information wise. But if you have a base case and assume that we will continue to generate profits, it's assumed that in the second quarter, sometime we will start buying back.
It's important as well to note that the 13% is on full Basel II numbers.
Yeah.
Not Basel III.
No. Okay, thank you. Mm-hmm.
Credit impairments.
Credit impairments, I think we had one shipping-related write-down, which was part of what we show in the LTNI credit impairments. Then it is the average sort of quality of the portfolio in the shipping part of the portfolio is improving, if anything. It's a one-off. I wouldn't read anything systemic into it at all.
Okay, thank you. Any particular segments, you are more exposed to in that respect?
No, we have a shipping portfolio that is quite well-balanced actually, and diversified. I think we have earlier actually provided some details on that, that we can, I can see to that you get.
Okay, thank you very much.
Next question comes in Chintan Joshi of Nomura. Please ask your question.
Hi. The first question is on the 13%, Core Tier 1. Just wondering if this has been in any way driven by the regulator? As in, did they ask you to be at 13% for the time being, or is it just your position, given that the regulator has been making some hawkish commentary lately? Second, on credit standards, could you give us the difference between the credit standards in the mortgage segment that you highlighted, that you've strengthened? What is the strengthening, and how are your credit standards different from your peers, if they are?
Third, on positive migration, if you could help us with, in some ways, to quantify how much we should be seeing through in 2011. Perhaps one way to get to that number is to look back and quantify the negative risk migration that you've seen over the last couple of years, so that we get an idea of the magnitude. Thank you.
I mean, the capitalization level, both the 13 and the 10, is what we deem prudent based on our risk profile. And, so what we control is the risk level in the, in the bank, and for that, we, in the stress scenario, want to have a fundamental buffer of 300%. And in the near future, there are so many uncertainties out there that we deem it prudent to have another 300 on top of that.
So not driven by the regulator then?
No. If I can comment on the, the lending criteria for private mortgages in Sweden, I, I think as prices and credit amount are so brisk, we feel that we need to make sure that the quality in the, of the things that we take in the book with an LTV higher than 75%, we need to really steer that towards the most prioritized clients and the best credit quality. And we've done that with a number of steering tools, which scoring is one, of course, price differentiation is also another one. And perhaps the most important one is that we think that there is fundamentally one element missing in the Swedish market, and that's the amortization. So we have institutionalized mandatory amortization above 75% LTV.
See, otherwise we have a so sort of a systemic debt build-up in the system in Sweden. How this relates to clients, I leave to yourself to find out rather than me commenting on that. With regards to risk migration, I don't have any number of how the risk migration sort of affected the RWA negatively in Sweden, running into the crisis. I can't really give you anything there. The only thing I can say is that we feel that, the risk RWA that we have towards our corporate credit portfolio in Sweden, is high if we compare it to certain peers. And especially if we compare credit losses with our Swedish peers for the past 10 quarters.
With that, we sort of want to understand that more thoroughly, why that is the case, because credit losses, they do not seem to substantiate that we have worse asset quality. Therefore, from my point of view, I want to see if there's anything we can do from a capital efficiency point of view.
Can I just follow up on that last question? I mean, could your ratings be higher because you have more SME exposure relative to peers? Could that be one reason?
That is, I think, one part explanation, of course, but we have peers with huge exposure in that segment as well. But, as I said, it's something I want to come back to. With regards to the risk migration that we saw in the fourth quarter, of the SEK 18 billion that we had in reduction of risk-weighted assets in the quarter, SEK 5 billion was relating to positive risk migration, of which most was in Sweden.
Okay, thank you very much.
Next question comes from Jan Walter of Deutsche Bank. Please ask your question.
Yes, good morning. Jan Walter, Deutsche Bank. Three quick questions, if I can. First is, what makes you confident that Baltic deleveraging is almost over, and that we can see volumes bottoming out this year? Second question is regarding buybacks. Do you need any more clearance from regulatory authorities if we disregard the go-ahead from the AGM to do buybacks then in the second quarter? And third question is, you talk about stable costs. What yardstick should we use here? Should we look at the 17.6 cost base for 2010, and then exclude the SEK 350 million variable pay, or should we look at something else? Thanks.
If I take the two last questions, no, there is no further regulatory requirements in order to do the buyback. Yes, that's a good proxy for how to look at the cost.
When it comes to the Baltic deleverage, then, we obviously can't give the full certainty about it. This is our current best view. How we interpret, and it's also fair to say that we have been wrong over the past about three quarters or so, expecting this deleveraging to end quicker. If we look to the four components in our daughter portfolios, and they also slightly differ country- by- country. If we look to the new origination level, then if we look to the natural amortization of the corporate and private portfolio, and then if we look also to the amortization of FR&R portfolio, both corporate and private.
Is that then what we're seeing is that, there is, amortization slowdown, or basically, the new origination is starting to be matched with the, with the healthy corporate portfolio in Estonia and Lithuania. And that is basically, I mean, it's one of the month-on-month, but that seems to be basically a slowly improving trend. So that would be the first part of the portfolio, which would probably bottom out. Then, on a private part, is that Estonia and Lithuania both also showing slowly picking up origination in a private, in a, in a mortgages, less in Latvia. But, it's still not in the size of enough to cover the amortizing part.
Yes, I mean, all of the loans are amortizing. There are no non-amortizing loans. What is going to, at a high- level numbers, what will come through 2011 and also possibly 2012, is that, and that is the FR&R portfolio. But it's also fair to say that, it's around EUR 1.5 billion in there, which is provisioned, but, and which also doesn't really pay interest anymore, but still in the books. So that is why this one is getting out of the books. It really doesn't have any bottom line impact anymore. So these are the moving parts.
Once again, we can't really say that we will see the bottoming out, but that's our best guesstimate for the time being and with the inputs what we have right now.
... Okay, many thanks for that.
Next question comes from Masih Yazdi of Erik Penser Bank. Could you ask your question?
Hi, good morning, everyone. The first question is on your mortgage margins. Could you please state how that has developed during the quarter and how you see that developing going forward? The second question is on your market shares for mortgages. I've seen that's down to 27% from 29% a couple of quarters ago. Do you aim at keeping your current market shares, and how do you think this will develop, given that you've tightened your lending standards? And the third and last question is on your interest rate sensitivity. That has decreased to SEK 1.4 billion, compared to SEK 1.8 billion a quarter ago. Could you please state why that is? Thanks.
I'll start off with the mortgage margins. The mortgage, as I already mentioned, that we saw the widening of the mortgages, Swedish mortgage margins, during the summer, and they reached to the, or they flattened out then in September. And since that, they have been quite flat in our books. We see, we also see some of the competitors are coming out, and they're showing slightly different direction. Some of them are even reporting about the lower margin. This is margin. This is not something we have, we have seen. So, yeah, I mean, we do have already kind of enhanced.
It's pretty much the daily information what we have, also rolling in into the 2011, and here the things are looking slightly more optimistic once again. I'll also take the interest rate sensitivity. Yes, it's the quality of this exercise is not very high, to put it blunt. That we model, we try to model some of the moving parts, and also to put in some of the convexity when interest rates are going lower, that obviously then the deposit rates cannot go through the zero, et cetera. And now when interest rates have started to increase, so then basically this same convexity is reversing or playing other way around.
So, but as I said, I mean, the I don't think it's it's exercise done at the quality, which would allow you to credibly estimate our NII. What really you should take, try to take the view or what, the way how we're looking it by ourselves is, let's use the base rate being it in the STIBOR or EURIBOR curve, and then seeing is that how our lending and lending margins and volumes performing against that curve. What is happening on the deposits? And there we have communicated we have very positive momentum because sizable low- interest- bearing deposits, and then the full self-funding. Full self-funding, I was also commenting earlier, that we have seen a gradual pick-up in there.
But now when we're rolling into 2011, we are starting to have maturing government guarantees, which should take basically the total full self-funding quite a bit lower. So these are the moving parts, and then I think that if you build a simple model around that, you will get a much better grip about the NII than you're looking just this static model, what we're producing there.
On the market share, I mean, long term, of course, being the bank for the many households, we should have a viable market share in the, in the mortgage market. Short term, we don't care about market share. We care about that our customers have a robust economy and can withstand stress. So for the year of 2010, the market grew with north of 8%, and we grew only with 5%, which shows that we have a view on this.
Thank you very much.
Next question comes from Peter Wallin of Handelsbanken. Please ask your question.
Yes, thank you. Two short one. Sorry if, there'll be some repetition here. But just on the NII side, how much was due to higher rates in Sweden? Are we talking about the, the full SEK 253 million in retail? Or if you can just specify as to how much, of an NII boost is on Q4 on the back of that. And the second question relates to the tax situation. If you can elaborate a bit around, what we should expect, in particular in terms of the Baltics, for this year and also next year when it comes to taxes.
Yes, NII was very much in the backbone of higher interest rates. As margins broadly stayed flat, and over that short period of time, and the volume impact is quite sure. I do also want to mention that it's not only sitting and waiting of the higher interest rates. There is also behind that is a good work by the retail team of actually expanding the spreads between the lending rates and also saving deposit rates. So the deposit margins have widened on the demand deposits, but also on the savings deposits.
So it's and it goes about half and half, I would say, the overall of the impact. Yes, interest rate changes have not given any impact in Q4 in the Baltic banking. But as we see now, the interest rates, the Euro interest rates have started to move up. But the Baltic benchmark is really around the six- month, not on the three- month, so it takes gradually longer period of time when effect is rolling in. What comes into the tax, then I would let me put it this way. Our tax numbers for Q4 were quite clean.
So, the effective tax rate what we were posting in Q4. That is something you probably, if you do the very simple calculation on the group-wide also, if you just carry forward to whatever estimate you have for 2011, then you should be pretty close to that, to where we're eventually going to land. So, the effective tax rate is there basically in a magnitude of 20%-22%, so you should basically apply that one to the bottom line.
Okay, thank you very much.
This question comes from Jan Erik Gjerland of DNB. Please ask your question.
Hi, this is Jan Erik Gjerland from DNB. I just have one question about the material, the material write-downs you did in Ukraine and the leasing portfolio, etc , and also the Ektornet. Could you elaborate a little bit about how you look at these properties there, that this is probably taking over properties, et cetera, which, you know, write down and should be viewed in terms of loan losses overall. What is the size of the portfolio you still have left, and what have you taken over so far? And could you elaborate a little bit more about your leasing portfolios in the Baltics, and what kind of magnitude you have still there? Thank you.
Of the, on the write-down in the tangible assets, which is roughly SEK 400 million, SEK 300 million is relating one way or another to credits, I would say, prior credits and overtaken repossessed assets. Of that, roughly speaking, SEK 150 million is relating to one particular borrower in Ukraine. And then SEK 85 million of tangible assets write-down is in Ektornet, where we apply sort of a very conservative valuation strategy, where we as soon as we recognize sort of a write-down need, we take that. While if we have any overvalues, we don't recognize those, and we see substantially higher overvalues than the write-down we've done for SEK 85 million in Ektornet. And then we have a mixture of leasing assets in Lithuania, primarily, that are credit related.
Overall, I would say that I at least expect these write-downs to not occur again. This was a—I mean, it has been a year of repossessing assets. Some of those assets have been harbored by the bank, and then on to Ektornet, while going forward, most of the things go directly into Ektornet. So I don't see that as sort of continuing during 2011, actually. But of course, with such a big book and a lot of traffic, there are always sort of over and underestimation of values when you repossess things. But as time clears, we will become more precise on this. But in Ektornet, there is a positive value.
Okay, just a follow-up on that. So the Ektornet, you will just book gains when and if you sell anything from that position and book that as a, you know, again, at that point in time, as, as you say, it potentially has overvalue already.
Correct.
Thank you.
Once again, if you wish to ask a question, please press star one on your telephone. Yeah, next question comes from Johan Ekblom of Bank of America. Please ask your question.
Hi, it's Johan Ekblom from Bank of America here. Just coming back to your Baltic business, you reported on about 11.5% return on allocated capital this quarter, and that's where the quite strong write-backs. If we think about the development through 2011 and 2012, where do you see the big levers to get a decent return on allocated capital with normalized write-downs, and where would you see that level be in the future?
I should start off from the capital allocation. While going into 2010, we used a capital allocation model, whereby we factored in also anticipated credit losses, quite sizable of them at that point of the time, for Latvia and Lithuania, which then we are glad to say now that never materialized, really. The gap was quite sizable. We expected the total credit losses in the Baltics to be in the beginning of the year in excess of SEK 6 billion. So... My point is that, with the previous model or also model used, that they have been overcapitalized, and then that has been, that was carried up to the end of 2010.
Going forward, the model, capital allocation model, what we're also going to use internally, and we, we will show them this, these numbers in, connection to the first quarter report. We use exactly the same logic, what Göran was just talking about at the group level, of, taking then the, the relevant regulatory minimum and, applying the, ICAAP related stress buffer on top of that. So you will, you will see these numbers, and then therefore, some of the, of the businesses or some of the countries also, the- they will actually change the capitalization quite a bit.
Now, if we talk, if we leave the capital and overall business performance, what there is, I think, little to add what we have spoken earlier, is that we, I think we have done a decently good job in terms of right sizing the organization, so we don't have really any effects coming from that. We are well positioned in all three markets in terms of the franchise strength to do the good business. To further and constantly improve, I mean, there is also the positive side in the deleveraging, is that we're coming from the loan- to- deposit of 200 down to 140 .
Obviously, I mean, throughout the crisis also, what we have done is that we have been inched up all of the time, the full self-funding cost towards the Baltics. Which has put actually some of the parts of the lending in a Baltic banking also with a negative carry. So, now when the loan to deposit ratios are improving, then also this necessarily doesn't all- I mean, all of this deleveraging doesn't necessarily one-on-one come through as a negative to the NII, which you also have clearly seen. To sum it up, we expect most of all, we want to see that the world lending volumes will bottom out during this year.
After that, we expect quite modest growth, if anything, over the further number of quarters. But during all of that period of time, we expect to show good business results with decent margins.
Perfect. Thank you very much. Next question comes from Rickard Strand of Danske Markets. Please ask your question.
Yes, hi. Just a question on the state funding. If there is any chance that you will be able to replace the state guarantee funding ahead of its maturity in the coming years? And also, just a little repeat on the Swedish mortgages for 2011. You said that you'll grow, you will be growing in line with nominal GDP, and do you expect that Swedbank will grow below the market, and why is it that you want to continue to lose market shares? Thanks.
I mean, as I said earlier, market share is not on top of the agenda in the short term perspective. It's so important that the quality of the book is there, and that consumers are taking decisions that are financially viable over time. And that's our role, to be their advisors in that discussion. So what others do, it's up to them. We will focus on ensuring that our customers are in good hands. So I believe that all the discussion around mortgages, the regulators' view on this, and the sports view on this, will make people think twice going forward, and that will cool the market slightly off. But in essence, we focus on our customer base and ensuring that they have good advice on this.
On the government guarantee funding, I mean, we, our primary focus at the moment is to cater for the SEK 80 billion of maturities that we have this year. Then, if you're asking the question, if you can choose, would you rather be out of the program two years in advance of 2014? Of course I would. And that's definitely something to look into. But the primary focus for 2011 is the maturities.
Okay, thanks.
There are no further questions at this time.
Okay. Then I think we wrap it up. Thanks for attending, and thanks for all the good questions. See you later. Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.