Ladies and gentlemen, welcome to the Swedbank First Quarter Report 2018. For the first part of the call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Now handing over to our first speaker, Gregori Karamouzis, the Head of IR. Please begin.
Thank you. Good morning, everyone, and thanks for joining us on this call. As usual, I have our CEO, Birgitte Bonnesen, Anders Karlsson, our CFO, and Helo Meigas, our Chief Risk Officer, in the room. We'll have short presentations from each one of them before we open up for questions. Birgitte, please.
Thank you so much, Gregori, and good morning, and welcome to this first quarter call. We are off to a very good start, as I hope that you've already seen, of 2018. We have a quality quarter, I would say, with high activity in all areas. We continue with customer focus, with more products and services that makes life easier for our customers and generate value. In Sweden, the mortgage commitment and consumer loan processes are now fully automated. It has given an improved customer experience and a higher degree of efficiency. 60% of all commitments and about half of all consumer loans are handled digitally. It's a great improvement, but there's a lot more potential.
The Smart ID, the authentication tool that we developed in the Baltic countries, have now reached more than 500,000 customers, and we have obtained approval for the tool to be used in the branches in Latvia and Lithuania. This is used for faster onboarding of customers, but it's also used for signing of new agreements in the digital channels. We build infrastructure, we make it easier for customers, and we increase efficiency at the same time. This is an important enabler for increased digital sales. Today, 56% of sales, in terms of contracts, are done digitally in the Baltic countries, and in Sweden, it's slightly above 50. We continue our efforts and focus on sustainability. We came out of the quarter as the number one arranger of green bonds for Nordic issues.
The asset management company earned another distinction for dedicated efforts to improve the sustainability focus in the companies in which Robur invest. In addition, Robur also had a quarter with increased inflows. In fact, we took the highest market share in the quarter. Swedbank is constantly moving towards becoming a more digital bank. However, the physical meeting stays important to Swedbank. An efficient development process is crucial, and Swedbank has continuously improved our modular infrastructure. But now, in order to ensure increasing quality and speed, we finalized a major reorganization in this quarter. We merged the development resources within IT with those of the product areas in digital banking. This is a natural next step to take, where the entire development process moves to an agile way of working.
It's a method that we have deployed throughout the different areas of the bank for the past five years, so we were confident that we could take this step now. The Swedish mortgage market continues to be in focus. We had a strong quarter, and we continue to take our market share. We have seen house price stabilization in most segments all over Sweden, and the lending growth in the quarter was solid. The amortization and debt-to-income requirement that was introduced on March 1st had an impact in the quarter, with high activity in the first two months. The underlying growth is supported by natural turnover, finalization of housing projects, and financially strong households in Sweden. Fundamentals continue to be good, and the mismatch between housing supply and demand has not been solved, so we still see a high demand, but for more affordable housing.
The recent development in the housing market may support a healthy change in the focus towards solving that, and in this backdrop, we are willing to lend. As the market calibrates to the new environment, we expect a slightly slower volume growth in Q2, based on what we've seen at the end of Q1. However, fundamentals support a solid growth throughout the year. So our focus on origination discipline and profitability remains. We had a strong quarter financially, with increased volumes in all customer segments and good activity in all daily banking products, although the net commission income was impacted by seasonality. Costs are under control and credit quality is good. Cost consciousness and being a low-risk bank are both important to us, as you all know. We have a plan, and we execute on it, and this is what you see in this quarter.
We are off to a really good start, and I'm very confident about the coming year. With this, I will hand over to Anders.
Thank you, Birgitte. I will, as usual, start off giving you the highlights of each business segment before I
... sum it all up on group level and say a few words about our capitalization. Helo will then go through asset quality and give you some information around IFRS 9 before we open up for questions. Starting off with Swedish banking, that delivers a strong result considering the known headwinds going into the quarter. NII was positively impacted by continued mortgage loan volume growth, and back book margins were slightly up. Corporate lending did also grow and contributed positively. The resolution fund fee increased as expected from 9 basis points to 12.5 basis points, impacting negatively in the quarter by SEK 67 million, and two days fewer in the quarter impacted negatively with around SEK 20 million. The final fee level for the full year, including possible risk adjustments, will be communicated to us by the authorities during the second quarter.
Net commission income was impacted by lower income in brokerage due to retail structured products and equity sales being weaker following the stock market volatility. In asset management, we saw strong mutual fund inflows, while research expenses from now on being carried by the funds impacted negatively. Other income was lower due to one-offs in the fourth quarter related to EnterCard and insurance. We did, however, see good underlying activity in the life insurance business. Asset quality continued to be solid. Turning to Baltic Banking, which delivered another quarter of solid result, considering similar seasonal headwinds as Swedish Banking. NII was positively impacted by loan volume growth, which was broad-based, both in terms of private and corporate segments, but also between sectors and countries. Margins were more or less stable, but fewer days and higher resolution fund fee weighed negatively.
Net commission income decreased on the back of the seasonally lower asset management and cards income. On the positive side, we saw continued good, good inflows in the mutual fund business. As the Swedish krona continued to weaken against the euro, the net FX effect in Baltic banking's result was positive by SEK 19 million. Asset quality continued to be stable. Let's look at LC&I that delivered a stable result. NII was stable with somewhat higher loan volumes and stable margins. Net commission income was impacted negatively by seasonally lower income in asset management and brokerage. Net gains and losses were stronger compared to last quarter, mainly due to positive FX and CBA effects, at the same time as we saw customer activity picking up, primarily in hedging interest rate risks. Credit impairments improved and showed reverses of provisions.
This was partly related to positive PD migrations and model calibrations since the transition to IFRS 9. Helo will talk a little bit more about this later on. To summarize at group level, higher customer activity, primarily in terms of new lending, more than offset the seasonal headwinds and increased resolution fund fee. Total expenses were in line with our full year guidance. Turning to capital. Capitalization remains strong, with a CET1 capital ratio of 24.8%, implying a buffer to the Swedish FSA's minimum requirements of around 280 basis points. We will not set our capital management buffer until there is more clarity on the final revised Basel III rules to be implemented in Sweden. The Swedish FSA has presented a proposal to move the risk weight floor for mortgages from Pillar 2 to Pillar 1.
If the proposal is implemented as suggested, there will not be any significant impact on Swedbank, as both the capital position of the bank and consequently, the capital requirements expressed in Swedish krona remain roughly the same. We are confident with our current capital buffer and find great comfort in our capital generation capacity. The introduction of IFRS 9 as of January 1st, 2018, did, as previously communicated, only have a minor impact on our CET1 capital ratio, reducing it by six basis points. Risk exposure amount increased by SEK 2.4 billion. The increase is mainly attributed to increased market risk as a result of higher market exposures in the form of larger bond holdings. Larger credit exposures increased REA, but were offset by primarily model adjustments in Baltic Banking related to classification of corporate versus private exposures. With this, I hand over to Helo.
Thank you, Anders. I shall give now a short overview of credit in Q4. Again, it was a strong quarter with stable credit quality. We recorded volume growth in all our home markets. Total lending growth in Q1 was SEK 27 billion, of which SEK 10 billion was a FX effect. The main growth driver was, again, mortgage lending, while growth in corporate lending was also affected by shorter facilities in large corporates and lending outside Sweden. Our exposure to the housing development in Sweden, which I talked about in the last quarter, has decreased as expected, as projects are being finalized. Exposures as of end of March in this sector in Sweden were SEK 70 billion. Now moving to credit impairments.
Total credit impairments in Q1 were SEK 127 billion, and as this is the first quarter where we report under IFRS 9, I shall now explain the underlying drivers in a bit more detail. Effectively, the credit impairments in Q1 consist of three main elements. Firstly, we have an increase in individually assessed provisions, which was in the total amount of SEK 213 million, and come from an increase in provisions in a small number of cases. These are more or less equally divided between large corporates and Swedish banking. Secondly, we have the effects which come from the new methodology under IFRS 9, and these can be divided into two.
The larger part of the effect is related to the changes in the portfolio composition, i.e., new versus matured credits and their underlying risk, primarily changes in collateral values and ratings, including stage transfers. The net effect is a release of provisions in the amount of SEK 109 million. In Swedish banking, we see an increase of provision from a stage transfer of a few cases, while in large corporates and Baltic banking, there is a release of provisions due to improvement in rating, also in a few clients. The second part of the effect stem from revised forward-looking macro assumptions. The net effect is an increase of credit impairments of SEK 80 million, affecting all business areas.
And finally, the third effect in Q1 provisioning comes from the calibration and fine-tuning of our expected credit loss calculation model, with an effect of a reduction of credit impairments by SEK 87 million, primarily impacting large corporates, as Anders mentioned earlier. If I then summarize these effects, increased individual provisions from a few cases being impaired, some PD migrations in selected cases with a net positive effect, adjustment of macro scenarios to a more conservative baseline, plus some recalibration of the model. The resulting credit impairment, as I mentioned for the quarter, is SEK 127 million, which is about one basis point to the total credit portfolio. With that, I hand back to Gregori.
Thank you, Helo. Operator, please, open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Our first question comes from Magnus Andersson of ABG. Please go ahead. Your line is open.
Yes, good morning. First, I have a couple of questions on NII. As you said, the corporate lending is up, and we can see that it's up 2% quarter-on-quarter and 3% year-on-year. And, it's primarily coming from property management and professional services. Could you say whether you think corporate lending should increase, or is, from here, is this just a few larger transactions we're seeing in this quarter?
Thank you. Thank you, Magnus. Yes, it's, I think that what you've, what we've seen in the quarter is we've seen an actual increase in activity, significant increase in activity in lending to the smaller corporates. The thing is that it's small tickets, and there is an ancillary element to that, that is important, and we need to continue that kind of lending, and this is in all markets. What you see in this quarter is also, you see a couple of in property management, some of it is actually relatively short term. There are sort of bridges when you go to capital markets, et cetera, and you will see that disappear in this quarter.
Okay.
However, I want to add that the activity that's out there, out in the country, it's not like we have withdrawn from the market. But as you know, we lend selectively, as we've done in the past couple of years, and we continue to do that.
Okay. Thank you. And in the presentation, you also mentioned the stable NII quarter on quarter in large corporates and institutions. And it stayed at the high Q4 level, also in Q1, after having been quite volatile in the past. Do you see the level we are at right now as sustainable going forward?
Magnus, it's gregori here. If I understood your question correct, now, of course, we don't guide on NII going forward, but there are no one-offs of any, of any sort in the quarter, neither on the negative or the positive side in, in LC&I. So yes, it's representative, you know, for, for the rest of the year.
Okay. Thank you. And then on loan losses, there were a lot of moving parts, back and forth. Just if I ask on Swedish banking, reported loan losses stayed at the Q4 level, which was quite high from an historic perspective at nine basis points, is, was that a fundamental level? How would you compare that quarter-on-quarter, or is part of it related to IFRS 9 adjustments?
Yes, we are in the new world of IFRS 9, so loan losses behave slightly differently compared to the earlier periods. As I mentioned, there were a couple of impairments in Swedish banking, but these were kind of, again, just a few cases, not really any significant deterioration of the credit quality. But also what is now happening is that you would get increase of provisioning from these rating migrations, i.e., stage transfers, and that's what you see in Swedish banking, again, in a few cases. So that's why you have a slightly higher provisioning in the Swedish banking than we have seen in previous years, but no underlying change in credit quality.
Okay, thank you very much.
Thank you. Our next question comes from Willis Palermo of Goldman Sachs. Please go ahead, your line is open.
Hi, good morning, thanks for the presentation. The first question I have is on the competition in the Swedish market. If you could comment on what we saw during the quarter, as there were some challengers and bigger player lowering the prices, also some new entrants becoming more vocal. How do you see this impacting the market going forward and any reaction you would have related to that?
Hmm. Thank you for that question. I think you should divide, as you did, in two. One is that we've seen new initiatives that have an ambition of entering the market. And then we've seen some of the more established players that have come out at a different price level on certain maturities. I think the important thing to remember is that Swedbank is a very large retail and mortgage bank in Sweden. We are the bank for the many. We don't do campaigns on mortgages. We consider a mortgage not to be any other product. It's a product that people come in and take probably the most important investment of their lives. We follow our customers through their life cycle. We offer not only different maturities, but also commitments.
You can borrow more on your mortgage, et cetera. We have the whole range. We do it through licensed mortgage advisors within the regulatory framework of the Swedish FSA. We also take, I think, a responsibility that we have towards the stability of the system in Sweden. When you're a big mortgage lender, you need to think in terms of your responsibility to the system overall. So commenting on the pricing, we follow the structure all the time, of course, but we haven't, we don't fluctuate. And this is, you haven't seen us change prices more or less over the past year. So we are, we're very sort of steady. You should be able to trust us, that you get the right price in relation to the risk that is expressed by each individual.
On the new initiatives, I think that this is something about the fascinating thing about the Swedish market, that you see new entrants all the time, new ideas coming onto the market. I think that is basically a good thing. The thing is that for the year, the initiatives that we've seen now are initiatives that are outside the regulatory framework under which we operate. They take only... They have sort of requirements that, you know, you need to be a customer of a bank before they can even accept you, and just that differentiates. And there are lots of other things. If you have a different environment, if you don't have liquidity requirements or capital or resolution fees, and you don't have to work in the same way as we do.
I think that is a. Let's see what happens. We follow it very closely. I think that, and we see, you know, what are the discussions that that has generated with our customers out in our branches, very much in the physical meeting. I know that this is a lengthy answer, but I think that it's an important one, because what we see is that the conversation that this has given, what we have with customers out there, contain other elements than it has had before, which is namely, how do you react if something happens in your life?
Okay. Thank you very much for the answer. The second question I have is on the housing market and volume growth going forward. As you pointed that there were some signs in of stabilization, is that your expectation that it will continue? And how much would you say that higher amortization requirement contributed to the strong volume growth in the quarter? I heard the first two months were very strong. What how or what was the difference between the first two months and and March, and how do you expect this to continue?
Yes, it's right that the first two months were definitely stronger than March. There was sort of a buildup of stock, you may say, through November and December, and all of that was sold off in the first two months. January is always a strong month, but this year was even stronger. So I think that what we'll see is we'll see an impact going forward. However, it's really important to bear in mind that the fundamentals are very strong in Sweden, and also there is an underlying need. We just got the figures from, sort of, the official figures, statistics for the need for housing in Sweden, and it's around 80,000 new apartments or small houses in the coming per year, in the coming two years, and we're nowhere near that.
So there is an underlying need that needs to be fulfilled. I think that we'll see the effect of the new debt-to-income and amortization rule that came in in March will have a dampening effect in maybe in this quarter. But let's see, we haven't really changed what we view, how we view the year as a whole.
All right. Thank you very much, and have a good day.
Thank you. Our next question comes from Andreas Håkansson of Exane BNP Paribas. Please go ahead, your line is open.
Thank you. Good morning, everyone. Can you just follow up a bit on the mortgage market? One would be out of the new amortization rules, could you tell us now when you see in a month at least, how many of your clients actually impacted by those new rules? Also related to mortgages, me and Anders, we've been discussing many quarters in a row the outlook for mortgage margins. Could you tell us what's the latest view on mortgage margins from here? Thank you.
1% of everybody who took a mortgage in March was impacted by the new rules, 1%. So it's, it is very limited. Over to you, Anders.
Thank you, Andreas. Yes, as I stated, the back book margins were slightly up in the quarter. But before I even go into that, I would like to remind you that the three-month STIBOR is an indication of where the margins are heading. We are not pricing mortgages off STIBOR. But turning into sort of the quarter, you remember that STIBOR went down quite dramatically, especially at the end of December last year. That change in market rate is if you do not change your price towards the customer, that translates into higher margins automatically. If you look in this quarter, STIBOR turned the other way around, which essentially then means that if you are not changing prices, margins on mortgages will come down in the next quarter.
But then I also would like to remind you that on the other side of the balance sheet, we have deposits of equal size as the floating rate part of the mortgages, where the same logic applies.
That, that's interesting. Following up on that, I see that you yet again increased the sensitivity you have to 100 basis points higher rates, and I think you're now up to SEK 5.8 billion, which is a big, big increase all, even in the quarter. Could you tell us how linear is that over the 100 basis points?
Yeah. Thank you, Andreas. I think primarily it's driven by exactly that question. Since the STIBOR rates have moved up in the quarter, we are closing into the zero level. And as you know, no part of our corporate book is floored on the lending side. So the closer to zero you get, the more linear this calculation gets. But you need to read through the assumptions as well.
Sure. Okay, and then, and maybe just one quick question. On your market share of new lending in asset management, you, you had, was it 60% market share? Is it something special you've done since you turned around this tough trend you had for a long time, or was it just a one-off event, or, or could you tell us a bit about this move?
It was a mix. I think that, as you know, we spoke a lot about it last year, too, that we've set up sales resources to support the physical meeting. We have had campaigns, pension campaigns. We'll continue to have that that year. So you'll see it in life insurance, too. You see it coming in. So a lot of it is generated by activities that we have in Swedish banking, third parties, but some of it is institutional, too. So... And we work actively on the institutional leg as well, more than we've done before.
Okay. Thank you very much.
Thank you. Our next question comes from Peter Kessiakoff of SEB. Please go ahead, your line is open.
Yes. Hi, good morning. A few questions from my side. The first one is relating to the large corporate division, where you mentioned during Q4 that there is an ongoing, say, repricing or trying to improve the ROE within that operations. Could you just tell us or elaborate a bit on how that has been trending in the first quarter, and whether that is partly an explanation behind the very solid NII within LC&I? That's my first question.
I think there's nothing new to add, really. This is a continuous work of making sure that the portfolio reaches the return hurdle that we have.
... Okay. Then just a very detailed question on treasury, where NII was down in the quarter. I think your, your most recent guidance is that, treasury NII could potentially be flat year-on-year for 2018 versus 2017. Could you just elaborate on, what your outlook is now for the rest of, of the year on treasury, results?
Thank you, Peter. We seldom talk about NII on treasury. We talk about the combined effect of NII and NGL. If you remember what we said in Q4, we said all things being equal, we forecast the result to be basically in line with 2017. But what you have seen in Q1 is that swap levels and spreads have moved. So if I assume that quarter one is an indication for the rest of the year, i.e., assuming everything held constant in Q1, I will downrate the result from treasury with a couple of hundred million SEK for 2018.
Okay. And is that then evenly divided between NII and net gains and losses? Sorry, can you give any indication in terms of split between those rows? Or am I pushing it?
You're pushing it, Peter. That's okay. I will not answer that. We are looking at NII and NGL combined.
Okay, fair enough. Fair enough. I tried. Then, the last question, I'm not sure whether you already answered this or not, but in terms of the mortgage margins, I hear what you're saying on the new lending. But, how is, how are front book margins compared to the back book, given that the back book trended up in this quarter? And I know that in the past, you discussed, the repricing potential that was remaining on the fixed part of the mortgage book. So if you could just elaborate a bit on front book versus back book margins and, where the increase in back book came from during this quarter.
The short answer, Peter, is that they are basically in line with each other, so the gap is, has disappeared in the quarter.
And the back book increase, did that come from the fixed part of the book, or was that evenly spread?
It's mainly from the floating part of the back book.
Okay, I think I'll stop there. Thank you very much.
Thank you. Our next question comes from Jan Wolter of Credit Suisse. Please go ahead, your line is open.
Hi, Jan Walter here at Credit Suisse. A couple of things, continue on the mortgage side. First of all, I think, Birgitte, you highlighted early in the call that you could see a lower mortgage growth from the second quarter compared to where the bank has been in the last few quarters. Is that the way to see it? And what signals in the market do you see that leads to this view of lower growth going forward? And secondly, and related to that, the activity levels in the housing market in March and April, what signals have you gotten there from the business? And my final question would be on the funding cost benefit from a lower NSFR.
So I think you previously, Anders, helped us with that. So two questions, if the NSFR now at 110%, is that likely to come down anytime soon, or will it be close to that level going forward? And then what would be the impact on the NII for one percentage point up or down on that metric? Many thanks.
Thank you, Jan. What I said is that we've seen the first two months were really strong. You know, the last year, we saw a growth of 7.4%. We were up at 7.23 in the first two months, very, very strong. Of course, we saw that the market became more hesitant in March as a result of the new rules that came in. But I didn't say that we saw sort of a significant drop for the rest of the year. I think that you need to remember constantly, fundamentals in Sweden are very strong. You see unemployment coming down, we have a very solid labor market, we have a strong balance sheet among households, we have increased the disposable income. It's actually growth of almost 5% in 2018, and it's historically cheap to get a mortgage.
So we have lots of these things. You see that the urbanization trends continue. But the problem is that we need to refocus new construction towards more affordable housing. This is the challenge for Sweden, and we are there to lend both to construction of more affordable housing, but also to the individual households. And I just want to mention that the new construction that we've seen in the past years, in the very high-end, more expensive, we have been very restrictive on that, as you all know. So today, we're in a very comfortable position to continue to lend to those who would take themselves into this better area. I also just want to mention that what we saw in the month or in the quarter was we saw this stabilization of the house prices.
So, as we go through this month, we continue to see that, and then, you know, that will have also an effect on demand when it becomes easier to predict what will happen.
Yes, Jan, I think you've taken over my favorite question from Magnus, but that's okay. To start off with maybe the most important part of it, the effect of a 1 percentage unit change in NSFR is, at current conditions, around SEK 20 million. So it's a fairly limited amount compared to what I talked about a couple of years ago. There is no reason to hold up NSFR at a very high level. We have said that we will eventually come down. The reason for it being on a high level the last couple of quarters are two, basically. One is the fact that deposit has been growing more than anticipated, and we have had a very benign funding environment in Q4 that we actually took advantage of.
But the long-term ambition is not to go down, but it is to go down, but I'm not sort of stressed by the fact that the economic impact is fairly limited at this point.
Thank you. Just related to that in the quarter, on the funding side, that is, one can say that the funding mix here in the quarter, just in principle, CPs are up SEK 30 billion plus or something, covered bonds up SEK 30 billion, and then the more expensive funding senior are down at 10 or so. So basically, the funding mix went to the cheaper papers in the quarter. Did that have any effect in the quarter on the NII, any meaningful effect there, please?
Not really, Jan. When you look at this, I think you should disregard commercial paper or short-term funding in that sense. That is something that we usually issue in the quarters on a fairly high level. As far as the other part comes, it's really our prime market is covered bonds, so it's no drama in that one.
Okay. Many thanks for that.
Thank you. Our next question comes from Johan Ekblom of UBS. Please go ahead. Your line is open.
Thank you. Just one quick follow-up on mortgages. I mean, when you talk about an expected slowdown, is that entirely driven by your view of the market slowing down, or is there some kind of assumption that these either new entrants or some of the other banks cutting pricing will take a bigger share of new production?
What we see is more like a calibration, as in sort of in response to the new amortization and debt-to-income regulations that was introduced in March.
So it's not an assumption that you will lose market share in new lending?
No.
Perfect. Thank you.
Thank you. And our next question comes from Kim Bergoe of Deutsche Bank. Please go ahead. Your line is open.
Good morning. Sorry, sorry to come back to the mortgage margins. I guess this sort of illustrates the importance of it. But just, just first, Birgitte, you were talking about digitization and how much that means, and I'm sure there is some savings with that. I mean, what is... I mean, are some of these savings gonna be passed on at some point to customers? It seems that mortgages are quite profitable at the moment when I look at the legal subsidiary doing that. And also, when you talk about margins going forward, sort of under the assumptions that you're not gonna change your sort of headline prices, and you talked about that there are other things than just price, but that determines where people go for their mortgage.
But, you know, is there a limit to how big sort of the price differential in terms of the list prices can be before you need to move, or do you think you're fairly stable in that and don't really need to move? Thanks.
The digitalization of the tools, it's sort of a way of meeting the needs of customers. This is developing in line with customer behavior. So I think that this is just a natural and a given. And as I've spoken back about before, the automation of the mortgage process is very important in a bank like ours, as it is the biggest process. And that will be finalized sometime next year. When you look at the prices, we follow the prices closely, of course. But as I've also said, we don't do campaigns. We sort of stay at a steady level that is dependable over time.
Okay. Thank you.
Thank you. Our next question comes from Robin Rane of Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, good morning, and thank you for taking the questions. So two quick questions. The risk exposure amounts from market risk increased due to larger bond holdings. Is this a new level, or can we expect to see reversals here? And the second question on the Baltics. So, are we seeing signs of increasing competition as a result of the merger between two competitors last year?
Thank you. On your first question, I think you should think about it as a year-end effect, really. And on the competition, I hand over to Birgitte.
Yes. No, I can't say that we see more competition. I think Baltics is there is a good competition in the market. I think it's I actually think it's great that this merger happened. It shows confidence in the markets, confidence in in the potential of the markets. And also that there is one more big player to work on the stability of the market. So I think that this is very good, and it hasn't affected the business of Swedbank so far.
Okay, thank you very much.
Thank you. Our next question comes from Brajesh Kumar of SocGen. Please go ahead, your line is open.
Hi, good morning, all. Brajesh from SocGen Credit Research. Just a quick one on your funding plans. I see on slide 17, you mentioned planned senior unsecured issues of around SEK 30 billion for rest of 2018. Can you get some more color around your sub-debt issues plan, especially on tier two, given you have a large call coming in early 2019? And on NPS, non-preferred, any update on the timeline, please? Thank you.
In terms of funding plans, it's, hi, it's Gregori here. In terms of funding plans for the year, we have communicated that we will be issuing slightly less volumes in 2018 versus 2017, purely because we have less maturities. The mix will stay the same, so we'll be about two-thirds covered bonds and one-third senior unsecured. Your second question about capital, we are currently, of course, meeting the requirements, and if we have upcoming maturities or potential calls, of course, we will see how that develops. But we will be looking at the markets on a continuous basis to pre-fund, if that is appropriate to do, based on funding levels. And that goes both for Tier 2 and AT1 instruments.
In terms of non-preferred issues, as you might know, there is a plan by the lawmakers to adjust and amend the insolvency law in Sweden by the end of 2018. We will wait for that to evolve before we enter the market.
Okay, fair enough. Thank you.
Thank you. Our next question comes from Paulina Sokolova of Barclays. Please go ahead, your line is open.
Hi, thank you for taking my question. I just have one question left on costs. So you have very good cost control, and you're running about, you know, 2% below the maximum cap of SEK 17 billion for this year. How should we think about this? Do you expect to ramp up spending later on in the year? Or maybe could you please give us some details on the projects that you're running now, and whether you expect to launch more initiatives later? Thank you.
You know, frankly, not really. We have the 17 that we've guided for over two years, and we'll stick to that.
Okay, thank you.
Thank you. Our next question comes from Riccardo Rovere of Mediobanca. Please go ahead, your line is open.
Good morning. Good morning to everybody. Three questions, if I may. The first one is, again, on funding. I've seen, I mean, the loan book grows nicely, but grows by roughly SEK 40 billion, just less than SEK 40 billion, while deposits go up by almost SEK 100 billion, and debt securities in issue go up by almost SEK 60 billion. So the funding has gone up by three times more than the growth in the book. So I was just asking whether there is anything, one-off in the deposits growth, first? Second, if not, how those these deposits will be redeployed? And third, if you have done any pre-funding in this quarter in debt securities, given, maybe in light of possible rate rise? This is my first question. The second question I have is on, on capital. Once again, you reiterate there is no surplus capital. Fine.
May you please tell us exactly what you need to remove that sentence from your outlook over the next, over the next few quarters? The third question I have is on housing. The loan book grows nicely except for one sub-segment, which is housing cooperatives, which is more or less stable or slightly down in the quarter. I was just wondering whether this is we should read anything into that or not? Thank you.
Riccardo, I will start with your last question. Yes, it's a conscious, it's a conscious stand from Swedbank. We initiated strict origination standards already by the end of 2016, and you've seen that during 2017, and you continue to see that. We are sort of a low-risk bank, and this is important to us.
... Mm-hmm, and if we come back to capital, it's what I have said, and I will continue to do that, until there is clarity in how the Basel III revised rules will be implemented in Sweden. So you will most likely hear me saying the same thing for the next coming quarters, Riccardo.
Then on the funding side, Riccardo, we do pre-fund, and that was the communication for last year as well, where we saw favorable market conditions and therefore pre-funded. We do have a number of liquid curves outstanding, so when it comes to public benchmark transactions. So it might be that we do a transaction in a particular market if it's favorable from a funding cost perspective earlier than we actually need the money. Then the deposits is a little bit, as Anders mentioned before, has been coming in or flowing in higher than we have anticipated. And that is, of course, something that is taken into consideration in the funding plan. And we have the possibility to do less issuance in each one of the funding formats. For example, cover bonds domestically.
So it's ongoing calibration of the funding plan that goes on throughout the year. And so there is nothing else, you know, in the mix that you describe that lies behind the funding activities.
And then to add to what gregori is saying, Ricardo, there, there are, as you can see, there are year-end effects where short-term money are disappearing from the market, then they come back, in Q1. So part of the deposit inflows and part of the increased short-term funding is more related to, to that fact than anything structural from a balance sheet perspective.
Yeah, no, thanks. So that, that was—that is clear. I just wonder whether, let's say, the amount. Now I've seen that the amount of cash in the balance sheet is almost SEK 400 billion. Generally, it happens over the course of the year that that amount goes down quarter after quarter. Should be any reason why this time should that should not happen? No.
No. You answered it yourself.
Thanks.
Thank you. Our next question comes from Vivek Gautam of JP Morgan. Please go ahead, your line is open.
Hi, good morning. I have two questions. Firstly, you disclose the average interest rate that you offer every month on three-month mortgages. That was 153 basis points. Can you tell us what the, what is the average rate that you have offered to less than 60% LTV borrowers or even less than 50% LTV borrowers? The second one, with the full year results, it was indicated that the regulatory costs are likely to be roughly SEK 450 million higher in 2018 versus 2017. That is based on your own estimates. But now it appears that in Q1, the regulatory costs are lower than the guided run rate. Can you explain what has changed since then, in your assumptions, which has resulted in a lower number? Thank you.
Hi, Vivek, it's Gregori here. On your second question regarding the resolution fund fee, when we guided the market of a delta of SEK 400 million-SEK 450 million, we did that on the back of the information that we had before we received the risk adjustments from the National Debt Office mid of last year. So the resolution fund fee that we book in the first quarter takes into account the most recent information, which is the risk adjustment received from National Debt Office mid of last year. As Anders, I think, mentioned in the call, we will get the final fee level in a month's time from today, so we don't change the guidance that we have given to you.
But if the risk adjustment is about the same level as it was mid of last year, the delta will be somewhat smaller.
First question, I can just say very, sort of overall, we have a sort of risk-adjusted pricing. What you see is the average of all the pricing, irrespective of the-
Any, any comment on how the sensitivity is from higher end to the lower end in terms of as you move down the LTV ladder?
No-
I'm just trying to understand how competitive are you in the lower LTV segment? Just trying my luck here.
We have individual pricing, so we don't, we don't talk in terms like that.
Thank you.
Thank you. Our next question comes from the line of Bruce Hamilton of Morgan Stanley. Please go ahead, your line is open.
Hi, thanks. Good morning. A quick question, obviously, there's been plenty of questions on sort of the outlook for sort of housing volumes, which you've been pretty clear on. When I look at the sort of asset management business, obviously, you've taken strong market share in Q1. But I wonder if you could comment at all on any change in sort of client behavior, either on the retail or institutional side, as we worked through the quarter. Did you see an increase in volatility in markets driving, you know, a change, you know, slightly more caution from investors? So as we think, you know, as we think out from here, we should expect perhaps the momentum is a bit slower, or has it been pretty, you know, pretty solid throughout?
It's been pretty okay throughout. I think the most important thing to remember about the asset management part is that in Sweden, the change in the pension scheme will... There will be more people who will need to save individually for their pensions, and this is something that will drive an increase in the asset management, and this is what we work on with the branches.
And to your specific question, Bruce, about the mix, we have referenced before that there is the savings are sentiment driven.
Yeah.
Since a lot of Swedes do have savings in the stock market and in mutual funds, when there is an increased volatility, you see a slight change.
Yeah.
People might not put as much money as they did in equity funds. You have a small part of that, but it's not a trend, and it's not a significant impact this particular quarter.
Got it. That's helpful. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. And we have two further questions coming through. The first is from Jacob Kruse of Autonomous. Please go ahead, your line is open.
Hi, thank you. Just a quick question on the process improvements that you talked about on the mortgage side. So you say almost everything is now fully automated. And I just wanted to ask, how much other processes remains? What percentage of... If this is 100% of the mortgage process, what percentage of the retail banking process are you now automating or have you now automated? Thank you.
I'll say that there's work ongoing on all processes. We have a goal of being sort of 100% on all daily banking services. On the mortgage process, the loan commitments end is now fully automated, but we also have one product that is, you can borrow more on the mortgage that you already have. That will be the next thing that we will launch, and the entire process will not be ready until 2019. And that is an important one.
And how many staff are involved in the mortgage process at the moment?
Yeah. We don't, we don't talk about that, to you at least.
Okay. Thank you.
Thank you. Our next question comes from Nick Davey at Redburn. Please go ahead. Your line is open.
Oh, yeah. Good morning, everyone. Two questions, please. The first one on fees, I don't think we've talked too much about. So can you just comment a bit about the strength in fees this quarter? Looking through the detail, looks like you've had multi-year highs in payments and service concept fee levels. So if you just talk a bit about the drivers. Second question, sorry, I know we've talked a lot about the wholesale funding change in mix, but it is notable, this continued decline in the wholesale funding cost in the Factbook , slide 11. So my one question really is, can you comment on the entire stock of your wholesale funding, what proportion has been swapped back to STIBOR, and what proportion remains fixed rate? Thanks.
You're right. So that what we see is, that we see an increase in payments. We saw that in the fourth quarter, too, even though the first quarter is always less because of the Christmas shopping spree in December. But we see healthy growth. We see we're taking new customers in the e-commerce space, et cetera. We see it on cards, too. We continue to issue more cards, contrary to what many think, that there are actually many young people that come in and ask for cards. And this, we see this in all four countries. Then you asked about the fees in the asset management side?
Yeah.
Yeah.
To add to what Birgitte said, if you look at the service concepts, that is a function of the fact that we acquired PayEx last year.
Mm.
And that is what you see on that row.
Yeah.
To add on the asset management, that has been a strong performance in the quarter.
And Nick, you had a question about the funding as well. You point to the development in the quarter. Of course, that is derived from how the swapping of some parts of the funding is developing. As you know, it is the covered bond funding primarily that we are swapping to match the three-month fixings, for example, in the mortgage market. We have about SEK 550 billion of covered bonds outstanding. About SEK 300 billion, I believe, of that is issued domestically, and a proportion of that, or a portion of that, is then swapped down to meet the three-month fixings that we have on the mortgages. On the international funding side, the swapping is done.
It doesn't necessarily—it's not necessarily done for the full maturity of the funding. So if we issue a five-year bond, we might choose to swap it down year by year. So it varies. I cannot give you an exact answer as to how much we have swapped in, at any particular point in time. It varies depending on how markets develop.
Thank you. And the senior?
The senior is not swapped or... It is typically we issue in a five-year note on the senior side, and it is fixed, but we've done some floating rate notes depending on how favorable the markets have been.
Very helpful. Thank you.
Thank you. The final question is a follow-up from Riccardo Rovere of Mediobanca. Please go ahead. Your line is open.
... Yes, thanks again for taking my follow-up questions. The first one is on the Baltics. You can have reversals. This has been the leitmotif over the past seven years. Any reason why that should change, or any idea for how long this could go ahead? This is my first follow-up. The second is on, we have seen the LIBOR-OIS spread, you know, widening over the past few weeks. Is something that we should worry about for Swedbank?
If I start with the Baltics, two comments on that. First, there definitely is a reason why reversals should disappear. That is, that we are almost 10 years from the crisis, where we actually booked a lot of credit impairments, so there is not that much left anymore to restructure. But secondly, again, I want to remind that we are in a slightly different world of IFRS 9, where you don't only see impact on credit impairments from reversals, but you also see impact to credit impairments from different stage transfers, i.e., you get PD migrations. To a positive, you might have a reversal, and when you get the PD migration to negative, you might have an increase of provisions, even if there is no impairment involved.
So the dynamics are going to be slightly different, so I don't think you should read into the previous year's numbers and use that only to forecast the credit impairments going forward.
On your question on LIBOR, Riccardo, it temporarily impacted our U.S. dollar funding in the quarter, both short and long term, but it seems to be more normal as we speak.
So, from your wording, I would imagine it's something that you sleep well at night, right?
Yes.
Okay.
Thank you. With that, I'll hand back to our speakers for the closing comments.
Thank you, and thanks, everyone, for participating so actively. We will see most of you on the road over the next couple of days. Thank you. Bye-bye.