Ladies and gentlemen, welcome to Swedbank's third quarter report for 2017. Today I am pleased to present Gregori Karamouzis, Head of Investor Relations. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Gregori, please begin your meeting.
Thank you. Good morning, everyone, and thanks for joining us on the third quarter results presentation. With me in the room, I have Birgitte Bonnesen, our CEO, Anders Karlsson, our CFO, and Helo Meigas, our Chief Risk Officer. I hand over to Birgitte first to run through some highlights for the quarter. Birgitte?
Good morning, and welcome. We're very proud to deliver yet another quarter of stable results in Swedbank. An ROE of 15, cost in line with expectations, a cost income of 0.37, solid asset quality, and strong capitalization. We follow the plan that we have for the year and continue to deliver according to the wanted position and our goal to remain the leading bank for the many households and businesses in our home markets. We've seen lending growth in all markets and products, mortgages, consumer loans, as well as corporate banking. Payments perform as expected, and this quarter we finalized the acquisition of PayEx, which complement our strong, acquiring business. In savings, we have a plan that we follow. However, it takes time. It does.
Despite negative fund flows, the market share stayed unchanged at 20.7, which means that Robur's assets under management has grown more than the Swedish fund market as a whole. This is related both to the solid performance in the funds and a higher share of equity funds than the market. Among the many activities to drive traffic to our Swedbank app and increase customer satisfaction, we have integrated a subscription service. This is the first time that any bank in Sweden integrate a fintech directly into its app, and we have done it in six months. It only took six months from idea to implementation, which is a proof that our new delivery model works. Activity is high, and despite more deliveries than ever, the internal employee satisfaction has more than doubled since last year.
This is a prerequisite for success and an important tool in increasing customer satisfaction. This quarter, we also got proof that our sustainability efforts have been successful, with 5 of Robur's sustainability fund were among the first funds to get a Nordic Ecolabel . We also came out as best in the industry, chosen by more than 600 businesses in Sustainable Brand Index . So the focus stays on the plan and high degree of delivery, on profitability and cost, which remains a priority. And with this, I'll hand over to Anders.
Thank you, Birgitte. I will, as usual, first go through the three business segments and thereafter sum it all up on the group level before I say a few words about our capitalization. Swedish Banking delivers a stable result, primarily supported by good loan volume growth. NII was positively impacted both by increased mortgage loan volumes and corporate loan growth. We captured around 20% market share on new mortgage lending in the quarter, while we saw a somewhat broad-based loan growth across sectors in the corporate space. Mortgage margins were stable in the back book, while front book margins followed the market rate movements, as STIBOR increased by around 5 basis points in the quarter and were 5-10 basis points lower. After the quarter end, we have seen a falling STIBOR, reversing the negative impact we saw on book margins in the quarter.
Overall, we see small differences between front and back book margins. Deposits grew by SEK 9 billion, almost exclusively in the private segments, and margins were somewhat higher on the back of higher STIBOR rates. 1 extra day in the quarter and the positive one-off effect of SEK 30 million from previous quarter related to the resolution fund fee impact the quarter-over-quarter NII comparison. Net commission income was impacted by the usual seasonal effects and the consolidation of PayEx. Income from cards was stronger, while brokerage and lending guarantees were weaker. Asset management income was slightly up as a result of positive asset performance. PayEx contributed with 1 month's result, SEK 36 million in income and SEK 34 million of expenses. Asset quality continued to be solid. Turning to Baltic Banking, that continued to deliver a solid performance.
NII was positively impacted by loan volume growth in all three countries, both in the private and corporate segments, and by one more day in the quarter. As the Swedish krona strengthened against the euro this quarter, the FX effects on NII were negative by SEK 12 million. Lending margins were stable. Net commission income was stable. Higher income from cards was offset by lower income from lending and guarantees and asset management, and FX effects that negatively impacted by SEK 6 million. Asset quality continued to be solid. On the back of our strong capital position in Estonia, with a Common Equity Tier 1 capital ratio above 40%, we decided to increase the dividend policy from 60% to 100%. The current capital buffer exceeding 25 percentage units allows ample room for growth in our loan book.
As dividends are taxed in Estonia, this change leads to a higher tax expense of SEK 115 million, of which around SEK 80 million refers to this year's first two quarters. Let's look at LCI, which delivered a resilient result. NII was stable as a result of flat loan volumes and lending margins. Net commission income was seasonally weaker due to lower activity in brokerage and corporate finance. Net gains and losses were slightly stronger compared to last quarter due to positive FX effects, despite slower trading activity. Credit impairments in the quarter were lower than in Q2, as provisions in the oil-related segments were down. Here, we'll talk more about our asset quality in a short while. So to summarize the group level, overall, a very stable result with positive loan volume growth.
Our mortgage loan book continues to grow steadily at an annualized growth rate of around 5%, while margins in the back book were stable, and in the front book follow the market rate movements. As we don't price mortgages on the back of daily market rate movements, margins on new lending near term are expected to follow the market rate movements up and down. We have, for example, since quarter end, seen that STIBOR rates have moved down again, which consequently should increase front book margins if the rate levels prevail. Corporate loans grew selectively in the quarter across sectors, but stay subdued overall year to date. Deposit margins benefited slightly from higher STIBOR rates, and NII was also supported by positive contribution from covered bond buybacks and favorable conditions in the short interest rate markets.
Commission income was slightly down on the back of usual seasonal effects in the capital markets related products, primarily. Net gains and losses were weaker, mainly due to lower market volatility and larger covered bond buybacks. Total expenses came in as expected. Following the strategic acquisition of PayEx, as Birgitte mentioned earlier, which is now being consolidated into the bank, we expect total expenses for the full year of 2017 to be around SEK 16.1 billion. The new target, that's in addition to PayEx-related expenses, also take into account slightly higher expenses due to FX effects and pensions. In conjunction with the publication of our Q4 results, we will guide you on expense development going forward. The acquisition of PayEx also leads to an impairment charge related to development project costs in the payments area.
Looking into next year's taxes, we will see a slight increase in our effective tax rate from 20%-22% to 21%-23% on the back of tax regime changes in Estonia and Latvia, to be effective as of January 1, 2018. Turning to capital. Capitalization remains strong, with a Common Equity Tier 1 capital ratio of 23.9%, implying a buffer to the Swedish FSA's minimum requirements of 230 basis points. We continue to wait for clarity on primarily the expected Basel proposals and the subsequent implementation by the EU and the Swedish FSA before we will set our management buffer level. This quarter, CET1 capital base was impacted by the consolidation of PayEx, as it resulted in intangible assets of around SEK 1.1 billion.
Risk exposure amount increased by SEK 12.8 billion, mainly due to loan volume growth and additional model adjustments relating to the large corporates portfolio. The model adjustments relate to the same corporate portfolio that we talked about in Q1 earlier this year, when we decided to hold more capital for expected PD increases. PayEx increased REA with approximately SEK 1.7 billion. Let me now hand over to Helo to walk you through the asset quality.
Thank you, Anders. I should give now a short overview of credit quality in Q3. Strong economic growth contributed to volume growth in all our home markets, primarily as a result of demand for private lending. Total lending growth in Q3 was SEK 18 billion, which lending in Swedish Banking contributed SEK 13 billion. Biggest loan growth, SEK 10 billion, was in mortgage lending in Sweden, whereas total corporate lending growth was SEK 6 billion, of which SEK 4 billion came from our Swedish business. We continue to have a strong credit quality in our home markets. Swedish Banking reports credit impairment of SEK 66 million, and Baltic Banking has recoveries in the amount of SEK 26 million krona.
In Large Corporates and Institutions , we increased credit impairment by SEK 995 million, which was primarily from two exposures, one from services sector and another in shipping and offshore. As to the guidance for the total 2017, which was 10-15 basis points credit impairments to the total credit portfolio, we expect to end the year in the lower end of the range. As our oil and offshore exposure, we see signs of stabilization due to new capital and ongoing consolidation, but investments stay low and there is still lower capacity in the market, so we maintain our cautious stance towards the sector. So I stay here.
Thanks, Helo. Operator, I'll hand back to you to allow questions from the, from the audience.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, and you'll enter a queue. Our first question comes from the line of Magnus Andersson from ABG. Please go ahead, your line is open.
Yes, good morning. First of all, Birgitte, in your CEO comment, in the last paragraph, you write that the current high level of activity means we can aim even higher, et cetera, and that you talk about next year's priorities. Does this mean that you will come out in Q4 with any revised financial targets? Anything in addition to the cost target for 2018, or what does it really mean that you can aim higher?
What it means is that we now see proof that the transformation of the bank into primarily working in value streams. Well, the proof is that we can actually deliver more, and in my book, that means that we can, you know, we can set up higher delivery targets internally next year. It doesn't mean that we will come out with a different guidance for next year, except for the cost target that you know we will publish in the first quarter. So it more means that we need to come out with more deliveries, and this, of course, will contribute to an underlying profitability.
Okay, but no, no change in financial targets at all?
No.
Oh, okay.
No.
Secondly, just on capital Anders, your comment there, does it mean that you will await Basel IV, EU implementation and Swedish interpretation before you make up your mind about what kind of management buffer you need, and therefore you will not change your 75% dividend payout ratio regardless of the buffer to the minimum capital requirement right now?
Yeah, I think it would be unwise when we have such an unknown situation in front of us, and even if Basel comes out, we really need to see what the EU is doing with it, and maybe more important, what FSA will do with the minimum requirements. So yes.
Okay. That might take a while then.
Yes.
Okay, more specifically then on NII, you mentioned that you had similar front book and back book margins now. You I think in connection with Q2, you talked about the potential back book repricing of 5-10 basis points over 15 months, over back book of SEK 150 billion Swedish. Does that still stand, or?
Yeah, Magnus, I think that guidance is, but you understand that it's around,
Yeah.
100 or roughly a bit higher than 100. But, I mean, there are so many assumptions in that guidance, but that's true. It's still more than SEK 100 billion coming in for repricing.
Okay, good. And then on treasury related NII, that was a bit stronger this quarter, again, up Q-on-Q. Is this kind of level; can you tell us something about what you did there and how you view the sustainability of that level?
Mm-hmm. The first part of it was that we actually, as you saw, we bought back larger volumes in this quarter compared to previous quarter, which is impacting NGL negatively, immediately, but NII positively, so for a couple of months. That was one part of it.
Uh.
The second part of it is related to our management of the liquidity buffer, where we have benefited from moves in the shorter end of the yield curves, including basis swap spreads. So whether that is sustainable or not, Magnus, is extremely difficult to say, but that's part of the day-to-day activities of treasury.
Okay, so probably quite volatile then. And then finally on PayEx, just your guidance of SEK 16.1 billion, does that include integration costs? Because I guess it would cost something to implement it in the bank. And also, if you can tell us something about what you expect in terms of net earnings contribution next year from that acquisitions and potential synergies.
Oops, that was a lot of questions. But if you try to decompose PayEx during this year, Magnus, you have PayEx running costs coming in, obviously.
Mm-hmm.
Then you have depreciations on some of the intangible assets, and then you have expenses related to the acquisition. It's no major system integration included in that. It's more related to the acquisition itself and the fact that we have intangibles that we need to start to depreciate. And as far as synergies comes, it's not a synergy case. There are very small synergies that we can see. One is obviously treasury and some other central functions, but the case is not about synergies. The case is of building a competitive payment solution for the merchants and their customers. I wouldn't really like to get into any income projections from PayEx next year, Magnus, so we need to wait for that.
Okay, but costs for integrating PayEx might come down on top in 2018. So the SEK 16.1 is just acquisition-related costs, et cetera?
Yeah.
Transaction-related costs.
Yes, and then you have what I also added to it was the things that you can't foresee in the beginning of the year, like FX is moving against us, and pension liabilities have increased slightly. But you might view it as expenses, I view it as investments. But we'll come back to that, Magnus, in conjunction with the Q4 result.
Okay. Just one more, if I might push my luck on asset quality to just, you know, you went out 6 basis points. You had 9 in Q1 and 11 in Q3, and you stick to your 10-15 basis point guidance in lower range. That would imply twice the level of loan losses in Q4, almost definitely more than SEK 500 million. What should drive that quarter-on-quarter if you start to see the restructurings now fading in the Norwegian offshore booking?
I think you are kind of taking it a bit too literally, what I have been saying. I'm just, I was just trying to give an indication that we don't think we will reach the higher end of the range. Where we actually end in Q4, time will tell. But, as you were saying, I think that this, the first wave of the restructuring is over for now, and we are starting the second phase, but it's a bit too early to say today what it will translate into in terms of credit impairment.
Okay. Thank you very much.
Our next question comes from the line of Peter Wallin from Handelsbanken. Please go ahead.
Yes, thank you, and good morning. I would like to come back to this, to Swedish mortgage margins, and what would you kind of expect there going forward if we indeed would see a slowdown of volume growth? What would your preference be then in terms of your market share currently? Would your preferential order be to maintain around 20% of new volumes, or would it be more to look out for profitability in your mortgage books?
Yeah. Thank you, Peter. I think that what we have clearly stated is that over the longer term, our ambition is clearly to keep our market share. Having said that, profitability and price is always in the short term, more important for us.
Okay. Thank you. And then, in Swedish Banking, you saw slightly improving margins from your corporate lending. Could you please elaborate? I mean, is there specific sectors, or is this... I mean, essentially, where does that come from?
I think it comes from basically, I mean, first of all, it's not something you would write on the first page of a newspaper in terms of size, when it comes to the margins. But what we have been doing diligently for quite some time is working with the part of the portfolio that is what we deem as subhurdle to our requirements. In some cases, we have managed to increase prices. In some cases, they have left the bank. It's the first of the two alternatives that have been driving margins slightly up, but it's not a big big thing, really.
Okay. But you, would you expect that the kind of this small progress would continue very gradually for the coming quarters as well, or was this some specific clients of which you were successful to do this with?
No, no, no. This is something that I expect Swedish Banking to work with on a daily basis. So if you have subhurdle returns, you should work with them. The exact outcome of the work is difficult for me to say anything about, but it's definitely expected.
Okay. And then to capital and this portfolio where you again then just some PD assumptions. Would you say that you think that for the foreseeable future, there are no more adjustments here to come? And is there anything with these adjustments that has to do with the underlying asset quality trend?
The adjustment we made now was related to the problem we also talked about after Q1 in our leasing operations, which is purely operational, but unfortunately, it's contaminating our numbers. So I know we made the first estimate based on the 2016 figures, which were where we identified the error. And then now we went through the earlier years and realized that unfortunately, the default frequency was a bit higher than it was in 2016. So we had to make a further adjustment. This has nothing to do with the credit quality, because it's all the customers eventually have paid their bills.
It is just that according to the regulation, over 90 days overdue have to be counted as defaults, and this is where the numbers kind of get distorted. The eventual impact to the PD levels, we will, of course, only find out after we have submitted the model to the Swedish FSA and got their approval. So that will happen only in 2018.
Okay. Thank you. And then if we stick to the subject of asset quality and loan losses, you're saying then that it'll be in the low end and not taking it too literal for this year, and during the very early phase of some kind of phase two restructuring efforts. But what you're seeing right now in terms of trends and your exposures, would you say that it's reasonable to assume that loan loss levels for next year will be at the same level as this year? Or as the best guess, would it maybe be something else?
We want to move away from guiding on the credit impairments. We started the guidance because we had a specific issue related to our oil and offshore portfolio. Now, we feel that we have entered the phase where the credit impairments will reflect our overall portfolio structure, and that means that there is no need for special guidance anymore.
Okay, thank you. Thank you very much.
Our next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead.
Yes, good morning. You write in your report that you've seen further signs of slowdown in the Swedish housing market. How should we expect this to play out in terms of margins and volumes in 2018 and 2019, or other kind of PNL items? How should we view this slowdown as impacting Swedbank in 2018?
Thank you, Matti. It's a very good question. First of all, if volumes go down, coming back to my previous answer to the question, is that we, we stick to pricing being the most important one short term, market share being important long term. How margins will develop is extremely difficult to say. I think it is very much up to competition, so I would refrain from giving you any forecast on exactly that. We will, we will do what we have said all the time. We will do our utmost to keep up the margins, but we are not alone in that market, as you know.
If you look at the volume side, then when you spoke about this slowdown, if it's now been like 7% year-on-year volume growth, is it kind of the rate at the moment? Do you expect that to be half of that or more or less? Or any kind of view on the volume growth?
It should come down. How much is very difficult to say. And as you know, what we said in the beginning of this year is that we aim to grow around 5%, projecting the market to grow around 7%. We have been growing with 5%, and we'll see what the take will be going forward.
All right. And then we've seen quite a lot of negative news flow on the real estate developers in Sweden. Have you seen any negative credit migration in that portfolio?
No.
You don't expect that to, to come through either, or?
The real estate-related lending is the most important part of our portfolio, so we, of course, follow what is happening on the market very closely. It is just too early to say how the kind of the recent news will really affect the underlying credit quality, but we feel very comfortable with our exposures and the credit quality right now.
All right, great. Thanks.
Our next question comes from the line of Andreas Håkansson from Exane BNP Paribas. Please go ahead.
Yes, hi, good morning, everyone. I think we've gone through many of the questions, but just coming back to the net interest income margin. Anders, if you remember at the launch of the Q2, we talked about what overall margins would do if we forget about floating, fixed, and front, and back. And you said that over the next 15 months, you expected mortgage margins to go up somewhat. Is that still your, your view?
Andreas, you have a better memory than I have. Are you... I assume that you relate to the part of the portfolio that is fixed rate, that is coming in gradually for the next coming, let's say, 15-18 months for a possible repricing.
Well, I try to step away from that because in order, because there's so many moving parts. If I forget about that, which then has an impact on the overall margin, I was just asking, what will the overall margin do then, of course, supported by those various items?
... It will probably be flat.
Okay, thanks. And next question also related to the NII, and you get this question every quarter. But if you look at the Net Stable Funding Ratio, it continues to go up, and it's now 6 percentage points higher in Q3 this year compared to Q3 last year. And I think you've been guiding for or hinting that it might come down, and each percentage point could be as much as SEK 100 million of NII. So what's your plan here? Do you see any reduction in the near term, or what's your current view?
Yeah. Thank you for that question, Andreas. First of all, we have, when I started to talk about the effect of the NSFR on a per percentage unit, it was around 100. Come down because spreads have come down. It's much, much lower right now. But leaving that aside, as I have said earlier, the ambition is not to run at NSFR as high as it is. What we have done in the quarter is that we have, and we did that, both in the first and second, and actually in the third, we are front-loading our funding a bit because the markets are extremely benign. So you will see the NSFR being on a high level for a while, and the NII impact is less than you think.
But that has been a conscious decision, taken in terms of our funding strategy.
Thanks. And then finally, maybe to Birgitte or, or maybe you all have a view, but we're reading the Swedish papers about the housing markets, and Swedish papers, yeah, they have all kinds of, of views on it. But what's your view, given that you are, are very close to the housing market? How do you see that the housing market is gonna develop going forward?
Our view is, and what we see also in the market, is that there will be an adjustment. And I would just say that the adjustment is ongoing. We see that it takes longer to sell very expensive apartments and new houses. But basically, I think that this is the correct thing that's happening at the moment, and I think it's a result, too, of all the amortization rules. However, when I look at our own business, we continue to, we continue to lend at the level that we think is prudent. So I, I don't see that we have, I don't see lending going down as a result of risks increasing in exactly the mortgage areas, apart from what we have talked about in earlier quarters. We talked about this in the second quarter, too.
Tenant-owned associations, where you know that we have introduced other regulation standards for the property management companies, and also we very much take the view of the consumer here. So, so in the discussion with customers of, I see that more cautiousness and very expensive part, we talk more about what does it mean to go into a newly built association? What does it mean if there's a negative cash flow? What does it mean? What is your part of the debt of the association, et cetera? And it's we meet with a surprisingly low degree of competence and understanding about what this means. And I think that that also contributes to this adjustment in the market, that when people start to understand, maybe they're not as eager to throw themselves into very expensive.
I know this was long, but I just want to say one other thing, and that is that one thing we're very observant of, and we work with out in the country, too, is that, so what does it mean that there are still so many people out there, and many of them are our customers, that can't afford... There's no really affordable housing options in Sweden today. It's... So, so just that fact forces the market down a bit because the pressure and the, you know, the disruption in the market, so to speak, is becoming wider and wider.
Great. Thank you.
Our next question comes from the line of Vivek Gautam from JP Morgan. Please go ahead.
Hi, morning. My first question is, it's just a bit of, if you don't mind explaining that to me, where does the benefit from wholesale funding repricing flow within the divisions? Does it go to the treasury for the interim and then transfer to the business division once you are sure about the sustainability, or it is directly attributed to the various divisions? And the second one, a follow-up on that is, you've had some, you have had a large senior unsecured bond maturing in late September, which was issued in 2012. So that benefit, the repricing benefit is expected to come in Q4. But where will we see that?
Will we see that in the treasury line, or will we see that directly in the divisions? Thank you.
Yeah, thank you for the question. I’m not sure I fully understood your question, but I will try to answer, and then you have to revert to me if it’s.
Sure.
I mean, the way treasury works is that, as you know, there is a fund transfer pricing, so that treasury takes up the funding, and they price it internally towards the business areas on both sides of the balance sheet. So if the bank benefits from lower funding costs, the business areas is benefiting from lower funding costs through the FTP.
That, is there a delay between that? So when the treasury sees the benefit, and then it's passed on, so is there a delay, a quarter or maybe?
No, I don't see where the delay should come from.
Right. Do you expect to see further benefit from wholesale funding repricing? Because you have unsecured bonds which were issued in 2012, 2013, which are maturing now. So that should have a benefit or not really?
It's extremely difficult to predict that. It depends on how market rates are moving. As we speak, the answer is yes, but that could change in the next quarter.
Okay. Thank you.
Our next question comes from the line of Bruce Hamilton from Morgan Stanley. Please go ahead.
Hi, morning. Most of my question been asked actually, but just returning to the PayEx deal, if I may. Can you give us any sort of update in terms of the growth, top line growth dynamics in that business versus the, you know, some of the financials that were given around the time of the deal being announced? And as we look to sort of cost impacts next year, I realize we'll get a fuller update from you, but for the PayEx business, is the sort of cost base, again, that was disclosed at the time of the deal, is that a sensible guide for the sort of impacts for 2018? Or will there be a—should we expect a lot of additional investments to, you know, to drive future growth in that business? Thanks.
Thank you for the question. First of all, let's make it very clear that we did not buy PayEx because we wanted to generate enormous amounts of income from that. If you look at that business on its own, it's not adding to our profitability or, for that matter, cost income. It is a strategic investment that we did because we need to follow the customers into the next generation of payments. If you look at PayEx standalone, the cost levels you see is what you can expect, and on top of that, you have the depreciations on the intangibles that I mentioned earlier in the call. As far as going forward in terms of investments, that will be part of our disclosure in conjunction with Q4 next year. Thank you.
Thanks.
Our next question comes from the line of Willis Palermo from Goldman Sachs. Please go ahead.
Hi, good morning, and thanks for the presentation. I have a quick follow-up on the volume questions that were asked before. If you could just maybe give us a normalized run rate that you would think would be acceptable for next year and going forward. And also, if you could add a view maybe on the incremental news of the last government or the FSA proposals to the government on a cap on the debt-to-income ratio, potentially some lower debt, debt ability. How would you factor in those into your volume growth assumption?
Birgitte here. Thank you for that. We don't, we won't guide you on, on volume for next year. And on the proposal that has come from the, Swedish FSA and now goes to the government, I basically believe that amortization is a good thing. I also think that the debt-to-income and the, affordability, rules that we follow in Swedbank are sound, and that is sort of very important to follow in order to make sure that the quality of our credit portfolio stays at a very good level. But, whether this will actually pass through government, I don't know. It's a, it's gonna be a huge discussion in Sweden. It already is.
But apart from that, I think that we already have so many different parameters in place that we operate by, that I, I don't think it will basically add so much to the Swedbank lending and credit quality.
Oh, okay. And among the new customer that you lend to, you would say that the amount of with the debt-to-income above this 450% is quite limited?
No, I wouldn't necessarily say that. What I say is that we already look at this, and it will affect a proportion, almost a fifth of the new lending that we do, should this come into force.
Okay, thank you for that. Then remaining on the volume side, you, you mentioned some pickup in, in corporate lending. I can see there is a part of it which is to property management. This debt was going down in the first half of the year, now it's coming up slightly. Do you, do you see this trend continuing at this pace? And also, could you maybe give some color on the high-end property developers? What is your exposure to those? Thanks.
Okay, we will probably share the answer, me and Helo. But first off, we are a big bank in property management. We have always been in property management, and we will continue to be in property management. What we have said in the earlier quarters is that we are focusing on our current customer base, where we know our customers. In some cases, if a good deal is coming up, then we are participating in that. We are not chasing new clients necessarily. But we will continue to see this, and since it is a capital-intensive business, there are large volumes from time to time.
And maybe to add to that, as you have been seeing on a year to date, we have not been growing, so we have the origination standards, what we stick to, as Anders was saying. And our total property management portfolio is SEK 220 billion, of which 66 is residential properties. But was it more, something more granular you wanted to know in terms of volumes?
Yeah, I think you asked about the developers.
Yes.
If you look at the line on construction and tenant owner associations, we've been flat through the year. Already in last year, we started to talk about the fact that some of these developers are building their business case on a not sound cash flow forecast. We were very clear that we will not participate in those deals, and we have been developing in accordance with with those standards that we set up, and that's why you see a flat development in those portfolios.
Okay, that's very clear. Thank you very much. My second question was around the Baltic business, as we didn't talk about it yet. Could you talk maybe a bit about the Baltic market environment? How is the competition, and especially in light of the competitors merging, what is the effect on Swedbank and any other things pointing to the outlook going forward? Thanks.
Mm-hmm. I think if, when you look at this quarter in the Baltics, it's a very strong quarter, and they continue to perform. What we see is, we see a pick-up in the lending growth that we've actually been waiting for. It's not, I wouldn't say significant, but still, it's a trend. All three countries' macro are strong and moving in the right direction, and we follow the market, as we've always done. The competition of the Nordea and DNB operations merging, yes, I think there are two sides to it. One side is, I think it's good. It's good because it shows trust in the market, and it also shows a trust in the development of the markets that we've seen always. And that's a good thing.
It also means that there will be a competitor now that is actually at par with us, and that will just mean that we will have to step up even more, and this is what we're doing. So we have intensified our own activities and also the plans we have for the development of new products and services.
Thank you very much.
Our next question comes from the line of Omar Sheikh from Redburn. Please go ahead.
Oh, hi there. I have two questions. So the first one is, you mentioned you're seeing broad-based corporate loan growth. Can you say what sectors this is in and how sustainable you think this is? And also, are you growing quicker than the market on these segments? And I can follow up with the second question.
To answer your last question first, no, we are not outpacing the market. It's selective growth in numerous sectors. Property management is one, healthcare is another one, renewable energy. But I mean, it's selective, so it's not something you should view as a trend.
Okay. And then the second question is, so you previously mentioned that the large IT project right now relates to the digitalization of the mortgage process. Can you give an update on the progress of this? And also, I know you can't give any kind of exact cost numbers, but directionally, is there an expectation that will lead to a net cost reduction?
Yes, we are following our plan. The next release will be in the first quarter of 2018, and then we'll continue to have releases over 2018 and into the beginning of 2019. So we follow the plan, and it still works really well with the new sort of value stream way of working with the digitalization. I actually won't give any numbers as to the cost reduction. This is just one part. We have other initiatives, robotics, machine learning, et cetera, in the lending area. So, but, yeah, as you know, we don't give guidance on this.
Okay. Okay, thank you.
Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead.
Yes, hello all. Thank you for taking my questions. Jan Wolter, Credit Suisse. And just go back to the housing market, or rather, Swedbank's standards there. Could you just remind us what debt to disposable income cap Swedbank is working with in the Swedish market, and how that relates to the proposed 4.5 times debt to pre-tax income that Swedish FSA has proposed? And then second question is, flows into Robur, the asset management business. We've seen in the past, and I think, Birgitte, you mentioned that in your introduction, quite a few quarters now, on and off with negative flows. What do you see as the main driver of those outflows, please? Thank you.
If we start with the mortgage question, we work with a 500% cap to gross income, and that includes all lending the customer has, not just mortgages. Whereas the FSA is talking about 450%, and only for mortgages. So that's the difference. But what we see is, it's kind of in terms of the impact on the, on comparing to where our limits are co- and where FSA is planning to put them, we actually kind of are more or less at the same level already now. So it's not that much more conservative than it is. But of course, new lending will have an impact. And on the Robur?
So, yeah, I, I can answer that. On the Robur, what we've seen, what we see, and you don't see that from the figures, is that it's more institutional. You see where the... And that is also why you don't see a big impact on the profitability, because the retail flows in all countries continue to come in. And we, and as I was saying, we have a plan, but it takes longer. There are some funds that we don't have in our, so in our product portfolio that we're developing at the moment. And at the same time, we've also seen the improvement of the performance of the funds in Robur. A lot of work is being done there, but it takes time. It takes time. We have a new sales force.
We have a new head of institutional sales that came in this quarter. So we're stepping up on the sales side, too, and that's important. We haven't done that for a number of years. So when we still see in the transfer business and the pension business, we're doing really well, and there we continue to take in new volume. So I think that's all I can say. I feel confident about this plan that we have. And I also think that keeping the market share with the performance of the Robur funds adding to that is really important.
Okay, very clear. Many thanks for that.
Our next question comes from the line of Peter Kessiakoff from SEB. Please go ahead.
Yes, all my questions have been asked. Thank you very much.
Our next question comes from the line of Johan Ekblom from UBS.
Thank you. If we can just come back to the property management side, can you just talk a little bit about what kind of covenants or lending practices you have there in terms of what levels of loan-to-values or, you know, what level of pre-sales do you usually demand before providing financing? And, you know, maybe just a comment as to how these have changed over the last 12-24 months.
We actually made the changes into how we look into the kind of the property management lending already more than 12 months ago. So where we basically made more conservative the cash flow estimates that we expect the clients to show to us in their forecasts. We have a kind of overall kind of general principle on LTV of 75% for residential and about 60% for commercial. We stress test the cash flows at 5% interest rate and kind of equity financing. It also depends a little bit on the business model, it's 20%-40%. So the pre-sale requirements , again, depends a little bit on the project, but we would usually not accept anything below 70% of pre-sale.
So that's, but that has not been that much change recently, because what we have been doing is very much kind of kind of preparing ourselves to the market change, what we are seeing right now.
Okay. So when we read in the press about, you know, the difficulty of selling properties and, you know, big writedowns and, things being converted into rental properties, those would not be on your books, those types of projects, because you would have pre-sale levels and a high degree of equity financing in there already. Is that a correct assessment?
We have a very large property management book, and we do lending to different clients. To say that we have none of the issues that you're describing on our portfolio, I think would be a little bit, you know, unfair to expect. But what we have been doing is we've been trying to avoid as much as possible this type of lending. And as we have been talking already today, really trying to shy away from financing expensive flats or to the housing associations which don't have a sound business plan.
Thank you.
Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. I guess just two questions. Firstly, on the cost, I think you upped the guidance to SEK 16.1, which seems to be a little bit more than just the PayEx integration. So is that a temporary effect for this year, and should we then expect it to come down again next year with respect to integration cost or investments? And my other question was just, are you currently using qualified signatures for your retail business? And if so, what portion of your retail clients have access to these qualified signatures under the new EU rules? Thank you.
Thank you. I'll start off with the PayEx question. You're right that when we guide on SEK 16.1 for this year, it's not only PayEx and PayEx-related expenses. PayEx, and the related expenses for that is roughly SEK 200 in this year. The rest of it is, as I said in the beginning, unexpected or very difficult to forecast movements in foreign exchange and increased cost for pensions. So, all in all, you could say it's a combination of a couple of things where PayEx is the largest contributor to it.
In that PayEx portion, is there a part there which is integration cost that falls away next year?
It's no integration cost in there. It is,
That's just the consolidated expenses?
Yes, including the intangibles and the expenses that are related to the acquisition. So no integration costs.
Right. Okay.
On the qualified signatures, I'll have to come back to you on that.
Okay. Thank you very much.
Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. Thanks for taking my questions. Just two from my side. The first one is I noticed a drop in cash and central bank accounts by roughly SEK 95 billion this quarter, and I also noticed an increase in treasury and other bills by roughly SEK 85 billion. So I was wondering whether there was a switch between the two categories. What was eventually the reason for doing that, and if you think this will continue, if you are kind of building up a carry type portfolio supporting NII? This is my first question. The second question I have is on, on, in general, on credit losses. For a couple of quarters or maybe more, your credit losses were burdened by oil, oil-related exposures. All of a sudden, these credit losses have basically have disappeared or reduced significantly.
I noticed no increase in collective provisions at all, in this quarter. So I would imagine that your models are not suggesting any further deterioration in the portfolio. Is it possible to see, obviously, at a much smaller scale, to see something similar to what has been happening in the Baltic area with regard to possible reversals if the oil price keeps remaining at these levels or eventually getting closer and closer to $60 a barrel?
Thank you. To start off with your first question, I think this is something you... It's not unnormal in any way. It's normal part of treasury operation that they switch between assets, depending a little bit on the market conditions. The second question I think you asked was about whether it is a large portion of carry trade in there, and what I said to you is that the contribution in this quarter is coming from changes that went our way in the shorter end of the yield curve. We are not carrying large carry trades on our book.
Now on your question related to impairments and our oil and gas portfolio. Yes, you are very right, that most of the credit impairments in 2017 and 2016 have been about this particular portfolio. And we are kind of, as I mentioned earlier, we are done with the first phase of restructuring, but we are already starting with the second phase of restructuring. How much that would impact our credit impairment line is a bit too early to say for now, but this is a portfolio which we are not running based on models. This is a portfolio which is individual exposure driven, and as a result, the credit impairments will very much depend on what will be the outcome of individual restructuring discussions.
But when you talk about reversals, I think it is way, way too early to start to indicate reversals in this sector, because we still, as I said, are very cautious about the whole overall industry. Even though the oil price has stabilized, it is still very low compared to where it has been for many years before that.
Okay, very clear. Thank you very much.
Our next question comes from the line of Tim Bergo from Deutsche Bank. Please go ahead. Your line is open.
Hi. I think most of my questions have been answered, but just one question. Birgitte, you mentioned and you used the words adjustment in the housing market in Sweden. I was just wondering, do you think there is a risk of a spillover sort of into the rest of the economy? I'm thinking back to sort of what happened in Denmark in 2006 and 2007. As the housing market slowed down, it impacted consumer spending and sort of spread to the rest of the economy. So that's sort of one question. Also, another question about what you're doing, increasing the dividends from Estonia to 100% into the group. What is sort of the, you know, the backgrounds behind that?
Why do you, you know, need to sort of repatriate that, that capital? Is there something else, you know, misunderstood in what you're doing there? So that's the two questions. Thanks.
Thank you. You know, with the adjustment that we see now is not, in my opinion, significant enough to have a sort of an impact on the sort of consumption patterns. There need to be more than what we're seeing at the moment.
Oh, okay, thanks.
On your second question, I mean, if you look at the Baltic operation, we are running that on a loan-to-deposit ratio below 1. It's 0.85. We are running the Estonian operation with a Common Equity Tier 1 ratio of 40%, and it's increasing. And we have said that it's something that is good enough, and we will not build more capital in Estonia, so we changed the dividend policy from 60%-100%.
Okay, but would it... I guess you could have left it there if you didn't need it elsewhere, or, or, or, what's the thinking there?
We have left a lot of money there.
Okay. Okay, thanks.
I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad now. We have a question from Paulina Sokolova from Barclays. Please go ahead. Your line is open.
Hi, thank you for taking my question. I actually just have one small follow-up on the Swedish mortgage market. Just in terms of timing, are you already seeing a slowdown in underlying demand in your business going into Q4? And related to this, you touched on this a bit earlier. It sounds like the housing types coming onto the market now do not exactly match the areas where there is demand. Is that a fair assessment, and do you still see a structural shortage of supply? Thank you.
I will take that, question then. No, we don't see yet the, the decrease in demand in, on the, on the housing market. If you look at the transaction statistics, actually, the volume of transaction is staying very high. But yes, there is also the supply is quite high, and as you point out, there is a risk of a mismatch between what the, in certain parts of the market in terms of what's being supplied and what people can afford to buy. So we are following that very, very closely, and as we've been saying now many times during the call, we have been trying to shy away from, very expensive housing associations where we believe the, the demand is starting to,
Okay. Thank you.
Our next question comes from the line of Adrian Cighi from RBC. Please go ahead. Your line is open.
Hi there. This is Adrian Cighi. I have one clarification question, please, on the proposed amortization requirements. Did I understand you correctly when you said that Swedbank already broadly applies the standard equivalent to the new debt-to-income cap being proposed by the Swedish FSA? Alternatively, do you quantify how much of this new lending this quarter would fall under the new FSA criteria if the proposal would be active at the beginning of the quarter? Thank you.
No, it's not exactly the same as the FSA is proposing. So, and as Birgitte was explaining previously, if we look at the new lending, it's about 20% of the new lending will be hit by this new limit.
Okay. Thank you.
Our next question is a follow-up question from Riccardo Rovere from Mediobanca. Please go ahead.
Yes, thanks again. Just a follow-up. Did I get it right? Did you expect the tax rate to go up by a couple of percentage points to something like 23% because of the changes in the Baltics, some of the Baltics countries? Did I get it right?
It's roughly, sorry, it's roughly one percentage unit. I said from 20-22 to 21-23.
Okay. All right. Okay. Thank you very much.
There are no further questions. I return the conference back to the speakers for any closing comments.
Thanks, everyone, for joining us. We'll see you on the road over the next two days. Thank you.