Ladies and gentlemen, welcome to the Swedbank second quarter report 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 listen-only mode, and afterwards, there will be a question-and-answer session. Speaker, please begin your meeting.
Thank you, and good morning, everyone, and thank you for joining our conference call for the second quarter result. With me, I have Birgitte Bonnesen, our CEO, Anders Karlsson, our CFO, and Helo Meigas, our Chief Risk Officer. I'll hand over to Birgitte initially. Birgitte?
Thank you, and warmly welcome to this strong Q2 quarter result. We deliver another quarter that has been very much characterized by both focus and execution. Profitability is strong and activity very high. We saw increased mortgage volumes in both Sweden and the Baltics, which contributed to a higher NII. The demand for corporate lending is modest, apart from real estate, and we saw a slight decrease in the quarter. Net commission income was up, given a high activity in payments and cards, as well as a strong stock market. This resulted in an increase of 6% quarter-on-quarter. We still see inflow from the retail network into our asset management, and we're very pleased about that, and we're very pleased about the inflow into the new funds that we have launched this quarter.
One of them was the micro-cap fund that reached almost SEK 1 billion in the first period that they were out there. It's and we, but we see outflows on the institutional side. Bottom line, we have an ROE of 15.6% and a cost-income of 0.38, which is very strong. As I mentioned to you before, we have a plan, a wanted position that we articulated last year. We will continue to develop as the leading retail bank with four home markets. This position has been articulated now into segment strategies, private and corporate, a channel strategy, as well as four product strategies. This gives us a very clear guidance in prioritization of investments and activities. I would like to highlight three important strategic initiatives in this quarter. First of all, payments.
Payments is a very important product area in Swedbank, and this quarter we decided to enhance our own offering of payment services with the acquisition of PayEx. PayEx is one of Sweden's largest providers of e-commerce solutions, but they also have a Nordic platform and operations in all of the Nordic countries. The aim with the acquisition is to enable a market-leading Nordic-Baltic omni-commerce offering and meet the customer where they want to pay, regardless of channel or payment method. It also includes a retail finance capability. We got the approval from the Swedish competition authorities last Thursday, and we're waiting for two more. One is the Swedish FSA, and another one is the Norwegian Competition Council. PayEx has a very innovative spirit, so this is something that also adds very much to our own setup.
Secondly, you saw that we entered into a strategic partnership with Kepler Cheuvreux this quarter. This means that we will source equity research, corporate access, and institutional equity sales capabilities from Kepler. The aim is, of course, to offer an ECM product to our customers that are far more competitive than we could have ever done on our own. And the third strategic cooperation that I would like to mention is with a small Swedish fintech called Mina Tjänster. It offers a service that facilitates management and monitoring of subscriptions and other recurring agreements. It really adds value to our customers, and they will be able to find best offers, for example, for mobile subscriptions, electricity, or insurance contracts in the Swedbank app. And we definitely see this as the way of the future, finding things that complement our own offering of financial services.
You will continue to see us make smart choices in complementing our own innovation capacity with external collaboration, and all leading towards remaining a leading retail bank. Basically, strong profitability, capitalization, and efficiency is not only a very good start, but I think it's really crucial for us to continue this good development of the bank. With this, I'll hand over to Anders to take us through the financials in more detail.
Thank you, Birgitte. I will start off, as always, walking you through the three business segments, and thereafter, sum it all up at the group level before I finish off with the capital situation. Swedish banking delivers a strong result across all income lines. NII was positively impacted by increased mortgage loan volumes, improved deposit margins, and lower resolution fund fee. The extra day in the quarter, as well as higher corporate margins on the back of the repricing of the specific leasing and investment loan portfolio in March also contributed. Mortgage loan volumes were up with SEK 12 billion in the quarter, and we captured around 20% market share of new lending. Corporate loans were down somewhat due to a few larger repayments at the end of the quarter. Mortgage margins were stable in the quarter.
We foresee the back book margins for fixed mortgages to continue expanding, everything else being equal. As we have around SEK 150 billion in fixed mortgages coming up for repricing over the next 18 months, the margin differential is around 10-15 basis points after recent changes in list prices. Deposit volumes were up due to tax refunds and dividend season. A positive stock market development, combined with a more favorable asset mix, improved asset management income, and higher customer activity improved income in cards. Stripping out the SEK 680 million one-off gain from the sale of Hemnet, booked in the first quarter, other income benefited from higher activity in Entercard, our joint venture credit card business. Asset quality continued to be resilient. Baltic Banking achieved another solid result.
NII was positively impacted, mainly by one more day in FX effects, but also from higher average loan volumes as private lending continued to increase. Lending margins were stable. Net commission income was positively impacted by higher customer activity in cards, and asset quality continued to be solid. Lastly, looking at LCNI, large corporates and institutions result improved in the second quarter. NII was up, impacted positively by lower resolution fund fee, one more day in the quarter, and improved deposit margins as we charged more customers to compensate for negative interest rates. Net commission income was supported in the quarter by higher activity in cards and debt capital markets, while income from brokerage was weaker. Net gains and losses were stronger compared to last quarter as FX trading picked up. Also, valuation effects in derivative exposures quarter over quarter impacted positively.
Equity trading was weaker due to lower activity around the time of the French election. Credit impairments in the quarter were somewhat lower than in Q1, and yet again, came from provisions in the oil-related segments. Here, we'll talk more about the outlook in the oil and offshore portfolio in a short while. So to summarize, on group level, this quarter, again, we demonstrated a robust profitability and continued high capital generation. We were able to continue growing our mortgage loan book while keeping margins stable. Corporate margins increased slightly in the specific corporate portfolio mentioned earlier, but otherwise remained stable in the SME segment and under pressure in the large corporate space. Deposit margins benefited slightly from higher STIBOR rates. This quarter, we also got the final fee level from the Swedish National Debt Office that we have to pay for the resolution fund for 2017.
The level for the full year became lower than we anticipated in the beginning of the year, and will end up around SEK 1.2 billion in total. Also, the new fee level decided by the SNDO for next year will lead to around SEK 450 million-SEK 500 million higher fee for us. Commission income was stronger on the back of higher activity in cards and positive asset performance. Net gains and losses improved, mainly as FX trading picked up. Group Treasury's result was in line with our previous guidance, where NII and NGL income combined in 2017 is expected to be around the same level as in 2016, excluding the one-off gain of the Visa transaction. Total expenses came in as expected.
When the PayEx acquisition is finalized, most likely during the third quarter, we will come back and revise our cost target for the full year of 2017 to also take into account the consolidated result of PayEx and various acquisition-related expenses. Our intention thereafter is to, in conjunction with the publication of the Q4 result, to guide you on the expenses development going forward. Looking at the loan growth expectations for the year, we note that the corporate activity was high in the quarter, but we saw a couple of larger repayments at the end of the quarter. Loan demand in sectors other than real estate remained low. Also, we see the trend from last few years continuing, where corporates, to a larger extent, turn to the capital markets or use own funds to finance investment.
As a result, we saw a good activity in DCM this quarter, as mentioned earlier. With regards to expectations for the remaining part of the year, we have a solid pipeline in the SME segment and expect to grow in line with our ambition. On the other hand, the continued loan demand from large corporates is expected to lead to slightly lower loan growth than anticipated in the beginning of the year, and we will not prioritize volume ahead of price or risk. Loan growth expectations for the full year in the Baltics continue at a healthy level. Turning to capital. Capitalization remains strong with the CET1 capital ratio of 24.6.
Our own estimation of our minimum capital ratio requirement, based on all by the Swedish FSA decided requirements and current risk exposure amount, ends at 22%, which gives a buffer of around 260 basis points. We still await clarity on primarily the expected Basel proposal and the subsequent implementation by the EU before we will set our management buffer level. The CET1 capital base was again this quarter negatively impacted by the pension liabilities valuation amounting to SEK 400 million. Risk exposure amount decreased by SEK 4 billion. We had two IRB model implementations in the quarter, one reducing RIA, and the other one increasing it. The acquired mortgages from Sparbanken Öresund moved to advanced IRB, and as a result, reduced RIA with SEK 6.5 billion.
This effect was more than offset by the implementation of Foundation IRB for sovereign and central bank exposures, increasing RIA with SEK 7.5 billion. In addition, we saw positive PD migrations and collateral valuations that reduced RIA with SEK 5.9 billion. Let me now hand over to Helo to walk you through the asset quality.
Thank you, Anders. I shall now give a short overview of credit quality in Q2. Volumes continued to grow in all our home markets due to strong demand from private lending, whereas demand among corporates remains subdued, as was also mentioned earlier by Anders. Private lending volumes in Q2 grew by SEK 14 billion, while in corporate portfolio, there was a slight decrease. We continue to have a strong credit quality in our home markets. Swedish banking reports credit impairment of SEK 86 million, and in Baltic banking, credit impairments were SEK 7 million. In large corporates and institutions, we increased credit impairments by SEK 307 million, mainly due to additional provisioning in the oil and offshore portfolio. This is in line with what we communicated during the previous quarter. As restructurings progress, we adjust the provisioning where needed.
As to the guidance for the total year, which was 10-15 basis points, credit impairments to the total credit portfolio, we are not changing it for the time being. We do have an improved visibility regarding our oil and offshore portfolio in terms of which clients will be able to take them themselves through the downturn and who may need to use the legal restructuring with an injection of new capital. But we want to wait before we come out with a change guidance, as the discussions are still ongoing. I stop here.
Thank you, Helo. We are happy to take any questions. So operator, please, pass through the questions.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, and you will enter a queue. After you are announced, please ask your question. Our first question comes from the line of Peter Wahlin from Handelsbanken. Please go ahead. Your line is open.
Yes, thank you, and good morning. I would like to start with maybe a clarification. If I understood you correctly, Anders, you're lowering your volume growth expectations for corporate lending this year, but you're also saying that you're gonna be focusing on margins and risk. So, does that mean that you expect to have higher margins than what you did previously, or is it just a slightly lower volume outlook? And if you could, please guide what kind of expected volume growth for total lending is reasonable to assume for 2017 now?
Thank you. Now, what I meant was that really, that we see that still, the most of the demand comes from the real estate sector. We have been very clear that we have been a bit more cautious in that space. That is also a sector where you see that they are attracted to using the capital markets for funding. So what I'm saying is that the competition is high out there, the loan demand is still low, and we will not go into deals changing our origination standards or our return targets. But at the same time, the activity is high. So if I am to guide you for the loan growth for the year, it's still including the private side.
We expect it to end up around 4.4% or something like that.
Okay. Okay. Thank you. And, to some extent, on the kind of high activity level seen in the quarter, would you say that those were maybe even higher than expected, so that to some extent, the volume growth you're not seeing as expected from corporates in terms of lending, is it reasonable to assume that you'll still see that kind of activity supporting your DCM to a maybe higher extent than what you thought three months ago?
Not really. When you look at what you see is the net lending figures, and it looks like our portfolio is decreasing in those terms, and that is actually the fact, or it's flattish. But what I mean is that some repayments are there, but there are new customers and new volumes coming in. But again, coming back to the capital markets, what we see is that corporates, the ones who have access to it, use it, which is good from a DCM perspective. And many of them are very strong financially, so they use their own funds to cater for new investments in new capacity. That is what we have seen so far.
Okay. And then if I could just ask one question on the mortgage margins and the outlook there, maybe especially at the end of the quarter, we saw that one of the more price-aggressive banks, Danske Bank, last week raised list prices in Sweden. Do you think that the level of price competitiveness in the Swedish market is slightly slowing down right now, or do you see any change, I mean, trend shifts?
Not really, Peter. I would say it's, it's still high and continuing.
Okay. Well, thank you. That's, that's all for me for now.
Our next question comes from the line of Magnus Andersson from ABG. Please go ahead. Your line is open.
Yes, good morning. First of all, I have a couple of questions on NII. First of all, a follow-up to Peter's questions about your lending growth here. When I look at your book, we see that private customers grows nicely. It's up 3% year to date, while it's corporate, as you pointed out, that is actually down. And we can see that it's primarily commercial real estate and a property management portfolio that is down. So my question is, is there a deliberate element in here of reducing that part of portfolio?
If that's, that is the case, is it primarily done from a risk perspective, or that you feel you don't really get the, the profitability you would like to have out of that segment, i.e., is there an element of phasing out less profitable volumes also?
Okay, Magnus, to start off, no, it's not about deliberately getting rid of volumes. If you look at the real estate or the commercial real estate segment, we have said clearly that we will work with the customers we have. We have enough of them. They are large. We know them very well. Some of those are cautious as well at this point. We have also said that we will not, and we do not need to chase new volumes. So it's not a deliberate decrease, we stick to the strategy we have in the real estate space. And then, what you have seen in the quarter, a couple of the larger ones have actually moved into the capital markets. So it's a combination of those two things.
Okay. Thank you. And then, just if I continue on corporate lending margins, we know that you repriced part of, a smaller part of your book, where you had fixed pricing. But last autumn, we talked a lot about potential repricing of the remaining parts of the corporate lending books as capital requirements increased. How do you look at that now? Is it really possible to reprice anything when volumes are not growing?
To start off with the first one, it was not fixed price, actually, Magnus. It was an administratively set rate-
Yeah.
So it was not connected to STIBOR. But that's right. We did that, and we... That was quite a successful action. As far as the other part of the portfolio comes, it seems to be we are working with it, but it is very difficult to reprice at this point in time.
Okay, thanks. And finally, just my favorite question on the NSFR. It continues to increase. It's now 110%. Sorry, yeah, the net stable funding ratio, and we see that your required stable funding remains stable, while your ASF is increasing. And you previously talked about this target of 103%-105%, while it continues to increase. What do you have any kind of time frame for when you think you will start reducing this?
Thank you, Magnus. I really appreciate that question. No. No, but seriously, as you know, we have funded, we expected to have a funding plan of around SEK 200 billion for this year. That is based on the projections on growth, and also the maturities in the book. We have had a very benign environment in the beginning of the year, so we actually issued more than SEK 120 billion in the first half w hich is aggressive, but it was part of the strategy. We have not seen the loan growth that we expected at the same time, so we are revising the funding plan regularly as we speak. My ambition is to get down to 103-105 range as quickly as possible.
Okay. Well, thank you very much.
The next question comes from the line of Andreas Håkansson from Exane BNP Paribas. Please go ahead, your line is open.
Yes, good morning, everyone. Just quick follow-up on Magnus' question on NSFR. Is it still SEK 100 million positive for each basis points there? So, should we see an improvement as and when you start to move in that direction on NII? Then next question, if we look at your sensitivity to rising interest rates, we've seen another quite big increase in that sensitivity in Q2 over Q1, and it's a 33% increase since the beginning of the year. Could you tell us a little bit what is driving this continued improvement? And should we expect that improvement or that increase to continue in coming quarters? We can start with those NII questions. Thanks.
Okay, Andreas, the previous guidance around the NSFR effect of around SEK 100 million is due to spreads coming down to 50. I need to add to that, that there are some technical restrictions in there. If you remember, we had a large drop in Q3 last year. That was due to the fact that two bonds went into the 12-month and six-month window at the same time. So there are some technical issues there, that is, so you cannot translate immediately into NII, but the spreads have come down, so the answer is not SEK 100 million, it's SEK 50 million. And on the other, the NII, I leave it to Gregori.
Yes, Andreas, I think it's, you should consider that the whole balance sheet is taking into account when you look at the sensitivity. So the duration of certain positions impact, and at the measurement point, which is the end of the quarter, we, in this particular case, we have entered in some position with a different duration the last quarter, and that gives a bit of a jump in the sensitivity. So there's, it's a technical, basically, reason why it increases this quarter.
Okay, thanks. And then just a question on your trading result. We've seen the other Nordic banks that reported quite weak trading in the quarter and talk about very low volatility, as we all know. You reported, on the other hand, a very good trading result. Could you tell us what should we consider to be a more of a normalized level for you guys?
Yeah, Andreas, I think we had a fairly rough start Q1, so the improvement you see quarter-over-quarter is actually FX trading picking up to the level that we expect it to be. So it's very difficult to guide on the NGL, as you know, but I would say that Q2 is more in the normal space than Q1 was.
Okay. Thank you very much.
The next question comes from the line of Willis Palermo for Goldman Sachs. Please go ahead, your line is open.
Hi, good morning. Thanks for taking my question. The first one is on, still on volume growth on the corporate side, whereby you mentioned a strong pipeline to come. I was just wondering if you could describe it and where you see it coming from.
Willis, could you just repeat the question? We was interrupted, so we didn't hear exactly what you said at the end.
Oh, hi. I was just wondering if you could describe the strong pipeline you mentioned for corporate lending volume growth.
Thanks, Birgitte?
Yes, what we see, there is a strong pipeline; it's actually broad-based. It's in Swedish banking and retail. We have a different way of working that we introduced in the beginning of the year. And the activities resulting in we see more deals coming in. But it's broader-based, and it's also, you know, when you move from real estate into other areas, the volume may not be as high. So I think that you need to factor in that thing, too.
Okay, so it's more in terms of client number than magnitude of the lending per se. Thank you. Then the second question on the net interest income on the pricing of the longer maturity loan. Could you describe a little bit how the competition is, how do you position yourself to the competition? Because it seems that the other player are moving on the other way around. So what's the rationale behind it, and how, and you think if there is a risk of losing market share or any change in that? Or do you have the same demand despite the, the increase in pricing?
I'm not entirely sure I understand the question, but if you look at the mortgage loan book, it consists of roughly 70% is floating rate, which is repriced more or less continuously with a three-month fixing. And then you have a remaining back book of around SEK 150 billion that comes in for repricing or resetting in the next coming 18 months. When they were originated, they were originated at a lower level than we see today. And I don't think that we are doing anything differently than our competitors. So I'm not sure what you're alluding to.
I was just wondering around variable rate, but for the three and five years, if you are moving in line with everyone else, is it just a trend of everyone moving up its pricing for longer, longer durations?
The dynamics you've seen recently is actually in the longer term, where most banks have decreased the list price. So when I talk about the repricing, it's about the fact that when these loans that was originated a long time ago are coming in, the new levels are higher than the original ones.
Okay, I understand. And then the last question on the loan loss provisions. Could you give maybe some more color around where you stand in terms of restructuring, if we can consider this quarter being the end, because it was a bit larger than previously in the first quarter, or if you still continue to see some conversation with clients whereby you have to take some more provisions?
As we have been discussing, we have basically a first phase of restructurings, which is more or less over by now. We are still in the process of finalizing one of the discussions. And that, of course, also might affect the provisioning a little bit, although I think there's quite a bit of visibility by now already. But then we see as the market is not really improving to the extent that maybe it was expected at the beginning of 2016, so we are starting to enter into the second phase of restructurings. As it looks now, it is more about further prolongation of maturities of the loans, not necessarily increased credit impairments. But as I said, I don't want to guide at this stage.
We, we expect to see more visibility through the year, and also we are very much, of course, aware that investments are not picking up in the sector as yet. So, we need to kind of see how the oil price develops in the second half, and then that will have an impact on also on the total sector at large.
Okay, thank you very much.
The next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead, your line is open.
Yes, good morning. Two questions from my side as well. Anders, could you repeat what you said regarding the mortgage margin in Sweden? The line was a bit bad. I didn't get it. Understood that you were increasing mortgage margin in Sweden, or was that correct? The other question is regarding the credit quality still. It's quite surprising that you're keeping the guidance of 10-15 basis points, taking into account that at least many of your peers are saying that the oil and offshore industry situation is improving. Is it because that you're seeing problems, bigger problems in the old exposures, or are these kind of new problems from new exposures? Or how should one look at this?
Because obviously it looks at least that the situation should be improving, or are you just conservative by keeping the 10-15 basis point guidance? Thanks.
Okay, thank you. No, what I said is that the mortgage margins were stable. The repricing that are still to come is in the part of the book that is fixed rate, and that is rolling in gradually over the next coming 18 months, and that amounts to around SEK 150 billion. So all else being equal, that will have a positive repricing. Other than that, margins were stable in the quarter.
Got it.
Following then on the credit, credit quality and the market outlook in the oil and offshore, we don't see that it's really necessarily improving. Oil price is still at a very low level. Yes, we, we do have a kind of some positive signs in terms of higher number inquiries for rigs and some new contracts signed, but at very low levels. So we believe that we need to see how the oil price develops before we can say that we are out from the stormy waters, so to say. But we don't have any problems in our current book in terms of the restructurings what we have made. The companies are performing as expected.
It's more regarding the outlook going forward that we are very cautious about. And we are a bank who is cautious to change its guidance. We do it when we see that there is a real underlying reason to do that. So we come back when we feel that we are out from the problems.
Just to remind you, most of these exposures are syndicated loans, so it's all banks are in sort of the same situation, more or less.
All right, I have a quick follow-up. In the Baltics, the credit quality, are now the write-backs over, and we're kind of approaching gradually a normalized run rate of loan losses?
Yeah, we have been saying that the write-backs are over, but if you look at also the amount of impaired loans and the provisioning levels, there isn't that much left anymore. I mean, of course, the overall quality, credit quality is very good there, so we see limited new impairments coming in. So, if the total kind of pluses and minuses are small, so you still end up being at zero, but don't expect anything significant anymore.
Great, thanks!
The next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead, your line is open.
Yes, morning all, Jan Wolter here, Credit Suisse. A couple of questions there on funding and NII. Is the funding cost going forward, is that coming down, you think, when you look at the maturities that the bank has? We can see that, I think, in the second half, at least SEK 30 billion or so of senior funding maturing. So that's my first question.
Okay, Jan, thank you. I think it is extremely difficult for me to have any good prognosis on the spreads going forward. It has been benign, but it's volatile, as you know, so I wouldn't do any projections on that.
Okay, no, fair enough. And then I think you mentioned on the call, either you or Gregori Karamouzis there, on the NII sensitivity increase in the quarter, alluding to taking positions or something along that line. Has this impacted the NII now in the second quarter, maybe in particular the treasury NII? Or do you think it will impact the NII conceptually going forward? And if you just could give some more color on what taking positions means.
No, Jan, it hasn't. What we mean is that it's a total balance sheet that we look at, and it's swap positions, interest rate positions of different kinds, and the duration of those positions vary over time. So depending on when you measure the sensitivity, it can be higher or lower, and that is what happened at the end of this quarter when we provided the measurement of the sensitivity. So it hasn't impacted the PNL in the quarter.
Okay, thanks. And then I think you alluded to some repricing on the SMEA segment, but that was the administrative loans with the administrative rates. When you look forward now, just not just in the second half, but into 2018, perhaps, a 12-month period, would you still expect that we'll see meaningful repricing of the loan book, if we exclude obviously the large corporates and the mortgage book? Or how do you see that going forward, given that we've seen now quite a few, quite a lot of increase in capital requirements, both coming from sovereign risk weights and corporate risk weights and higher resolution fund fees? Thank you.
Yeah. Thank you, Jan. The sovereigns I think is extremely difficult to reprice. It's Federal Reserve, the European Central Bank, and the Swedish government.
Yeah.
Leaving that aside, we said it before, our ambition, we have a clear return target. Our ambition is to price increased costs, whether it is capital increases or if it's a resolution fund increase, we definitely have the ambition to do that. We think it is rational to do it. But with a market with high competition and subdued demand, it is extremely difficult to do that. So, bringing you into 2018, giving you any projections on that is, that would be stupid of me. I can't do that. But that is our ambition, and it has been all the time.
Okay, no, well, that's fair. And I think just finally, another question, which I understand is very difficult to answer, but I think you previously talked about treasury, NGL, and NII together unchanged vis-à-vis 2016. Is that still your view, the most likely outcome?
Yes.
Okay. No, that's very helpful. Thank you.
The next question comes from the line of Yafei Tian from Citigroup. Please go ahead, your line is open.
Thank you very much for taking the question. I have a question on operating expenses. So, in the call, you mentioned that this will be revised as we have more clarity on the EX acquisition. But assuming that we are leaving the EX acquisition outside the equation, you had a cost target of SEK 15.8 billion. And if I were to take what you have already done for first half, that implies somewhat reduction in cost level in second half of the year. What kind of confidence or what are the efficiency in the pipeline for us to know that you are still on the track to deliver towards that cost target? And I'll have another follow-up question.
Thank you. Yeah, I think what I said is that we are, we are coming in as expected in the quarter, and we said that in the previous quarter as well, that the, the actions we have will, start to pay off later in the year. But you're right. If you take the two quarters and multiply it by two, you end up higher than 15.8. But I'm confident that we, in the second half, will be able to do that. And the efficiency measures we've been talking about has been primarily continued nearshoring, and our work with the procurement, side coming in later the year.
Just to follow up on the cost, I noticed that there is a bit of a FTE increase in the group center over the past few quarters. Could you remind us what is that increase related to? Is that investment in technology or something else?
I t's primarily, I mean, if you remember what Birgitte said in the previous quarter, we have a very high ambition within digital banking, and we have formed that on group level. And in addition to that, we also formed a unit that we call Customer Value Management, which is very much about using customer information to provide relevant offers on a more individualized basis. So we have been investing into new FTEs on those specific areas. So it's about innovation and customer offering primarily.
Okay, and a follow-up question on the interest rate sensitivity table. I know it's a theoretical calculation. It will be very helpful for us if we can have, you know, a reference level that doesn't fluctuate so much from quarter to quarter to put into our forecasts. And also, in that table, do you assume any asset side competitions, or do you just assume that you are able to maintain the same margin on the asset side while rates go up?
It doesn't take into account any competition, Yafei, and I think as far as the first part of your question, I think it's what you have to do on your own, I'm afraid. I mean, we give you the parameters and certain assumptions, and then you will need to use those and make your own assumptions, to come up with the numbers that you need to put into your forecasts.
Okay, thank you.
The next question comes from the line of Peter Kercsmar from SEB. Please go ahead. Your line is open.
Yes. Hi, thank you. First one, just a clarification. I'm not sure, Anders, did you mention a number for how much you think the resolution fee will be up for 2018? Was that something that you mentioned?
Absolutely. I assume that it will go from nine to 12.5, and our rough estimation, because, you know, it's based on historical balance sheets, but it's also a function of the risk adjustment that the National Debt Office will do later in 2018. But without knowing exactly how that methodology looks, it's. We expect it to increase with SEK 450 million-SEK 500 million next year.
Okay. Then I understand you. Then just a question relating to the agreement that you took with the Swedish National Debt Office relating to payments for Swedish institutions. Just it's a big agreement, but are you able to say anything in terms of what kind of income a contract like that actually brings?
No, you mean that the... No. The thing is that we—what we did is we landed the overall sort of umbrella agreement, and under that, what we're doing now is that now we are targeting each of the institutions that are sort of included in this. And so far, we have been winning more or less all of the institutions that we targeted. And at the end of it, I think that we will probably come out with more than 90% of the volume. And this is important, just filling up volumes, as this is sort of a scale business. This was a very important contract for us. But I won't go into any specifics on how this will impact the profitability in the payments area.
Okay. Then just a final question from my side. In the Baltics, just looking at salary inflation, which seems to be around 7%, and, I mean, to what extent are you able to mitigate that? Or, should we expect to see costs in the Baltics gradually rising, given that you have such a large cost inflation there?
You know, if you look at the way that the Baltics have delivered over time, we definitely expect them to be able to handle this salary inflation going forward.
But is that done by, I mean, removing FTEs, or is it by mitigating central costs, moving them to the Baltics, so thereby you get the average salary level down? Or is, or to what extent is that, are you able to do that?
You know what, there are lots of different activities, but that doesn't go only for the Baltics, that goes for the entire Swedbank Group. And it goes from everything, from automation to, yeah, nearshoring, as we talked about, but also as you transform the, how should I say, the distribution model, there will be fewer people, and this is a fact, but this is a fact for the entire group.
Okay, thank you.
The next question comes from the line of Nicholas McBeath from DNB. Please go ahead. Your line is open.
Thank you. Just getting back to the mortgage margin, once again, I appreciate your comments about the trends on the loans with the longer durations. But could you say something about the front book margin development you're seeing currently and your expectations on front book margins developments for the second half of 2017? What kind of outlook do you see here? What kind of trends do you see that could impact those margins positively or negatively? That's my first question. Thank you.
Okay, that is, that is a good question, but it is very difficult to answer. If you look at the front book, we have said flat or stable, and the back book, I will not reiterate again, the one that is coming in for repricing. As far as, the outlook going forward, it is a function of two things, competition and STIBOR. I don't think that I can, give you good guidance on either of those.
Okay, fair enough. And then, also, if you could quantify what kind of margin pressure you alluded to that you're seeing in the large corporate space, and how you think that this could feed into the NII, given the duration of this type of a contract?
When I talked about the margin pressure, I talked about the new lending. I did not necessarily talk about the current book. So, it's about the competition to increase the lending more than anything that has to do with the back book. That is fairly stable, actually.
Okay, thank you. Then, if you could also please update on how much of the corporate loans that are now reference rate floor at zero.
Amongst large corporates, it's around 50%. In the Swedish banking business, it's around 15, and then in the Baltics, it's 80%.
80% of the total book in the Baltics?
Yes, of course, the corporate book.
Okay, thank you. And, my final question, and then, in the comments by the CEO, you mentioned efforts about to fully digitize the mortgage process. If you could give any more color on this work here, how much cost do you expect that this will that Swedbank will incur as a function of this, and when this will be completed? And then, also, if you could maybe comment about what kind of cost savings you're seeing as a consequence or other positive impacts.
Yes, I can give you some more color on it. I'm not so sure I'll be willing to give you an indication of the cost. But if you look at a bank like ours, the mortgage process is by far the biggest and most important process. It's also the most costly process in a retail bank like ours. What we've done is that we have now this big project that is digitalizing the entire mortgage process. It will be finalized in the beginning of next year. It's been a project that has been really successful. We've run it in an agile way, as one big value stream. This is the first time that we've done that with a significant process in the bank.
We have all the competencies that are needed and all the competencies that work from IT, from the product area, for compliance, risk, et cetera, that work together to digitalize this. We take every step of the development, we have also the customer interface element into this. I think that this is why we've been so successful. Some of the deliveries have been the rollover of mortgages. It's been mortgage commitments that are completely digitalized at the moment or now. We also have digitalized consumer lending process that was launched this year. We see these, these are all steps, and finally, in the beginning of next year, everything will be completely digitalized. You can imagine that this is something that's gonna run through the entire bank, from back to front.
As far as cost guidance comes, we will come back in Q3 for the full year of 2017, and we will come back in conjunction with Q4 for the expenses going forward.
Yeah, just to follow up there. When you say fully digitalized, what more explicitly are you referring to here? I mean, is it the customer experience that's fully digitalized, or, like, how much of the back office work and administrative work is also digitalized? Because I appreciate that, it's probably not possible to completely remove all the need for manual signings and so on, given that other measures are needed by other authorities to kind of approve this from Kronofogden and so on. Could you comment any more on this?
What is within our, what we are responsible for, all of that will be digitalized front to back. But then, of course, exactly as you are saying, there are different parts of the process that we cannot digitalize because we're waiting for authorities to do that on their side.
Okay, thanks.
The next question comes from the line of Adrian Cighi from RBC. Please go ahead, your line is open.
Hi there, this is Adrian Cighi from RBC. Thank you for taking my questions. I have two questions, one on, asset quality and one on capital. On asset quality, you have a provision ratio of 34% for the shipping and offshore portfolio, which is actually lower than the group figure. What gives management confident that this is the right level of coverage? And then on capital, please, what is your estimate for the day one impact of, the application of IFRS 9? And do you see any other headwinds impacting your capital ratio in the near term, excluding the Basel IV uncertainty? Thank you.
If I start with the provisioning ratio, you are correct. The provisioning ratio on our shipping and offshore portfolio is lower than our average as well as then, which means it's lower than our normal provisioning ratio is. Normally we would rather look at provisioning ratios in the range of 50%-55% or even up. But the difference is that the shipping and offshore portfolio, this is actually a portfolio where clients are paying interest. Whereas usually in the rest of the portfolio, we have defaulted clients who are basically bankruptcy. And that is the reason why we have a kind of lower provisioning ratio on our shipping.
Thank you.
Yeah, and on the capital side, we have said that the best estimate we have as we speak on the IFRS 9 is a immediate impact of around 30-60 basis points. But as you know, there are a lot of components in there that can really change that, but that's the best estimate we have right now. The other headwind we see, it's small, but PayEx will add a bit headwind on the capital side, but it's really small.
Okay. Thank you very much.
The next question comes from the line of Kamal Shah from Redburn. Please go ahead. Your line is open.
Hi, good morning. I have two questions. Firstly, on mortgage competition. So you mentioned it's still high. Just wanted to get a feeling on how you think it has changed since the start of the year. So your thought on this would be great. And the second question's on the fixed rate mortgage book. You've said that in this quarter, there's a 10-15 basis points from front book, back book difference. However, in the first quarter, you said there was a 15-20 basis points difference. And what I've seen in the second quarter is that you're saying that the front book on the fixed rate book has also increased. So I was just wondering how to think about this. Thank you.
If you start off with the competition and the development of the competition, it continues to be high. But what you saw in the first quarter was that, basically, if you look at the market, you have four big players that are trying to maintain the pricing we have, and you have two smaller, much more aggressive players. They still continue to be aggressive, but you have seen that it has been sort of declining slightly if you compare Q1 to Q2. What is coming for Q3 and Q4, I have no idea. It will most likely continue. As far as the back book fixed repricing comes, we have seen dynamics in the quarter in terms of list price changes in that specific space of the yield curve.
So when I'm saying 10-15, I take the list price changes into account. At the end of the day, what will be the outcome depends on the discounts that will be given. But being cautious there, the list prices has changed, and therefore we changed slightly from 10-15 to 20, down to 10-15.
Okay, thank you.
The next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead, your line is open.
Hey. Yes, good morning to everybody, and thanks for taking my question. A couple of questions, if I may. The first one is on capital return. You keep reiterating there is no excess capital, and this is a kind of leitmotif that we have been hearing for so many quarters, that I don't even remember how many they are. Now, some of your competitors have started being, say, more active on this front, Danske, more recently, DNB, maybe Handelsbanken. Now, what prevents you from being more active on one side, but maybe stating clearly on the other side that if regulation gets tougher, all of a sudden, you might eventually revise a more active capital return instead of waiting for an enemy, Basel IV, that never comes? This is my, this is my question, my first question.
The second question I have is, on the guidance that you've just provided on IFRS 9, is the 30-60 basis points guidance fully phased or phased in, in, say, five or six years, making it irrelevant at first time application? The last question I have is for Helo. If we strip out the oil and gas component, with the current level of rate, do you see the level of provisions that you have reported in the first half as kind of sustainable going forward, if rates do not change? Thanks.
Thank you, Riccardo. To start off with your capital question, just to remind you that we adjusted our dividend policy. It is at 75%. It is adjusted to the fact that we have seen subdued demand in the loan space. Then whether it... But, but we have said that clearly, we are not stacking up capital for the sake of stacking up capital, but we are handling it through a fairly aggressive dividend policy. As far as the enemy, as you call it, the Basel IV comes, we might have slightly different views on whether it will come or not, so I will not comment on that. When it comes to Danske and DNB, they are working in other jurisdictions, so that, that, I leave to them to handle.
Other than that, I don't think I can comment on it. As far as IFRS 9 comes, it is an immediate impact.
So immediate impact means not phased in. What does it mean?
It's a one-off, one-off impact when we move into the IFRS 9 accounting principles, and then thereafter, we have a new base where provisions will move up or down, depending on how the macro or the loan book develops.
Okay.
And then answering your questions about the credit quality and credit impairments in our home markets. We have a continued good credit quality, and the provisioning rate is, of course, reflecting what we perceive to be the risk in the underlying portfolio. What you need to keep in mind is that we have had a very benign environment for a long period of time, which means we have a very small level of impaired loans. So each individual impairment will be very visible in the provisioning level. So that's why saying that you would continue to see kind of plus minus zero credit impairments, I think it would be kind of unfair to expect this type of level. So things pop up because we do take risk, and that's what we are paid for.
So, that's why you might see some changes quarter for quarter as we kind of go forward in the cycle.
All right. Okay, thank you very much.
Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead, your line is open.
Hi, thank you. I just wanted to follow up on the NSFR question from earlier. So you lowered your guidance from SEK 100 million to SEK 50 million per percentage point decline. Wouldn't that, if I understand that correctly, that's because the funding cost is lower. So wouldn't that imply that you have a benefit on the funding cost side? That assuming the guidance that you're, you're talking about is correct, that you would also get an offsetting benefit to the, to the rolling funding if you do not move your NSFR, or, or are these different dynamics? Thank you.
Hi, Jacob, it's Gregori here. I mean, the funding is correct. Funding spreads or cost has come down, that's why there is a smaller per percentage unit sensitivity. And funding cost is moving up and down, and that is what we try to price into our internal pricing, we price deals towards the customer. So if it's the margins that you should be following rather than funding costs per se. So our comments are on funding cost is baked in when we talk about margin development in corporate or private lending.
Okay, that's clear. Thank you very much.
The next question comes from the line of Alice Timperley from Morgan Stanley. Please go ahead, your line is open. Alice Timperley from Morgan Stanley, please go ahead with your question. Your line is open.
Hi, it's Alice Timperley from Morgan Stanley. Thanks very much for taking my question. Could you perhaps give us an update on your thinking around PSD2, from the perspective of the APIs that you have in place and the ambitions that you have around the technology that you want to implement in the longer term, and also the costs associated with that? Also, when we listened to the Bank of America call yesterday, they commented that, on the sort of mobile deposit-taking front, they've been able to do this, but they, they expect this can be done at one-tenth of the cost versus that over the counter. Are you able to give us any detail on how you think about, you know, the digital transformation from a cost perspective going forward? Thank you.
Thank you. Really relevant question. I think if I can start off with the latter part of your question. We have a plan for the transformation of the distribution as such. I won't be able to give you any numbers, because we don't actually guide on that. But we have a very clear plan on assumptions, what we think will happen and how that will affect the traffic in the mobile, the internet bank, the telephone bank, and in the physical space. When you talk about the physical, we'll see a transformation. This is in our plan of what are actually the things that we do in the physical space. What is gonna be the size of the branches? What is the activity that's gonna happen in the branches?
When I talked earlier on the call about we see this corporate banking activity, this is one of the results of the way that we change the working methods in the physical space. There will be a lot happening in this space. Also, this quarter, we came out with a new version of the internet bank and the mobile bank. So we are continuously, every three weeks, we're actually delivering a new feature or changing a bit touch and feel in the digital space. That will also change the structure of the cost, of course, over time, but I will not talk about this. As to the PSD2, we have a number of initiatives. What I talked about initially with the Mina Tjänster, that is part of that initiative, too. Same thing with the acquisition of PayEx.
It all boils down to the strategy and the wanted position that we strive to maintain the interface with the customer, and then we collaborate with others in order to enable us to stay strong in the interface. So, we also finalized the sandbox setup, and we're almost ready with the APIs in preparation for PSD2. So we're moving steadily, slowly but surely in the right direction. We have initiatives both on robotics and AI, and we are setting up a new structure for all of this. But I think that I will come back on that in the third quarter, when we publish third quarter, so I can be more concrete.
Okay, thank you very much.
And we do have a follow-up question from Andreas Håkansson from Exane BNP Paribas. Please go ahead. Your line is open.
Yes, hi, thank you. Just a follow-up on the resolution fees. You say that it increases by SEK 450 million-SEK 500 million in 2018. Could you just confirm that should we then, in 2019, expect roughly the same drop again from 2018, and then in 2020, we should see a roughly SEK 500 million-SEK 600 million additional drop from the 2019 level?
Yes, Andreas, the answer is yes, with the disclaimer that it is dependent on the balance sheet composition, as you know, and that could change over time. But other than that, that is a good assumption to make.
Okay, thank you.
As there are no further questions registered, I will hand the call back to the speakers. Please go ahead.
Thank you, and thanks, everyone, for taking part of this call. Wish you a good summer, and we'll probably meet some of you on the road over the next few days. Thank you. Bye-bye.