Ladies and gentlemen, welcome to the Q1 report 2017. Today, I'm 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. Gregory, please begin.
Thank you. Good morning, everyone, and thank you for dialing in to this call, presenting our Q1 result. With me, I have our CEO, Birgitte Bonnesen, our CFO, Anders Karlsson, and our CRO, Helo Meigas. With that, I'll hand the word over to Birgitte.
Thank you, Gregori, and, welcome to our Q1 call. We have, as you've seen, a very strong quarter where we succeeded in mitigating the headwinds of increased resolution fund fee, seasonal, and day effect. On the upside, we have the one-off gain from the sale of Hemnet and increased volumes in mortgages in Sweden. Despite a more subdued demand in the corporate space, Swedish banking has still seen more activity and a slight pickup in volumes. As mentioned in previous quarters, we have a goal, a wanted position, and we deliver in all areas of our plan.
This quarter, activity in the organization has been extremely high. We have created a CVM unit working with customer value based on data, proactivity, and relevance in the office. We have delivered a large number of new services to the customers across the different product and business areas.
The digitalization of the lending process reached one goal this quarter and delivered a fully digital consumer loan functionality in Sweden. We also entered into collaboration with a fintech, Mina Tjänster, which is an app for managing different service agreements in Sweden. This we do both for revenue reasons, but a lot for loyalty reasons. It complements our own services and it increases customer satisfaction. In Baltics, we launched Smart-ID, which is an app for identification and signing of agreements. This is something that will enable the use of digital devices even more and significantly change the way of doing business in the market. It is a true game changer. These are just three examples of deliveries, and they show the areas that we focus on.
We will come back to other areas, one that I will just mention before I go to the figures, that the inflow we've seen in Robur, in the funds area for the first time in a very, very long time, and it's a quality net inflow. We'll come back to this, but all in all, the Q1 shows an ROE of 15.9, strict cost culture, 38 in cost income, a strong capital buffer of the 250 basis points, and a continued low, low, loss level. Our previous guidance on cost, credit losses, and credit growth remains. And with this, I'll leave the word to Anders.
Thank you, Birgitte. I will, as usual, first talk you through the highlights in each of the three business segments and thereafter sum it all up at group level. Lastly, I will mention the quarterly developments with regards to our capitalization. Before starting, I just want to remind you that we have made some reporting changes in the quarter that have impacted the business segments, although the group reported result is not impacted. This means that some historic figures for Swedish banking and large corporates and institutions are not directly comparable. I will comment on them specifically. The biggest reporting change, however, is how we report the compensation to the savings banks, and that is reflected in restated historical figures. Now moving to Swedish banking. They delivered a strong underlying result.
NII was flat in the quarter despite increased resolution fee, fewer days, and transfers of customers and volumes to large corporates and institutions, all in all, SEK 250 million in headwind. The strong underlying NII is mainly due to further backbook mortgage margin expansion and loan volume growth, but also slightly increased deposits and corporate margins. Mortgage margins on new lending fell with a couple of basis points in the quarter. A positive stock market development and net fund inflows, as Birgitte mentioned, improved asset management income. Income from cards was seasonally weaker. The sale of Hemnet, the real estate advertising website, generated a one-off tax-free capital gain of SEK 680 million. Asset quality continued to be resilient. Turning to Baltic banking, yet another quarter with a resilient performance.
NII was negatively impacted by fewer days and FX effects, while increased private lending volumes supported income. Mortgage lending margins and deposit margins were flat in the quarter, while corporate margins were slightly down. Net commission income was negatively impacted by normal seasonal effects, both in cards, payments, and asset management, and I want to remind you that in Q4, we had a performance fee in asset management in Latvia, which is not coming back in Q1. Expenses were slightly down due to seasonality and FX effects, and asset quality continued to be solid. Lastly, looking at LCNI. LCNI delivered a somewhat lower result before impairments. NII was impacted negatively by the increased resolution fund fee, fewer days, and lower average lending volumes in the quarter. Also, positive one-offs of around SEK 40 million in Q4 impact the comparability.
The customer transfer from Swedish banking increased NII this quarter with approximately SEK 90 million. Net commission income was lower in the quarter compared to a very strong Q4 due to seasonal effects and performance fees in asset management cards and brokerage. Net gains and losses were also lower versus a very active Q4, and trading income, especially within FX and equity, was slower in Q1. Also, valuation effects in derivative exposures quarter over quarter impacted negatively.
Credit impairments in the quarter were lower than in Q4, 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. To summarize this on group level, we delivered another strong set of results. Mortgage volumes and margin expansion supported NII and mitigated the negative pressure from the increased resolution fee and fewer days.
Commission income was lower due to seasonal effects. Activity is high in the market, which bodes well for remaining part of the year, at the same time as we have inflows again in our asset management business. Net gains and losses were lower in the customer-related part, but were supported by better result in group treasury. Normalization in the FX swap market, following some volatility over year-end, reversed the negative valuations from Q4. The Hemnet capital gain mentioned earlier will be part of the distributable result in 2017. Expenses came in seasonally lower in the quarter. Let me spend a few minutes on group treasury result and expenses for 2017 before I move on to capital. Our group treasury result guidance for the full year of 2017 remains.
That means total income looked at by combining NII and NGL and excluding the one-off gain of the Visa transactions, is expected to be about the same level as in 2016. This, of course, assumes no change in interest rates, covered bond spreads, and FX swap rates. The outcome in the Q1 does not change the overall guidance, but the outlook on NII and NGL has slightly changed. NII is expected to be around the same level as in 2016, and so does NGL. Looking at the expenses for this year, as a consequence of the reporting changes we made during the quarter, moving the variable part of the compensation to the savings banks to NII, we adjust the total expense guidance for full year 2017 to around SEK 15.8 billion. Turning to capital.
Capitalization remains strong, with a Common Equity Tier 1 capital ratio of 24.2% and a minimum requirement of 21.7%, including a countercyclical buffer increase to 2% and current risk exposure amount levels as base. Our buffer to the minimum requirement remains solid at around 250 basis points. We still await clarity on primarily the expected Basel proposals and the subsequent implementation by the EU before we will set our management buffer level. The CET1 capital base was adversely impacted this quarter by around SEK 500 million as a result of lower discount rate than valuing our pension liabilities, the so-called IAS 19 effect. Risk exposure amount increased by SEK 16.6 billion, mainly due to model adjustments relating to default frequencies in the corporate portfolio.
As part of a model review in conjunction with preparations for submitting the planned model related to the increased capital requirements for corporate exposures that the Swedish FSA took a decision on last year, we found that one of the corporate models has been underestimating the default frequencies. To rectify for this problem, we have, as a consequence, decided to hold more capital for expected PD increases already in Q1 2017, leading to higher risk exposure amounts, which is captured in the other credit risk category while waiting for the model updates to be approved by the Swedish FSA. Let me now hand over to Helo to walk you through the asset quality.
Thank you, Anders. We continue to have strong credit quality in our home market, both Swedish banking and Baltic banking, so reversals in Q1 with SEK 3 million and SEK 66 million krona recoveries, respectively. In large corporates and institutions, we report SEK 408 million krona credit impairments, in our oil and offshore portfolio. This is in line with what we communicated during the previous quarter, that we may see further provisioning need during 2017. Referring back to the guidance we gave last quarter, which was 10-15 basis points credit impairments to the total credit portfolio, as Birgitte mentioned, we remain with the same guidance for this year. We have not seen improvement in the oil-related industry, and even though there are first consolidation transactions ongoing, the situation remains strained and further provisioning during the year may be needed.
Thank you, Helo. Operator, we're handing back to you, and happy to take any questions from the audience.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from the line of Magnus Andersson from ABG. Please go ahead, your line is now open.
Yes, good morning. Just a few questions on NII. First of all, you talk about continued expansion of back book Swedish mortgage margins of 3-4 basis points, if you can say something about how, for how long you expect this to continue. And secondly, just, I note that your NSFR is now 109%, and previously, Anders, you had talked about a target level of 103%-105%. And roughly, I think we were discussing around SEK 100 million NII impact per percentage points in NSFR. If you could give us some update on that target or what, how you expect to arrive there.
Also, finally, more technical perhaps, but if we could get the resolution fund fee, the increase of SEK 183 million quarter-on-quarter per, per business area, which facilitates the analysis. I, yeah, that's it on NII. Thanks.
Thank you. So as always, relevant and difficult questions to answer. But, on the mortgage book or the repricing is, can sort of divide the stock or the back book into ... This one is the three-months floating that is sort of constantly repriced, and then you have around SEK 200 billion of fixed mortgages coming in. And it's primarily in the latter part that you see that the, a mortgage expansion or the margin expansion is continuing.
Yeah.
When it comes to NSFR, I kind of regret that I ever mentioned that. But I still stick to that we shouldn't have a higher NSFR than necessary. Why we are at 109 now is that we have, since the capital markets has been very benign, and we have a fairly large maturities in the year, we have front-loaded the funding agenda. So there is no sort of ambition to keep up the 109 NSFR going forward. And the third question was about the resolution fund fee per business area. I have it somewhere, but I ask Gregori to-
Yeah, Magnus, as you can see in the fact book, the resolution fund fee in total for the quarter was SEK 343 million.
Yeah.
If you look at the approximate split that we gave you in the press release on April 3, 66 of that belongs to Swedish Banking, 26 to LC&I , 8% to Baltic Banking. So that's the split out of the total fee. The deltas, the deltas in the quarter were an increase in Swedish Banking of around SEK 130 million versus last quarter, and SEK 95 million increase in LC&I versus last quarter. And the Baltic Banking correspondingly then decreases with the difference.
Yeah. Okay. And just sorry, on the back book repricing, the SEK 200 billion, for how long do you think this will continue? Should we expect the same amount in the coming quarters?
Yeah, it's-
The magnitude.
It's not evenly spread in terms of maturities, but it goes on for a couple of years still.
Okay. And just one final question on capital. Do you know anything more about the timing or the phasing in of corporate risk weights?
We have started the preparations for submitting the model update to SFSA, but it will take a bit of time. So we expect to submit it definitely before the year end, in the later part of the second half of the year. But then it's up to the SFSA, when they will give us approval for this.
Okay, great.
Most likely in Q1.
Okay. Thank you very much.
Thank you, Magnus.
Our next question comes from the line of Andreas Håkansson from Exane. Please go ahead, your line is now open.
Yes, good morning. Following up on Magnus' questions on NII, could you just continue, you sent out a press release, in the quarter saying that you're repricing parts of the SME book. Could you just give us a bit of details of that, and, and when do you expect to see a positive impact on that repricing? Also, could you give us a number, you mentioned in the text that the rising interest rates did have a positive impact in the quarter. Could you tell us the size of that, please?
Thank you, Andreas. On the first part, which is the repricing on the corporate, it is a, as we also say, it's a small portion of the corporate portfolio. It's around SEK 40 billion. That is, where the sort of rate, the base rate is, administratively set by us. It's not an IBOR-related base rate. So the bank, sort of have the possibility to set the rates ourselves. We did that in March, 40 basis point was the increase, and you can calculate the yearly effect of that, which is SEK 160 million. Obviously, not that much in the quarter, though, since it was in March. And then we have seen, but again, it's not a trend.
We have seen that in some sectors we have been able to reprice even on the IBOR-related lending, but the ones we mention is that. The other question was about how much-
Impact, yeah.
Yeah, sorry. Please repeat the question.
No, it was if you could give us the size of the impact on rising interest rates that you mentioned in the text.
Is it on deposits in particular you mean, Andreas, yeah?
Yeah. It's, I would say, it's between one and two basis points.
Excellent. And then, just final question. We talked about the back book of mortgages, and you said that the front book declined a bit in the quarter. Could you tell us? You then sometimes repriced mortgages up in the quarter. What, what's the outlook for the front book from here, if you could?
That's a very good question. I think we also increased our rates, but as we have said, in the past, and we stick to that, we will not be the first mover. I think that what you will see, if anything, if rates continue to increase, is incremental small changes, step by step, by us and different actors in the market.
Okay. Thank you.
Our next question comes from the line of Willis Palermo from Goldman Sachs. Please go ahead, your line is now open.
Hi, good morning. I have two questions. The first one is on the fee income. As you mentioned, that there was some quality inflow now from Robur, and I was wondering if you could elaborate a bit on of quality, what do you mean, and where do you see those inflow coming from? And if we can talk about a trend reversal in that business now, and what kind of growth you had in mind going forward? That's the first question.
Okay. If we start with the asset management, what we mean by high quality is that it's sticky money. It's private individuals buying into our funds. Institutional money is, as you know, a bit more volatile. As far as the action comes on how we sort of proceed with asset management and our initiatives there, I hand over to Birgitte.
We have this year, we have a very ambitious plan for the savings area overall, and we have increased our activities in support for the branches and also in the digital channels for sales of savings products. We've also increased the activity and changed, you know, a big part of Robur. We have a new CEO in Robur, the asset management company. And, for example, all our funds now have a sustainability profile. We have launched two new funds this quarter. This is the first time in years, I would say. And, they have been extremely successful from the beginning, so really, really well. So, this is what we see. We'll continue working intensively with the asset management company and with the front line in support.
It's primarily pensions we are targeting, and that has been successful so far.
And just to add to it, I mean, this inflow has a limited impact on the income in the quarter, obviously, and that is more related to the fact that the stock exchange or the markets have been very benign.
Yeah, of course. Thanks. And just related to that, do you still believe that, and you still continue to have a more attractive pricing than competitor, and you think this is also part of the better inflow now? Do you think it start to materialize?
You know, we have a very attractive offering. You can have anything from funds, whether you pay 10-20 basis points, up to a very actively managed that are about 125. So it's we have sort of- this is the range where we move. And, and within that range, we have a very good combination of different funds. So I think our pop- you know, our offering as whole is very attractive.
Okay, thank you. And the second question was on the costs and more specifically on the trajectory you would expect for the full year. As when we analyze the Q1, it's currently running above the full year target. And if you could please remind us about the initiative you started last year, and the magnitude, and indicate us maybe an idea of the timing when they will feed through the cost line to meet the target of the 15 point something.
Around 15.8. Yeah, if you take 4 and multiply it by 4, it becomes more than 15.8, so it's a very good question. I mentioned it before, and it's still very relevant. It will all come during the year. We have a lot of procurement initiatives going on, and they will pay off as the year goes along. We have nearshored a large number of services and FTEs to the Baltics that is gradually coming in to the cost on a positive note. And thirdly, I expect us to see fewer FTEs during the year within the bank. So I'm very confident in that sense. But the Q1 is a bit on the higher end compared to 15.8, but that's the ambition, and that's the target.
Okay, thank you very much.
Our next question comes from the line of Anton Kryachok from UBS. Please go ahead, your line is open.
Good morning, and thank you very much for the presentation. Just two questions, please. One following up on the net interest income and the mortgage margin trends. Given that mortgage pricing has lagged a little bit at the pace of the increase in STIBOR, I was wondering if you can lay out the key constraints in your mind that have prevented you from pricing up the mortgage book on the front end at the same pace as the rate rises. The second question, please, on the inflation in REA that we have seen this quarter. Can you just confirm that the change related to the technical default frequency was caused entirely by your internal review rather than the regulator having a look at the models?
Have you finished reviewing all of the models, or are you still in the process of doing that on the corporate side? Thank you so much.
To start off with your question on the mortgage repricing. I think that, I mean, first of all, we are not changing list prices as STIBOR moves. That would be new prices every day. So, you will see, as I said earlier, incremental shifts upwards if STIBOR stays or in further increases. So it takes time. It will be gradual. It's not something we do on a daily basis. As far as the risk exposure amount comes, I will hand over to Helo.
On your first question of, yes, I do confirm that this was purely our own, on our own finding, as part of the regular model review and because we started to prepare for the model update. So it was us who went to the regulator and said that we have found a deficiency. About reviewing all the models, this is an ongoing process. This is not something that is, that is done within one year. So we continuously review the models and see whether the actual default frequencies in the models are in line with what we see in the real life. So this is an ongoing process, but we don't expect any further significant adjustments as we have this quarter.
That's very clear. Thank you so much. I'm sorry, if I may just come back to the mortgage margin question. I'm curious to understand how do you think about passing on higher interest rates to the consumers on the mortgage side? Do you evaluate the kind of the benefits that you get on the deposit side from higher rates versus your mortgage pricing, and you kind of look at the two together? Or do you look at mortgage prices separately, only in conjunction with your funding costs and kind of ignoring the benefits you get from deposit margin expansion in a rising rate environment?
Okay, thank you very much for reminding me of the deposit fees, because that is a very relevant comment. No, we are not looking at them together. When you look at the pricing in the mortgage market, you see that there are different actors acting differently in this quarter. Some are more aggressive than others. We have said that we will follow the market. We will not be the leading player in terms of repricing, and that is what we continue to work with. But it will be incrementally rather than any major shift in pricing. But you shouldn't view them as... We don't view them as in combination. We view them as separate products, and pricing are separate.
Perfect. Thank you so much for this.
Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Your line is now open.
Yes, morning, Jan Wolter here, Credit Suisse. Can you hear me okay?
Yes, we can.
First, on the NII sensitivity, when I look into the disclosures in the fact book this quarter, it looks like it's now SEK 4.8 billion NII increase for a 100 basis point higher interest rate. So although we can discuss what the right number is, what drove the increase between the Q4 and the Q1, just in principle? So that's the first question, if you have any details on that.
Yes, John, thank you. The main reason for the change in the sensitivity is the fact that STIBOR has increased. And as you might remember, we have a chunk of corporate loans where we have floored the rate. So when rates move closer to zero, you will get a sort of higher effect from the sensitivity calculations. That is the main reason for it.
Okay, thanks. That's very clear. Then I think when we look at the model adjustment that Swedbank disclosed this quarter here, I think lifting the REA by around SEK 20 billion-SEK 22 billion. And I think, is that related to the oil book only? Because the lending, the oil lending-related book is around SEK 26 billion when I look into the presentation. So an REA increase of SEK 22 billion, I just wonder what book should we look at? Because SEK 22 billion increase on a book of SEK 26 billion gross lending, that seems like a lot.
No, it was not only oil book. It was actually consists of two parts. One is related to the how we capture the, late payments, related to our, leasing contracts. And then the second part is about the oil. And the big part is actually related to the leasing contract. So this is a purely technical method. It has nothing to do with a, a change in the credit quality. We basically, what we, what, what it means is that if a client is over 90 days overdue, we need to kind of register it as a default. And we have had process, deficiencies, in capturing this. In reality, all these clients, even if they have been in over 90 days, overdue, have actually paid, so we have not had credit losses.
So this impact we expect to come out from the models over the basically four to five years' time as the kind of basically the time rolls forward.
So how big is the leasing book then, which drove, together with the oil and offshore book, this, this REA increase?
Yeah, the REA increase is about two-thirds comes from the leasing side and one-third from the oil. But it's the problem with the models is that it's not about the size of the leasing book. It's actually if you have a total client exposure and you have an overview in one single contract of it, then it kind of contaminates the whole exposure. So that's related to the clients who have leasing contracts, and if they have been over 90 days overdue.
Okay, many thanks for that. Then the final question here. The repricing of corporate volumes outside the books where the contract is based on an administrative rate, could you say anything about what are the most likely volumes that we can see repricing and where the company intends to offset the higher cost from the resolution fund? Thank you.
Yeah, if you look at the corporate portfolios, we have said in previous quarters, with the continued subdued demand in large parts of the corporate sector, the competition is very fierce. So we have seen anecdotal evidence of it, but it's not really happening the way we thought. The only sector where we have seen a possibility and also acted on it, more specifically, is in the real estate sector. So we will see as the year moves on, John. I don't have a much better answer than that.
Okay, that's... Many thanks for that. Very clear. Thank you.
Our 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. Firstly, regarding asset quality, you say that credit impairments were in line with your expectations. Does this mean that we should see write-backs in the Baltic operations with this magnitude also in the following quarters? Second question is regarding the Swedish mortgage market. You also have in your presentation a slide showing the house price growth in Sweden, and recently Moody's said that Sweden is one of the four countries most vulnerable in the world for a house pricing correction. How have you taken this into consideration in your risk management, volume appetite, and pricing measures in the Swedish mortgage market? Thanks.
Well, first of all, the credit impairments and our guidance, and if it was fine if we comment on it on a total level, not on a business area level. I mean, the write-backs in Baltic Banking, we have said it previously that we expect them to come to an end. They continue coming in, but I continue to reiterate, we expect them to come to an end. We don't expect to see further write-backs of the same magnitude going forward. So guidance is only on a total level. As to the mortgage market, we continue to be very confident about the credit quality in the mortgage market.
We do see our clients' buffers increasing because of the general increase on the household's wealth, as well as because the mortgage costs or housing costs are at a very low levels. That was also confirmed by the SSSA in its recent mortgage review. So, of course, if the house prices continue to go up, then the kind of the fragility of the kind of the house price itself will increase. So the probability for correction is higher. At the same time, this we believe will primarily be affecting consumption, not whether our clients are able to pay on the mortgages or not.
If I understand you correctly, you haven't basically taken any significant measures to kind of prepare for this?
No, what we, I mean, what we have been working on, we have the debt-to-income cap, which we have not changed. This is at 500%. We do look at some of the, kind of, the more vulnerable sectors of the, of our core, of the portfolio, where we see that the affordability margins are smaller. If they also have high LTVs, and they are borrowing very close to our debt-to-income cap, then we are more cautious with them, and then we ask them to, kind of, to look at increased amortizations. LTVs are going to stay, to remain at a very low level. In general, we have not made any significant changes in our origination criteria.
Just to remind you that the LTV of the Swedish mortgage portfolio on average is around 50%. So even if you see a price correction, there is a big buffer.
Great, thanks.
Our next question comes from the line of Geoff Dawes from Société Générale. Please go ahead, your line is now open.
Hi, good morning, everyone. Two questions from me, and then a quick clarification, if I may. First of all, on the questions, if I look at the shipping oil portfolio, the absolute level of non-performing loans actually declined quarter-on-quarter, and you had quite a big step up in the coverage ratio, which was the reason for the new losses. Can you just talk a little bit about that dynamic, and specifically, whether you're at both an NPL level and a coverage ratio that you're happy with? Or if we go through the year, that coverage ratio will need to go higher again. Second question is on the mortgage volumes. You've obviously been growing at a slower pace than the market overall.
Can you just clarify, is that a pricing issue, or is that kind of a reticence or a caution issue, vis-a-vis growing new volumes? And then finally, the clarification. You mentioned some net interest income guidance in the opening section, being flat year on year, so flat 2017 versus 2016. Can you just clarify, was that Swedish banking? Was that the group? I didn't quite pick it up. Sorry. That's it. Thank you very much.
So let's start from the end then. The guidance I gave you was on group treasury, and that was the combination of NII and NGL, where I said that 2017 will be in line with 2016. So it had nothing to do with Swedish banking.
Got it. That's clear then. That's good to clarify. Thank you.
And the second question was about the volumes in the mortgage market. It's a combination of both, actually. As Helo alluded to, we are a bit more cautious in specific segments where you can see that the vulnerability is higher than what we want to see. And it's also price issues. It's a combination of both.
Mm-hmm. And then on your question on the coverage ratio, we are comfortable with what we have now, but we are guiding that we may need to take further provisions during the year. We, it will depend on how the restructurings will be finalized, and if there is a need to make further provisions, then we do.
Okay. But I guess the dynamic that I'm looking at, it's roughly that 41% probably reflects some NPLs where you don't expect any losses and some NPLs where you expect quite a big build-up over the year-
Mm-hmm.
which is why you've got absolute NPLs coming down at the same time as coverage going up. Is that correct?
Yes, that's roughly correct. That's the range where we have also been, kind of, previously.
Very clear. Thank you very much.
Our next question comes from the line of Ronit Ghose from Citigroup. Please go ahead, your line is open.
Yeah, good morning. Thanks. It's Ronit from Citi. I just wanted to follow up on the volume question from Jeff. Specifically, if I look at loans, if I adjust for FX, FX movements quarter-on-quarter, am I looking at basically a flattish loan book, you know, plus or minus 0% loan growth? And in terms of thinking ahead for the rest of the year, I'm just wondering how much of a deceleration... Do you think Q1's a bit of a one-off, a seasonal one-off, or is there a bit of a deceleration in the loan book?... On the other side of the balance sheet, on the corporate deposit side, corporate customer deposits are up quite strongly, up 34% Q-on-Q. How much of that jump in the quarter is FI deposits?
Is the, and can you give us some feel for the underlying corporate client deposits alike? Your retail deposits are flat again quarter-on-quarter. I'm just gonna—trying to get a sense again of the underlying business momentum here. If I strip out the, you know, you usually have a big FI deposit swing in the Q1. My final question is to circle back to all the questions we've had on mortgage pricing. Now, of course, I understand when STIBOR moves, you're not going to change your list prices every day, Anders.
The 2-3 basis point decline we saw in the fund book, if STIBOR continues to rise on the same, on the same magnitude as Q1, should we assume a similar type of front book decline, or would the ambition be to absorb front book pricing pressure? Thank you.
Thank you. A lot of questions. Let's see if I remember them all, otherwise you have to remind me. But the first one-
All right. Sure.
The first one on volume development, you can see two things happening in the quarter. One is that mortgages is growing in Swedish Banking, and also corporates to a certain extent. In LCNI, you see corporates decreasing. There are two reasons for the volume development in LCNI, specifically. One is that there are a couple of large corporates that has repaid their debt and gone to the debt capital markets, which was expected. And the second thing is, it's not that we cannot take volumes, but it has been, to a very large extent, a price issue.
When it comes to Baltic Banking, it's more or less, you could say you see growth in particular in private, but corporate is fairly flat. If we go to your next or your last question, because I don't remember the one in the middle.
Sure.
about mortgage pricing. I stick to what I say. The ambition is absolutely to reprice if STIBOR goes up. As you know, it's a competition out there, and as I also said, we will incrementally do it, because I don't think that it is wise to have a very volatile lift price in a volatile underlying market. So the ambition is definitely there. And when it comes to the deposit volumes, you're right, it's the increase you see in the quarter is primarily related to LCNI and its financial institutions to a very large extent. So I don't view it as sticky, and we are charging for it.
Right. Just, just to clarify, Anders, so the corporate deposits, private clients flat, corporate deposits up 100 and, uh, 120, 100 and odd billion, 116 billion.
Yeah, yeah. And that's the other part of it is treasury that is related to the short-term money market fund placement from the US.
Yeah.
They tend to disappear, and they, at certain points in time, and then they come back.
Totally. So if I take out those money market fund deposits, what's the underlying corporate deposit balance like? Is it sort of flattish? Is it growing? Curious how big the US fund number is?
It's very large. It's around SEK 90 billion, I would say. So the underlying deposit growth is around SEK 30 billion, but in that, you have some financial institutions.
Ah, okay.
I wouldn't say that it's a strong growth, but the corporate deposit growth is not strong at all. It's there, but it's not strong.
Okay, that's really clear. Can I ask one clarification? You talked about as a bit of pricing issue, giving up volumes on the loan side. Was that specifically on LCI-
Yes.
-or were you talking about corporate? Okay, LCI. Thank you. That's very clear, Anders.
Thank you.
Our next question comes from the line of Peter Kessiakoff from SEB. Please go ahead. Your line is open.
Yes, hi. Thank you. Most of my questions have been asked, but some detailed ones, however. Firstly, on payments, I think that you're mentioning in the report that you've made some price adjustments now in Q1 following, I guess, the interchange fees that cap that came in slightly more than a year ago. If you just can elaborate a bit on that. And then, secondly, in terms of risk exposure of the market risks, which were down now in Q1 as well, and they were down in Q4, and I think back then, back at the Q4 report, you mentioned that it should probably pick up again in Q1, but it declined again. If you just can elaborate a bit on that as well. Thank you.
Hi, Peter, it's Gregori here. On the first question on card payments, what it really is, is that the card providers, Mastercard and Visa, have changed their pricing models, in particular Visa, towards the end of last year. And that is now shining through or coming through in the Q1. So it's a fee and pricing and rebate changes that those two providers have made.
Okay. So the kind of additional decline that we saw in Q1 is, that, that's you can see that as the new run rate?
Yes, that's sustainable. Correct.
And then my question on market risk?
I think it is extremely difficult to view it as a trend, Peter. Market risk in between quarters is volatile. So I would, I wouldn't even dare going into giving you a trend on market risk.
Okay, okay. I think I'll stop there. Thank you.
Thank you, Peter.
Our next question comes from the line of Adrian Cighi from RBC. Please go ahead, your line is now open.
Hi there, this is Adrian. Thank you for taking my questions. I have two clarifications, please, one on NII and one on asset quality. On NII, apologies if I missed this, but can you specify if the front book mortgage margins are still above the back book level? And then, the second one on asset quality, your net credit impairments in the quarter were nine basis points, with obviously a significant chunk coming from the oil-related impairments.
However, at the beginning of the call, as I understood, you reiterated your full year guidance for basically a full year levels in line with 16 levels. Do you expect oil-related losses to remain at these elevated losses for the remainder of this year, or do you have a buffer in your guidance for potential deterioration in the rest of the book? Thank you.
Okay, thank you. Starting off with the mortgage book. If you look at the back book and the front book, the gap is closed. What I said is that when you look at the back book, it consists of, you can say, two different parts. One part is the one that is running on floating rate three-month fixing, and the other part is fixed rate, which was written a long time ago. The one that is written a long time ago, which is equivalent to around SEK 200 billion, or there is still a gap between front and back. But on average, the gap is closed in this quarter.
Then on the credit impairments, we guide for 10-15 basis points. We are at nine basis points. I think we are well within the guidance. And where does it come from? Majority of it is in the guidance related to the oil portfolio. The credit quality in the home markets continues to be very strong. Of course, the Q1, we have had no credit impairments, but this is not normal. One should have credit impairments when one gives out loans to customers. So of course, within this number, there are some credit impairments for the rest of the market, of our portfolio as well.
Perfect, right? Yeah, thank you.
Our next question comes from the line of Daniel Do-Thoi from JP Morgan. Please go ahead, your line is open.
Hi, good morning. Just two questions from me. The first one is, on IFRS 9. I think last quarter you mentioned the, or you estimated the impact to be between 40 and 80 basis points. Just wanted to, to know whether that is still the case. And then secondly, on mortgages, I believe the FSA has made a, a few comments this quarter, that they would like to see a lower share of households on floating rate mortgages. Is that something that you are actually currently seeing, particularly as rates, begin to rise, or is that something that you're expecting to see? Just a bit of, thoughts around that would be helpful. Thank you.
Okay, thank you. To start off with IFRS 9, we have said 40-80. And clearly it comes as time goes by and development internally is progressing. What we see as we speak is rather an effect of 30-60 basis points. On the floating versus fixed, you can see that it's been a healthy debate in the media around that in Sweden lately, and you can see a gradual shift. Some clients are moving more into fixed than floating, but it's very gradual. It's not a significant jump.
Can I just follow up on that, fixed versus floating debate? I mean, I guess if I look at your list prices, it's sort of encouraging customers to move out in terms of duration. So just wondered if that is something that you're actually actively steering your customers towards. And then secondly, what would that actually mean in terms of margins if customers start to increasingly switch out to longer duration mortgages? Thank you.
I see your point. Yeah, I mean, we talk about sustainable lending, and when we look at customers and their repayment capacity, that is taken into account. So if you are on the weaker side, we definitely recommend people to at least partly fix some of the rates. And you're perfectly right that the list price curve is a bit flattish. So which essentially means that as we speak, the margins are a bit lower on the fixed rate than on the floating rate. But as you also know, market rates are moving all the time. So we'll see where that ends up. But it's a gradual shift, and I personally think that it's good that people are fixing more from a risk perspective.
... And sorry, just to follow up one last time. The margin differential that you mentioned, could you just give us a feel for how much that is, let's say, between a floating and let's say a five-year mortgage?
If you look at the last six months, it's been, varying between zero and 40 basis points. Less margin.
Okay, and on average, somewhere in between, or?
I don't have that on the top of my head, but that could be a fair assumption.
Great. Okay, thank you very much.
You're welcome.
Our next question comes from the line of Johan Ekblom from Bank of America. Please go ahead, your line is open.
My questions have been covered. Thank you.
Johan.
Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead, your line is now open.
Yes, good morning to everybody. A couple of questions, if I may. The first one is on risk-weighted assets again. How much of the kind of SEK 20 billion increase you reported in this quarter can be considered as an anticipation of what could come after the approval of the PD models from the Swedish FSA? This is my first question. The second question I have is on oil-related loan losses. I'm a bit confused. Now you are taking all these losses, but the Brent prices started collapsing more than a year and a half ago. So I was wondering why such a long time, first?
You say you have increased the coverage ratio, the exposure is going down, you have updated PDs, LGDs, all the model stuff, but you keep saying that you might continue to have provisions related to the oil and gas exposure. I am just trying to understand, to understand why, after the provisions, after higher coverage ratios, you might have more to come in the coming quarters. If I get your comments right, thanks.
If I start with your question regarding the RIA increase. Yes, all of it, all of it is what we expect, we need the one as part of the model update. And this is our best estimate as of today. Then on the kind of the dynamics of further provisioning in the oil portfolio, I mean, the... Of course, oil price is an important variable in when we look at the underlying quality and how our clients are doing. However, the bigger impact is related to the investments, and there have been expectations that we will see improvement in the market in the end of 2017, 2018, 2017.
We now expect to be a very difficult year for the oil sector because the occupancy rates for the rigs and the supply vessels are at historically low levels. Prices for the services are not going up. Profitability in the market is very low, so clients have difficulties with their cash flows. We have not finalized fully the first phase of restructurings. This is one uncertainty why we think that before we will say how much credit impairments we need, we need to finalize the work we are in the middle of. We also see that there may be already we are starting to see clients restarting to restructure their exposures again, because the market has not been improving.
This, however, we don't think will result in further credit impairments as we see it now, but it is a difficult situation, and that's why we continue to guide on the possibility for the further credit impairments during 2017.
Right, but wasn't this the case over the past, the same story over the past 18 or 24 months? What has changed?
But, uh-
Actually, now it should be a little bit better, no, than maybe 18 months ago.
No, I mean, the... We have had a, there has been no change in the story. It is exactly what we have been telling. These, this is a sector with a difficult situation in front of it. We have exposures which need restructuring, where we have 10, multiple stakeholders who need to agree. Things take time. The input to the situation is an oil price, which is very difficult to predict to any of us. There are adjustments ongoing in the market, but we don't think that there has been a significant improvement compared to 2018. I believe we have not changed our story.
Okay, okay. Thank you very much. And if I may, very final question. What is your base case assumption with regards to monetary policy from the Riksbank from now going forward?
That's a very good question, Riccardo. I think you, I think we have given you the guidance through our macro economists. And it, it's really the expectations is that it will start to we will start to see some increases in the repo rates in the beginning of next year. But again, as you know, the Central Bank of Sweden need to act in sort of harmony with what the ECB is doing. But we stick to that and we'll see.
All right. Okay, very clear. Thanks.
Thank you.
Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead, your line is now open.
Hi, thank you. Just, I guess two questions. Firstly, on the cost side, you say that this quarter is a bit high, and then, then you get the benefits. Does that mean that when we get to Q4, you should have an exit run rate that is below your current target 15.8, so that when we look at 2018 and 2019, you could see costs declining on an absolute level relative to this year? And my second question was just on, you used to, a couple of years back, have this big IT simplification program in place where I think you had 1,100 systems or products and 800 systems, so you were bringing those numbers down. Is that still an ongoing process?
Where are you now, and what could be the benefits of doing that? Thank you.
Thank you. To start off with your first question, not necessarily so. I understand why you ask it. It really depends on the investment agenda that we have. So the run rate at the end of the year, let's come back to that. When it comes to the second question, I think absolutely so. If you're listening in to the strategy we talk about, which is to digitalize basically all our retail daily banking products, in order to be able to do that and to get the efficiencies out of that, you need to continuously rationalize within the both product spectrum, but also in the IT. But that is something... It, it's actually progressing well, but it takes a lot of time. But that is definitely part of our ambition going forward.
But if, just, if in 2012, you had 1,100 products and 800 systems, I think you said, what, do you have those numbers now?
I don't have them on the top of my head.
No. Okay, thank you.
Our next question comes from the line of Maths Liljedahl from Nordea. Please go ahead, your line is open.
Yes, good morning. Just a clarification, if I may. You say the NII in group functions or treasury specifically is very strong from, or positive effect from the covered bond repurchases. Is it possible to quantify that? And how should I... You also say that you will have more covered bond issuance in 2017 compared to 2016. So how should we think of this going forward? Also, we know the relationship between gains and losses and commissions and NII here. But should we see this as a very strong quarter in Q1? Because you also guide that the NII level for 2017 could be at about the same level as in 2016. So how should we think about this going forward? Thanks.
Thank you. To start off, I think the, you, you could roughly say that SEK 100 million comes from two things. One is the, as you remember, we bought back SEK 34 billion of covered bonds in Q4, which is giving an ease on the NII. And then we also had some favorable spreads in the, basis swaps, helping us. But all in all, that's around SEK 100 million.
Okay, thanks.
On your second question, we will, as we have large maturities in the year, we will continue to buy back covered bonds. The effect will not be as evident in those, because more of the volumes are at amortized costs. That's why we keep the guidance on NII and NDL the way we do.
Okay, thank you.
Our next question comes from the line of Alice Timperley from Morgan Stanley. Please go ahead, your line is open.
Good morning, I've got two questions. First one, you mentioned that you've been able to reprice some of this IBOR-related lending in your corporate book. Could you perhaps just give a bit more color on the segments that you've been able to reprice? And secondly, thinking ahead to January 2018, could you just talk us through how you're positioning for PSD2, and how we should be thinking about payments, payment fees, I guess, in particular, going forward? Thank you.
On the first question, it's primarily within the real estate sector that we've been able to see certain repricing in the corporate portfolio. As far as PSD2 comes, I hand over to Birgitte.
Yes. As you know, that we are the largest payments bank in all our home markets. And the way the strategy that we have on PSD2 is that it's a combination of collaboration with other providers and internal development. I think we have a very ambitious plan, and we'll be able to roll it out as it comes in.
In terms of the plan, are you able to just give us a bit more color on that, please?
I, I don't think that there's so much to say other than, with a position like ours, we have plans in all areas, the omni, commerce, e-commerce space, but also the aggregation space. So, we're working strategies in parallel to be able to sort of maintain the position we have today, and also to be able to, going into PSD2, to be able to continue to, you know, to catch that, the market share that we have today.
Okay. That's very clear. Thank you.
I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad now. Our next question in the line comes from the line of Rajesh Kumar from Société Générale. Please go ahead. Your line is open.
Hi, good morning, Rajesh from Société Générale Credit Research. Two questions for me as well. First off, on funding plan, you said that, 2017 funding will be higher than 2016. Any more color on that, especially on subject issuance? Next on MREL, do you expect the final requirement to be widely different from what we know now? On the same topic, what are your thoughts around issuing non-preferred senior? Thank you.
Yeah, to start off with the funding plan, it's a combination of two things. It's the maturities you see in the year, which is higher this year than it was in the past year. And then we also try to factor in the net growth between lending and deposits. I would... To give you some flavor of it, it's around SEK 180 billion of issuance, and we have done so far, I think, SEK 85 billion in the quarter. And that's what I meant with front loading. As far as MREL comes,
Yeah, let me jump in here, it's Gregori Karamouzis. Yeah, we have estimated the requirement to be around SEK 80 billion based on the documents that the National Debt Office sent out a few months back. We don't have any reason to adjust those calculations for the time being, but we will know what the exact number will be at the end of the year when we have the resolution discussion with the National Debt Office. And they are keeping this window themselves open to make adjustments if there are any clarifications further at the European level.
And then when it comes to us issuing non-preferred senior, for sure, I mean, the requirement that has been described to us includes these type of instruments. The question is the timing, and the timing will depend on a number of things. First, we want to know what the requirements are. We want to see how long it will take for the insolvency law to be changed in Sweden to be allowed to issue those type of instruments.
If we make the assessment that it takes too long and we want to get starting, we might look at different structures that are being discussed in the market, as you know, with calls and different structures, basically, that allows you to either buy back or convert those instruments into something that is eligible later on. So timing is, we're not in a hurry. It's a consideration that we are working on and thinking of, but we're not at all in a hurry to come to the market early.
Very clear. Thank you.
As a last reminder, if you would like to ask a question, you will have to press zero one on your telephone keypad now. There appears to be no further questions, so I'll hand back the conference to the speakers.
Perfect. Thank you, operator, and thanks, everyone, for participating, for all the good questions. We'll see you later in the week and speak to you if you have any further questions.