Ladies and gentlemen, welcome to the Swedbank second quarter report 2016. Today, I am pleased to present Birgitte Bonnesen, Acting CEO, Göran Bronner, CFO, and Anders Karlsson, CRO. For the first part of this call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Speakers, please begin.
Thank you, operator. Hi, everyone. Good morning, this is Gregori, Head of Investor Relations. Just want to make a short correction on the announcements. Of course, in the room, we have Birgitte Bonnesen, our CEO, Anders Karlsson, our CFO, and Helo Meigas, our Chief Risk Officer. Good morning, everyone, I'll hand over to Birgitte.
Good morning. I will come back to the new management team a bit later in my presentation, but, I'm sure you all know who we are. Thank you participating in our Q2 earnings call this morning. We... I'll start off a bit with the upside world and the turbulent time that we live in, with weak governments, fragile economic development in Europe, and some geopolitical tension. This means that we will continue to see volatility in markets, a certain cautiousness, and low interest rates. In the midst of this, Sweden and the Baltic countries stand very strong. We see healthy growth rates, and I'm very pleased to report this strong result for Swedbank. It is important to the continuous strengthening of our position as the leading bank in four markets for the many households and corporates.
The strong NII and provision income reflects a broad-based increased customer activity. We've seen increase in payments and card transactions. Lending volumes continue to grow, primarily in Swedish mortgages. The introduction of the mandatory amortization requirement led to an increased activity in mortgages in this quarter. We introduced these rules last year, but the entire market seems to have sort of woken up to these new standards, and that generated extra activity. The amortization requirements also triggered a slowdown in house prices in Stockholm and Gothenburg. However, I believe it's much too early to draw any conclusions regarding future mortgage loan volumes, and also on future house price developments.
But I can tell you that our ambition, as we've said before, is to capture the equivalent of our back book market share in new lending, and to continue to provide our customers with advice that is relevant to the financial situation of the individual. We also increased lending in corporate Banking, and we had a very active quarter in our investment bank. We stay close to our customers, and we participated in several advisory and capital-raising transactions. We also saw an increase in trading in FX and equity markets. The Baltic loan book also continued to show slow growth, which started actually last quarter, but we see a continuation. Although this quarter it is supported by the migration of the portfolio, the retail portfolio that we acquired from Danske Bank. This is primarily in Lithuania and some in Latvia, too.
All in all, the loan growth, the loan volume growth, combined with margin expansion, strengthened the net interest income in the quarter, despite a continued margin pressure on deposits. Cost efficiency remains in focus, and performance in the quarter was according to plan. The asset quality was solid in Sweden and in the Baltics, which was demonstrated by recoveries and just a smaller provisions. As we have previously communicated, the challenges in the oil-related part of the loan book, has continued and resulted this quarter in provisions relating to just a few counterparties. Our Norwegian entity is an established part of our corporate Banking strategy, and this means that when there are difficulties in one part of the more Norwegian sector, we experience that, too. Helo will come back and talk more about this later in the call.
All in all, it was a very strong result, and in addition to that, we have the Visa transaction that we have informed you about, and that came through this quarter. Also, this quarter, I appointed the new management team. This is the team that will take Swedbank through the transition and create the bank of the future, together with the colleagues in all four countries. This is the management team that I believe will best execute on our strategy and also deliver on our financial goals. I've selected a team of individuals with long experience in Banking and with very strong execution skills. We know where we're going, so being able to execute is gonna be crucial. Also, and equally important, they are part of Swedbank's corporate culture and our values.
I also decided to establish a new unit, this quarter, called Digital Banking, that will focus on developing our group-wide digital offering, and also the tools used both by customers and internally. Our four home markets are some of the most digitalized countries in the world, and we'll continue to stay ahead and be proactive towards our customers. I'm very excited about this, because I strongly believe that we have so much expertise in the bank, but we need to get it together to leverage. Our focus was demonstrated in the quarter as we launched a number of new functionalities in the internet bank, both in Sweden and in the Baltics. We also, this quarter, launched our first partnership with a fintech. In Sweden, it was a social equity trading platform, Sprinkle Bit.
We start this by rolling it out to all employees, and then later in the year, we'll make it available to our customers. We also introduced a collaboration with an external digital partner in the Baltics that offers a service for our corporate clients. One event that I would just want to mention before I close off and hand over to Anders is one thing that made me very proud this quarter, and that is the fact that we are now rated double A minus by Fitch. That means that we are one of the few banks in the world with a double A rating from the three major rating agencies. I'm extremely pleased with what we accomplished this quarter. We stand very strong.
We're very well capitalized, we have a good return, and we have a cost-income ratio to be proud of. We stand for stability, predictability, and transparency. I think that in these turbulent times, these are the characteristics that matter the most. Ultimately, this is what will facilitate strong performance and allow us to focus on our customers and build the bank of the future. With this, I hand over to Anders.
Thank you, Birgitte. I will go through the key trends in each of the three business areas, and thereafter, sum it all up at group level before I finish off with, capitalization and funding. So starting off with Swedish Banking, they delivered a very strong result. NII is supported by continued mortgage lending and further backbook mortgage margin expansion. Deposit margins continue to be under pressure as a result of the falling market rates in the quarter. Deposit volumes increased due to the annual tax refund and seasonal effects in public sector entities. The increased customer activity Birgitte mentioned, translated into seasonally higher card and payment income, commissions from lending, asset management income, and real estate brokerage. Cost was under good control and asset quality continued to be strong. Turning to Baltic Banking, another solid quarter with resilient and stable result.
Deposit margins were pressured by lower market rate, while lending margins were flat. Loan volumes were significantly up in the quarter, supporting NII. They stemmed primarily from the acquired Danske retail portfolio that Birgitte mentioned, but also modest broad-based lending and certain FX effects. Deposits also increased significantly in the quarter. The increase was driven by corporate, public sector, and retail deposits, but also a small amount from the Danske retail portfolio and FX effects. Cost was as usual under good control, and asset quality continued to be solid. Now over to Large Corporates and Institutions. They were also able to benefit from the increased customer activity. Lending volumes grew in the quarter, supporting NII. Deposits decreased in the quarter. In this case, it was due to regular volatility in institutional money, and deposit margins continued to be under pressure.
We also saw higher hedging and trading activities from our customers, primarily within foreign exchange and equities, on the back of the higher volatility in the quarter. And I'm very glad to say that Swedbank participated in a number of M&As and IPO transactions that required advisory services as well as capital raisings. Costs were stable, credit impairments were hit by provisions in the oil-related segment. Helo will walk you through the dynamics in that portfolio. So summarizing the quarter, we delivered another strong set of results. Loan volumes and lending margin expansion supported NII and mitigated the negative pressure from deposit margins. We expect the back book repricing of the mortgage book to continue, while front book corporate margins should start moving up later in the year on the back of the increased capital requirements that the Swedish FSA will introduce in the third quarter.
The backbook repricing of the corporate portfolio will, however, be slower than for mortgages due to its nature with longer interest rate fixing periods. Loan volumes were strong this quarter. The mortgage market was spurred by the introduction of the amortization requirements, while the large corporate volumes were fueled by event-driven M&A and other bridge financing. The inclusion of the Danske acquired loans led to an extraordinary increase in the Baltics. I'm glad that we again, in this quarter, demonstrated that we are well positioned with our customers to capture both generic market activity but also company-specific events. As previously communicated, we have booked the proceeds from the Visa transaction in this quarter. It impacts both NGL by SEK 457 million and other income by SEK 1.658 billion. In total, a tax-free income of SEK 2.1 billion.
Since Visa Sweden has not yet paid out the proceeds to its members and the allocation amount is not yet fixed, then the final settlement can vary somewhat from the mentioned amount. Costs are in line with our expectations, and we are in line with meeting our cost target for the full year of 2016, set at SEK 16.2 billion. And just to be clear to all of you, I will come back to you in conjunction with the third quarter and communicate our cost ambition for 2017. Finally, then turning to capital and funding. Market volatility in combination with increased Risk Exposure Amount made us end the quarter with a CET1 ratio of 23%.
REA increased by SEK 14.6 billion, mainly due, mainly due to increased credit exposures, but also due to special treatment of the Visa, future Visa proceeds, standing for SEK 4 billion out of the 14. This REA effect will disappear once the proceeds are paid out. We also saw continued negative PD migrations in our oil-related loan portfolio in Norway, but the effect was offset by positive PD and LGD migrations in other parts of the loan portfolio. The Common Equity Tier 1 capital base was adversely affected from pension liabilities increasing and impacting the capital with SEK 1.4 billion as the discount rate was lowered in the quarter. At a Common E quity Tier 1 ratio of 23%, we still maintain a buffer of around 200 basis points to the minimum requirements, taking the future Swedish FSA announced capital requirements into consideration.
We feel comfortable with this buffer, but as earlier communicated, we have no excess capital. Our strong liquidity position is maintained with an NSFR ratio of 108%. This is a comfortable situation to be in, in pre-periods of uncertainty. Having said that, it is expensive to run a too high NSFR, and on the back of increasing deposit volumes, we are continuously revising our funding plan to calibrate ourselves. With that, I hand over to Helo to walk you through the asset quality.
Thank you, Anders. I am now moving to risk and commenting on the asset quality. Overall, we had a good and balanced portfolio growth in all business areas, and we continue to see strong underlying asset quality in all our businesses in Sweden and the Baltics. Swedish Banking showed recoveries as a result of a release of individual provisions for one customer, while Baltic Banking, after series of quarters of recoveries, is reporting SEK 50 million credit impairment. This is a result of a provision that is related to one customer in Estonia. The main area of concern is, as we have also communicated previously, our oil-related exposure in Norway.
If you remember, in Q1, we took an active decision to change the sector view on the exposures which are negatively affected by the oil price. And as a result, we changed the probability of default, and this resulted in an increase of Risk Exposure Amount, and we also did portfolio provisioning. Now in Q2, we have been going through this portfolio on a individual client level, and this has now resulted in a further Risk Exposure Amount increase, which for this portfolio in Q2 was 3.7 billion SEK. And then we also are reporting credit impairments of 570 million SEK. Going forward, we expect the Risk Exposure Amount to stay fairly stable, even if we need to make some smaller adjustments in the second half of the year.
As regards to credit impairments, we still have uncertainties, as the restructuring discussions are ongoing, so additional provisioning may be necessary, but will depend on the outcomes in a few ongoing cases. A few words also on the restructuring work. It is going according to plan. We are expecting to be ready with the first phase of restructuring these negotiations by the end of the year. Our clients have taken an active part in restructuring their business and their financials. They are putting in place cost reduction programs. They are canceling and postponing investments. They are making equity injections. Bondholders are stepping in with reduced coupons and changed maturities. Then banks are also asked to change their loan conditions.
And these are then the syndicated deals that we are talking about, where we are present, and we have been asked to change temporarily the amortization schedules as well as then postpone maturities. There has been no write-offs or exposures at this stage. Well, as we progress with the restructurings, we are making our own assessments about whether the restructuring is strong enough. And in case we see that this is not the case, we are putting aside money for possible future losses in order to handle the risks prudently, and this is what we are reporting this quarter as credit impairments. I think I'll stop here.
Great. We'll hand it over back to the operator, and we'll be happy to take any questions that the audience has.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, and you'll enter a queue. After you're announced, please ask your question. Please hold until the first question. Our first question comes from Omar Keenan of Deutsche Bank. Go ahead, sir. Your line is open.
Good morning. Thank you very much for taking the question. I just had a question on margins, and then secondly, a question on capital. So firstly, on mortgage margins, I can see that in June, it looks like the front book increased a little bit versus the back book. So I was wondering if you could give us an update of what the front versus back book position on the mortgages is. And then just a related question to that. I was wondering if you could give us some color on the difference between margins on mortgages and housing cooperative loans.
Just noticed that kind of the largest player in the market with a 40%-50% market share kind of treats these as corporate loans, where kind of meaningful capital increases are about to go through. So, just wanted to get your idea on, you know, should we be thinking about these loans as mortgages, and what kind of margin increase could come through on that book? And then the second question is on capital. If I'm not mistaken, I think the pension discount rate is 2.5%. Can you just update us what the sensitivity is to further changes in the discount rate is on capital, given that bond yields have fallen further since the end of the quarter, I think? Thank you.
Okay, thank you for your question. You might have to actually take your last part of it once again if I missed that. But starting off with margins, the front book versus back book is around 10 basis points. As far as the tenant owner associations or housing cooperatives, as you also call them, we are treating them as private currently. When it comes to the capital situation and the IFRS 9 sensitivity, it's not a linear, straight-through way of calculating it, but I would say that 25 basis points are typically impacting us around SEK 1 billion. And then you had a last question, Omar, that I lost you there, so I think-
Yeah. Okay. So, I guess, the 25 basis point sensitivity is around, also 25 basis points on quarter one, I think. The question was on the housing cooperative loan, which you said is treated as private exposures. What's the difference on margins between the housing associations and then the residential mortgage, the private residential mortgages?
A good question. I don't have it on the top of my head, so we will revert to you on that one.
Okay. Have you seen any repricing in that particular segment? Because I guess the point I was making is that the largest player with a 40-50% market share, you know, currently risk weights, those loans are about 4%, and they're probably going to increase by a multiple of that. Just wanted to get your take, you know, firstly, whether you're aware of that, and then secondly, what you think is the impact on pricing.
Yeah. I'm... You're mathematically more skilled than I am, but you have a point in the fact that when risk weights will increase during the third quarter, going into, to the end of the year, that will have an impact on, on these exposures as, as well. And, and therefore, logically, the way we've been doing historically, we'll reprice, that portfolio as well.
Okay.
But I have to get back on the details.
Okay, great. Thank you very much.
Thank you. And our next question comes from Andreas Håkansson of Exane BNP Paribas. Please go ahead, sir.
Yes. Hi, good morning, everyone. First question is also on the NII. In Q1, Goran talked about, good possibility to grow NII going forward. In this quarter, NII did actually grow quite nicely, both compared to Q1 and, and in the previous year, despite rates going down. Could you tell us a little bit of the outlook? Because volumes are strong, could you tell us the outlook if, let's assume that rates are flat from here, do you still agree with Goran's comments? So what's the outlook at the moment? Thanks.
Yes, I will do my best. I think the tailwind that Goran talked about, we still see it. As we have said, in previous quarters, there is a back book in the mortgages coming in for repricing. Still on the back of higher capital requirements. We also know that the corporate risk rates will increase in the third quarter, and as I said, that will impact the front book, although the credit demand is subdued. It will also impact the back book, but that will take a bit of a longer time. We have also seen increased deposit volumes during the quarter, which is obviously a cheaper funding source than issuing bonds. We have to see if it is as sticky as we think.
But yes, I am positive on NII going forward.
Thank you. And then on loan loss provisions in Norway, is it possible that you give us any type of indication how much more we're gonna see? I mean, are we gonna extrapolate this level now for the next two years, or are we gonna expect just one more quarter, or what should we be looking for?
Thank you for the question. It's Helo here. I kind of expected to have this. No, we... I will reiterate what we have been saying before as well. We do not want to be very specific on the provisioning of our oil-related exposure, because as you know, as we've been telling, it's a small portfolio. It is about 30 clients, stock exchange-listed clients, out of which 20 are negatively affected by the oil price. So the outcome of the provisions will be very much dependent on how we will, what we will achieve in our restructuring negotiations.
So, and but we do continue to be of the opinion that oil sector is challenged by the low oil prices, and the investments have not been picking up, and that will continue well into 2017, and maybe also even longer. So, if I then will kind of instead give you a little bit of a feel about what we, how we are thinking about our credit impairments, then I would rather just kind of reiterate what we've been saying, that we think that on the total loan portfolio, you could expect credit impairments in the range of 10-15 basis points.
But we do, of course, admit that this is a guidance which is very much dependent on how our loan portfolio is going to develop in Norway, and what we shall achieve in our negotiations with our clients in restructurings.
Okay. Thank you.
Excuse me, before we take the next question, Mark, just want to clarify the question from Omar before on the housing associations and tenant owner associations. The margins have been flat over the last few years on the back book. There is a difference between front and back book of around five basis points currently. As far as the future price development, and to your point about treating this as corporate exposures, I think it still remains a bit unclear how the Swedish FSA will treat housing associations as part of their new requirements for capital exposures. So we will probably need to wait and see how that treatment pans out before we can comment on future margin development.
Thank you. And our next question comes from, Willis Palermo of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning. I have three questions. One is actually a follow-up on asset quality, on what you say, and I just wanted to have more color on your discussions with clients in the oil and gas sector. But has this changed by the beginning of the year, despite of with, in light of the better oil price and condition in the market, do you see more restructuring to come? And when you discuss with these clients, when do they think being ready to start investing again? Do we think about 2018, or should we look forward in time? And then the two questions are on your number. The first one is on the fee income. The run rate is actually a bit stronger than the beginning of the year.
Should we expect some of these elements to remain by the end of the year? And the second one is on costs. So now you're also running below your target for the full year. Should we expect some inflation at the end of the year, or could we assume that this is the normal run rate at SEK 16 billion for the year? Thank you.
We'll start. I'll start then with the asset quality and our oil portfolio and restructuring negotiations. What we have been seeing now, the first half of the year, is actually a very, very constructive approach from our clients. And and they kind of when at the beginning, maybe there was a little bit of more hesitance about how we progress. So now we are doing very, very good progress there. And that is also the reason why we actually have seen a little bit of a earlier provisioning than we guided in last quarter. That means we have been able to close some of the negotiations earlier than we expected when we were discussing the results and our oil portfolio before, in the first half of the year.
So, has there been any change during the year as the oil price has stabilized? Not really. I think, all our clients are as concerned as we are about the level of investments which are not picking up. So they are, they are putting in new cash because they understand that they need time, at least two years, if not more, to survive, with the current, low level of investments. And whether the investments are expected to pick up in 2018 or later, I mean, 2018 is a very optimistic view on that. I think it's probably could even be later than that. So we are, in our restructurings, we are talking about, stabilizing the cash flows minimum two years. In some cases, we, we try to get, up to four years.
Okay. And, as far as the development on the net commission income, I mean, there are two parts. We typically say that one part of it follows the economic development, which is payments and cards and, and that type of commission income. And then you have the corporate finance-related income, which is very difficult to have any firm view on going forward. It, it, it is volatile and very much up to the market sentiment. When it comes to cost, I reiterate what we said previously. We are in line with the cost target that we communicated for 2016, which is SEK 16.2 billion. And for 2017, I will come back in the third quarter. Thank you.
Mm-hmm. Thank you. That's very clear.
Thank you. Our next question comes from Anton Kryachok of UBS. Go ahead, sir, your line is open.
Good morning, and thank you for the presentation. Just two questions, please. The first one on NII. I was encouraged to hear that you expect widening of corporate margins on the back of the high capital requirements. But maybe you can give us a little bit more color on which elements of your corporate book do you think you'll see this repricing benefit coming through? And how do you expect this to play out? Do you think Swedbank can lead this repricing, or would you expect your peers to move first? That's the first question, please. And second question on risk weighted assets or RWA. We've seen a strong increase in Q1. You've, sorry, in Q2, you've explained where it came from.
If we look forward to 2017, what are the main driving factors that you see when it comes to RWA? Is it just volume of new business that you write, or do we need to take into account other things such as rating migration, et cetera? Thank you.
Okay. If I just start off with the margins on corporate lending, you know, as a consequence of increased risk weights coming from the FSA, it's sort of this is the way the market works, and we already started to guide for higher prices on corporate lending. And I think that you'll see that in the last week, our competitors have done exactly the same. So I think the Swedish market is very rational in that respect, and the fact that we already started to talk about it early in this quarter with our corporate clients, yeah, it will happen. I can't tell you exactly how much and when, but we've started to work on it.
Just to elaborate a little bit further on it, as I said, there is a subdued lending growth, so the front book is, is sort of, it's the thing that grows quickest, but then on the other hand, you don't see large volumes in that. Secondly, when the back book comes, and these capital requirements will impact different sectors differently depending on the, the risk weights in the different sectors. The one sector that has relatively low risk weights is the one that is collateralized, typically by real estate, and there you will see an impact, as to give you an example. But this needs to, to be seen, coming into the third quarter. When it comes to the Risk Exposure Amount, I think that absolutely exposure change will be the, the main driving factor.
As far as rating migration and LGD changes comes, it's extremely difficult to forecast. What Helo said, though, is that we expect the Risk Exposure Amount in the oil-related portfolio to be fairly stable going forward.
Thank you. That's very clear.
Thank you. Our next question comes from Magnus Andersson of ABG. Go ahead, sir, your line is open.
Yes, good morning. First, on capital, I would just like to know if you can confirm that you received the preliminary SREP letter from the Swedish FSA. That's it, that it's in line with what you think your capital requirement will be?
Thank you. Yes, we have received the preliminary SREP. It is in line with our expectations and no negative surprises.
Yep. Okay, good. And also, about the timing, now you will get a Pillar 2 requirement covering for the higher or compensating for the higher risk weights in the corporate segment as of Q3. When do you think you will have your models revised and approved so that we will see this in risk-weighted assets instead?
... It's a very good question. You have to ask the Swedish FSA about that. It will most likely take time, because there are numerous models that need to be revised, so that will take time. But we will be transparent anyway with the Pillar II charges in that.
Are we talking mid-2017, or?
You have to ask the Swedish FSA. I'm sorry, I can't answer on their behalf.
Okay, then, then just on, on the PD migration. In Q1, you had, I think around SEK 5 billion of, of PD migration in Norway, and you thought that there would be no more, rating migrations from there. Now we get another SEK 3.7 billion in this quarter, and you think that there will be no more rating migrations from here. Can we be more certain about that now than after the Q1 report, or, or what are the main uncertainties here with regards to those, those rating migrations?
The rating migrations are coming from two sources. First, you do a sector assessment, and then you go through the clients individually.
Uh, yeah.
What we did in Q1, we did a sector adjustment, where we basically took a view that we think that the, say, oil sector in general needs to have an increased PD. And, and that was actually around a little bit over SEK 7 billion. I do not think that we guided that there will be no further PD adjustments, because at this point, we had not gone through the portfolio on a case-by-case basis. So now, as we have been going through the portfolio one by one, we have-
Yeah
much more confidence on our, on our PDs on an individual client level. And that is why I feel confident to confirm that we don't expect to see any major changes going forward.
Okay, good. And just finally on the corporate lending margins, can you remind us again about the duration of that corporate lending book in Swedish Banking? Is it still 2-3 years repricing we should expect or?
Yeah, it's 2-2.5 years, approximately.
Okay. Thank you.
Thank you. And our next question comes from Adonis Katakis of Swedbank. Go ahead, sir, your line is open.
Yes, good morning, everyone. Adonis from Swedbank Research here. I just have a few, some questions here. One follow-up on, credit quality. When you are talking about the 10-15 basis points, is that for 2016 or should we also expect a similar level in 2017? So that, that was my first question.
We are talking about 2016 now because we have, we think it's a bit too early to guide for 2017. As we progress with our restructurings and we see how the market and the external environment develops, we may give a further guidance on that as well, but not now.
Okay, that was clear. Then, a question on the NII. Do you see any potential on deposit repricing, for example, in the SME segment?
We stick to what we have said earlier, that we selectively charge larger institutions and corporates for deposits, and that still remains.
Okay, thank you very much. And then a follow-up on capital. Now that we will receive the new requirement from Q3, are you happy to have a buffer of 200 basis points, or how should we view your ambitions when it comes to capital buffer?
I'm very confident with the buffer going forward.
When do you expect to update the market on capital target?
I think we have been quite clear that, and as you have seen in the quarter, we need a buffer. To change any guidance or give any guidance on that, I think we need to have much more clarity, when it comes to Basel IV regulations. So, their timeline will most likely have an impact, so.
Okay. That was very clear. Thank you very much.
Thank you. Our next question comes from Geoff Sheridan of Soc Gen. Please go ahead, sir.
Good morning, everyone. Geoff Sheridan here from Soc Gen. I'll, I'll be quite brief with a couple of questions, mainly related to the oil book. And the key thing that I wanted to ask about was that exploration book, which is about SEK 10 billion, which I guess is where most of the sensitivity lies. Can you just give us a little bit more color on that, specifically in terms of the geographical breakdown? Is this all Nordic area, or did you participate in syndications outside of the Nordics? And second of all, how much of that oil exploration book is you participating as a syndicate member, and how much is self-originated? And then the second question on the overall book, relates to the RWA sensitivity.
You said at the start that you didn't expect any further RWA increases from this oil book. Can you just give us an idea of why you have that confidence, and whether there are any variables that could change that? So anything that could change, that could cause RWAs to go up in due course, rather than just feeding through on the impairments line. Thank you very much.
Yes, we're starting first about what is the book, what we are talking about. We have exposures only in the Nordic regions. These are all syndicated loans, so we have no self-originated loans in our book. Then on the second question, on the RWA sensitivity, our, we are confident because we have gone through the loan portfolio on a case-by-case basis, and we make an assessment based on where we currently are in the negotiations with our clients. Can that be changed if the negotiations will change dramatically, and some of the kind of the early commitments that we have been seeing will not be signed up?
Theoretically possible, but as we discuss with our clients, we feel that we have a fairly good understanding about what needs to be done, and that is why we are currently quite confident with our forecast on the RWA.
Thank you, and going back on the issue of syndication, I assume that you're kind of a, a mid-level member of most of those syndicates. So essentially, we're talking about a very similar portfolio to those that we've already seen at other Nordic banks. Is that fair?
I would not comment to the portfolios of other Nordic banks, but you are right, we are a mid-range participant in these syndications.
Okay, that's very clear. Thank you.
Thank you. And our next question comes from Riccardo Rovere of Mediobanca. Go ahead, sir, your line is open.
Hi, good, good morning to everyone. Just a couple of questions from my side. On capital, let's assume that next quarter, your capital requirement is gonna go up because of the corporate, revised corporate Pillar II. And let's assume that, the negative PD migration goes on, so your risk weights, your risk-weighted assets go up. Would the capital requirement eventually go down in the future? Because in the meantime, some of the capital requirement Pillar II would be incorporated in risk-weighted assets. Or would a higher capital requirement be applied on a higher amount of risk-weighted assets? This is the first question. And the second question I ask is, on, you say, you keep saying that you have no excess capital, fine, at 23% Common Equity Tier 1 ratio. You mentioned Basel IV. I understand that.
Can you elaborate a little bit, what are your concern related to Basel, Basel IV, sorry? Again, is risk weights maybe going up further, market risk, op risk? Can you add a little bit of color for that, provided that Basel IV is your main concern, or do you expect further tightening from your local regulator?
Okay, thank you. That's, we're quite very good questions. See if I can cover them all. First of all, the 200 basis point buffer that I talked about is actually. I have taken into account the effects of the upcoming floors and maturity factor changes by the FSA. We have said before that it's around. Our assessment is that it is around 90 basis points. I have also taken into account the upcoming increased countercyclical buffer that FSA communicated, that will actually come into effect in March next year. So, the 200 basis points are. Then I have taken those things into consideration. Then you asked about the Pillar II, Pillar I.
I did not really get your reasoning there, but I, I mean, Risk Exposure Amount impacts, the risk weight floors on mortgages or the size of it. The other Pillar II charges are set by the, by the Swedish FSA. As far as Basel IV comes, I think my main concern is, if, they put output floors in place, that will wipe out the risk-sensitive approach, because then you will see, we are coming back to the old Basel I, world, where you, you can't differentiate, at least not in, in, in, in the Pillar I calculations. Other than that, we will cope with it. The visibility is still too low. I think there will be an, more clarity in the third quarter, so let's come back to it.
Thanks. Now, if I can get back just one second on this, the Pillar II. The question I was referring to is, if your capital requirement is gonna go up, let's say, let's stick just to the 90 basis point you mentioned before. These additional 90 basis points would be applied to a larger amount of risk-weighted assets, if your risk-weighted assets had to go up because of negative migrations in the portfolio related to oil and gas or whatever.... or would the 90 basis point become, I don't know, 70? Because in the meantime, the risk, the capital requirement included in risk-weighted assets would go up.
Okay, now I think I got your question. The capital requirement is set in absolute amount, which then obviously means that it will have an impact.
Okay. Yeah, thanks.
Thank you. Our next question comes from Adrian Cighi of RBC. Go ahead, sir, your line is open.
Hi there, this is Adrian Cighi. Two questions for me, please. One on Swedish mortgages and one on costs. On the Swedish mortgages, you mentioned that it's difficult to estimate the impact of the amortization requirements that recently came into force. However, assuming there's a downward pressure on volumes from these measures, do you expect banks to be able to continue expanding their mortgage margins as they intensify their competition on these lower volumes? And then secondly, somewhat related on costs, you mentioned you were looking at introducing some new cost ambitions in Q3. Can you give us any color as to how you're thinking about this? Is this something you're thinking in absolute cost caps or cost- income ratios? And do you expect these developments in the Swedish mortgage margins in Q3 to act as an input factor into your cost target?
Thank you.
To open up on the mortgage development, it's much too early to tell. What we saw in after the first of June, when amortization became mandatory, we saw, you know, a dampening. It's seasonal, but we actually saw a bit more than that. But the underlying issue in the housing market in Sweden is the fact that there is, you know, an undersupply, and that is not gonna go away. Whatever many amortization rules or DTI rules you introduce and make mandatory. So it's a bit of wait and see. We follow this closely, and as you know, we are present all over Sweden, and we have a well-diversified grip on the mortgage market. So it's too early to tell. And then you talked about cost caps.
Yes, Anders, you wanna comment on that?
Yeah.
Yeah.
I think that we will come back with the-
Yeah
... the cost in absolute terms. We follow cost- income, but we don't steer on cost- income.
Okay.
Let's talk about that-
That was more for 2017. We're not gonna do anything else in 2016. We stick to the cost target that we have.
Perfect. Many thanks.
Thank you. Our next question comes from Jacob Kruse of Autonomous. Go ahead, sir, your line is open.
Hi, thank you. Just a couple of questions. Firstly, on consumer finance, you talked previously about your ambitions to grow in that area. And I just wanted to ask, is that still something you see that you have opportunity to do, despite, I guess, quite a lot of new entrants in that space? And, is your... Are you now at a point where your IT platform supports people applying and receiving consumer loans entirely online? And then my other question was just about this restructuring of oil exposures. How much control do you actually have there, given that you're part of a syndicate and you're, I guess, not the lead syndicator in this?
Are you basically gonna have to be a taker of the terms, or can you affect that process in a strong way? Thank you.
Happily, I can tell you, yes, yes, you can apply for consumer loan in the internet bank. And also, our ambition remains, and it remains because for many of our customers, and the kind of customer that we, that is our core customer, it's a natural thing to actually have all their financing in one place. So, and we also, we are slowly but surely increasing the volume. So we stick to this, and we'll continue, and we still see lots of potential. And then I'll hand to Helo on the, yeah.
Yes, on the restructuring discussions, it's a, it's a very good point, what you, what you raised, because, we are in syndicated deals, and in many of these cases, we have many tens of banks around the table from different parts of the world, with sometimes quite diverging views about what needs to be done. We see clearly that the Nordic banks are actually having similar views, and that, of course, helps us to move forward in the discussions. We are not controlling the discussions, in that sense, as we are not the leads there, but we are very active in it. We were the first ones to actually also raise the issues.
We have been starting to guide the market on the, what we saw as challenges in that sector, and that has given us a position to actually have a quite a big say in the ongoing negotiations.
Okay. Thank you. And just on the consumer lending side, just to clarify, the target there, is that still, I seem to remember, about SEK 1 billion of NII over a number of years that you, you're hoping to achieve? And when you say you can apply online, will you also get the funds disbursed, or do you need to physically fill out some form or something like that to complete it? Thank you.
... Hi, Jacob, it's Gregori here. On the NII impact, we haven't specified any ambition or any target.
Mm-hmm.
Our ambition is to grow this part of the business, and we are taking or have taken initiatives to make our offering available to our customers.
Mm.
That's what we started doing in the Baltics and also in Sweden.
Mm.
Okay, thank you.
Thank you. And our next question comes from Masih Yazdi of SEB. Go ahead, your line is open.
Hi, I'm Masih Yazdi from SEB here. A couple of follow-up questions. Just the clarification on the loan losses, 10-15 basis points. Is that for the full year 2016 or for the remaining quarters of 2016? Secondly, on group treasury, you've earlier guided for NII and net gains and losses to be in line in 2016 with 2015, those two on aggregate. Is that your guidance now as well? And can you give any kind of split of the trends there in NII and net gains and losses for the remaining quarters of this year? And then finally, on NSFR, as you said, it's pretty expensive to uphold the level of 108% there.
Do you have a go-to target on the NSFR, and when do you believe you'll be at that level?
I'll start with the question on the credit losses. The 10-15 basis points is for the total of 2016.
Okay. On the group treasury, we stay with our former guidance that it will be in line with 2015, but there will be traffic, so it will be more coming on NGL and less on NII. As far as NSFR comes, we believe that it's prudent to be conservative, especially in uncertain times, but 108% is too high. We rather would like to talk about 103%-105%.
Okay, thank you.
Thank you. And we have a follow-up question from Goeff Sheridan of Société Générale. Go ahead, sir, your line is open.
Great, thank you very much. Sorry to come back with another question, but it's very, very brief. Just going back to the oil book, sorry. I can't see anywhere a clarification of what percentage of that book is investment grade versus sub-investment grade and so on. Can you provide that? Is that something you can disclose? Thank you.
We have a graph in our presentation where we also show the rating migrations, and as of now, the most of it is not investment grade anymore.
Yeah, the graph is based on your own, categorizations, correct?
Yes.
Do you have anything based on kind of market categorizations?
Uh, no.
Or public?
No, we don't. No, we don't.
But you could say that 13 in the graph is where you will find the investment grade.
Basically, everything is sub-investment grade now?
Yes.
Okay, thank you.
Thank you.
Thank you. And we have a further follow-up from Riccardo Rovere of Mediobanca. Go ahead, sir, your line is open.
Yes, thanks. Thanks for taking this follow-up questions. Leverage ratio this quarter stands at 4.2%, and this number has been traveling around anywhere between 4-4.5% for quite a long time. Are you happy with that? Is there any plan to eventually improve it? Is there any pressure from anyone to have a better leverage ratio than 4.2%?
Thank you. First of all, as you know, we are happy with it. There is no pressure. If we need to adjust, we will adjust, but as we speak, we are happy with it.
Very clear. Thanks.
Thank you. Once again, if there are any final questions, please dial zero one now. There are no further questions at this time. Speakers, please go ahead.
Thanks, everyone, for participating on this call. We will meet some of you over the next couple of days. For the rest of you, we wish you a nice summer, and we'll speak after the summer. Thanks. Bye-bye.
Bye.