Ladies and gentlemen, welcome to the Swedbank First Quarter Report 2016. Today, I'm pleased to present our speakers, Birgitte Bonnesen, as Acting CEO, Göran Bronner, CFO, and Anders Karlsson, CRO. For the first half of this call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Speakers, please begin.
Good morning, and very welcome to this first quarter call. I'm especially pleased to and proud to have been given the trust to lead Swedbank and present this first quarter to you. We have a very clear and well-anchored strategy, and that strategy will remain. We will continue to be the full accessible, full-service bank with low risk in four home markets, Sweden, Estonia, Latvia, and Lithuania. I see my mission primarily as being about mobilizing and organizing the skills and competences, and also the positive energy that we have in Swedbank to consolidate and even strengthen the current market and financial position. The focus is, as I have said before, the customer and my colleagues. The customer behavior has changed dramatically. Our customers expect us to be accessible and relevant where and when they like.
This requires a different way of working for us and for the customer, who is the guiding principle. This is needed at many different levels, customer focus, efficient processes, and good, good internal control. My focus will be on the execution of the activity plans, and extra attention I will give to the IT agenda, as this is completely key. We have ambitious goals in Swedbank. We strive for market-leading cost efficiency and a return on equity of 15%. These goals push us forward and support me and the rest of the management team to take on the challenges and to capture the opportunities that lie ahead of us. They force us to think out of the box and strive for even higher efficiency. That is important. Now, coming to the first quarter, it has been characterized by volatility, increased macroeconomic uncertainty, and further negative interest rates.
Amidst this, I think our focus has remained with our customers. We have had more customer meetings than ever using our digital channels. Our customers like our digital offering. We have more customers using our mobile bank, both in Sweden and in the Baltics. This trend, and the focus is on digitalization of daily banking services. In this quarter, we have digitalized mortgage loan renewals as well as commitment. In the Baltics, consumer loans have been made available in the mobile, just to mention a couple of deliveries. We also deliver a very strong result despite the challenging environment. I think that our ability to price risk correctly and grow our loan book in Sweden has upset the headwinds faced primarily from even lower interest rates. Our front book market shares in mortgages climbed back to around 20%.
This is very good. This is where we should be. As a retail bank, and the retail bank, Sweden, Estonia, Latvia, and Lithuania, we should have healthy market shares in all daily banking services. And I think with the, when you look at the mortgages, with the final decision coming up by parliament to implement mandatory amortization in June this year, this is completely in line with what we have been applying since August last year. So we expect the front book, market shares to be restored. I'm also very happy to see that Swedish Banking corporate loan book have grown this year. However, the demand is still low. We continue to have outflows in our mutual funds business, and this is not good. We've taken a number of measures this quarter, and we have a plan for the year.
We hire more sales staff support, we adjusted our fund offering in terms of investment focus and also style, and we've lower prices. These measures are being closely evaluated and will be complemented with additional ones if needed. The Baltic franchise continues to deliver. I think that this quarter, their return, their returns are less than, not less than world-class, with a cost income ratio of 37 and very high return on equity. We see increased digital sales and also long-term customer relationships that have led to loan volume growth. It's ticking up slightly in Baltics now, which is a very, very good sign. In this quarter, we also got the final approval to take on Danske Bank's private customer portfolio in Latvia and Lithuania, and we'll welcome 90,000 new customers. They will join our platform later this year.
The Large Corporates and Institutions business faced a difficult trading environment with poor liquidity. We saw less activity in the corporate finance area. However, on the debt capital markets business, we had some very good quarter with several very good mandates. We'll come back and talk more about Norway. Good cost control was manifested in all areas, and as you know, this is a priority for Swedbank. Our asset quality remains strong, and this was confirmed by very low loan losses. We continue to stay very close to the few customers that we have in the oil sector. And since the last quarter, we have successfully completed a few restructurings. But as I said, we'll come back to this.
The stable profitability, the solid asset quality, and high cost efficiency that we demonstrated again this quarter give us the comfort and confidence to deliver on the ambitious plans that we have ahead of us for the remaining part of the year. As I said, my focus is on execution. It's on executing the strategies that we have, and it's, more specifically looking closer into the IT agenda and make sure that we are correctly equipped to meet up with the digitalization trends and challenges, too. Let me say just once again, finally, how proud I am to, to be able to present this quarter to you and, and for the trust that's been placed in me. With that, I'll hand over to Göran.
Thank you, Birgitte. I will go through the three various business areas very briefly, and then I will summarize that on the group level and look a little bit on capital before I hand over to Anders. Starting with Swedish Banking, the development in the quarter, we have seen continued pressure on the deposit margins due to the rate decreases by the central bank. We have experienced a continuation of the widening of the mortgage margins during the quarter, and we have also had good loan group volume growth in the business area, both on the mortgage market, I think, but also on the corporate side. Provision income has been affected by the weaker stock market, primarily by Robur and asset management income being weaker in the quarter.
Cost control continued to be very good, as always in these business areas. We have, though, experienced an increased compensations to our cooperation with the savings banks due to the fact that we, on the volumes that they place with us on the mortgages, we give them a kickback fee, and that has increased with the widening of the spreads. Asset quality continue to be excellent. This quarter, we even have a small reversal. Deposit growth has been weak or haven't been any real deposit growth, but that is also a seasonality of the first quarter being slightly more subdued on this deposit growth. Turning to the Baltic Banking business area, I think, as Birgitte mentioned, it is a pleasure to look at the numbers, being a CFO.
I think there also are encouraging signs in the business area where we actually are seeing tentative signs of a more, rapid growth numbers, especially on the mortgage segment. I think we have seen a month and a couple of quarters with more steady buildup of volumes, and we are looking ahead, that feels very encouraging. The income in this quarter is in small numbers, slightly down compared to the Q4 number, but that is mostly relating to seasonality effect in the fourth quarter, actually. So the underlying income trend, I feel, is very solid. The business area continue to deliver a fantastic cost efficiency and capabilities to manage, the operational efficiency in an excellent way. Asset quality continue to remain robust with, slight recoveries in the quarter.
Lastly, turning to large corporate and institutions, this business area has been more exposed to a difficult environment. They have been more affected by the shrinking deposit margins, but also the lack of activity, you could say, in some part of the capital markets, especially in Norway. So the corporate finance fees are slightly lower compared to previous quarters. We have continued to see financial effects of the difficult situation in the offshore market, oil and offshore market, through a PD migration with increased RWA. I will come back to that. But also the credit impairments that we have booked in this quarter are almost entirely due to [the] Norwegian market.
Nevertheless, I think with a return on equity of 15%, I think with these rather difficult circumstances, I think the result is quite good. Then, trying to summarize on a group level, we have slightly weaker NII. Much of that is due to the fact that deposit margin pressure comes immediately, but also we have one day less this quarter than the previous quarter. If I look at the NII going forward, I think we have an increasing tailwind coming to us, and I think there are three elements to that. One is that we continue to have good volume growth, and I can't see that changing really, and the volumes will drive NII.
I also think that the widening of the mortgage margin has come to the such a magnitude, though, if you go back over a 12-18 months period, that the repricing of the fixed element of the mortgage book that is coming through, the 40% of the book, the incremental NII tailwind is quite good. And the third element, I would say, is that we feel that in light of the capital requirement changes in Sweden, with Countercyclical buffer and other measures, we can also feel that the pricing environment are pointing towards higher margin for the corporate market in Sweden. That will have a slower financial effect coming through, but nevertheless, it will be a good tailwind going forward. In the quarter, as I've stated, we have slightly weaker provision income on asset management and also on corporate finance.
Costs are, or before cost, I just want to mention treasury. We have a stronger treasury result, net gains and losses, that is primarily relating to that we have done fewer buybacks in this quarter, and we have some positive valuation effects due to shrinking credit spreads. So normal volatility, you could say, that we experience in treasury. Then coming to cost, cost is well-maintained in the group. I think we are definitely set to reach our plan that we have previously. There is one changing element, though, and that is that with the increase in mortgage margin, we are also paying more in compensation to our cooperation with the independent savings banks for the volumes in the mortgage book, and that will drive some variable cost in the cost line.
The cost target for the full year of 2016 will be SEK 16.2 billion, an increase of SEK 200 million, but it's very much revenue related, so we shouldn't see that as a negative. On the contrary, that's a positive going forward. Asset quality for the group is very good. Anders will come back to that, and then we have a one-off tax effect of roughly SEK 100 million in the quarter. Return on equity, 13.8%, cost income number, 0.43, and quarter one in the quarter is 23.7%.
The slightly lower capital ratio is relating almost entirely to an increase in REA, and that you can say the volume are driving increased capital need, but also we have had as I've stated earlier a positive PD migration in the Norwegian book. And on this picture, you can see it's SEK 5 billion. It's actually more than that. It's higher than that, because in the Swedish book, we continue to experience a positive PD migration, while the negative one is in the Norwegian market, so it's an offsetting. We see increased collateral values that actually drives release of capital in the LGD dimension. But all in all, this is a slight increase need for capital.
Looking at capital and the capital position, the ratio has gone down 40 basis points, and predominantly, that has been the effect that the pension that the IAS 19 has taken out the sort of retained earnings element, and therefore, we have a small dip. Looking on the requirement, we have seen an increased countercyclical buffer, which we have added on, so the requirement is 20.4. On top of that, the likely impact effect of the announced changes from the Swedish FSA are around 90 basis points.
So all in all, the buffer currently with all known regulatory changes are in the neighborhood of 250 basis points, which we feel very comfortable with, but do not think we have any excess capital in light of upcoming new regulatory initiatives from the Basel Committee. We need to review those first. Lastly, before I hand over to Anders, I just want to say the other sort of binding requirements, NSFR at 107, is very strong and LCR, as always, quite good. So with that, I hand over to Anders.
Thank you, Göran. Strong growth in the Swedish economy and stable economic development in the Baltic countries contributed to the positive trend for the credit portfolio. Hence, the trend seen in previous years with low credit losses and a decline in impaired loans continued in Q1, ending up with losses at SEK 35 million or one basis point.... With both the Swedish Banking and Baltic Banking showing reversals, and the provisions, although limited, came from LC&I and were oil related. We have guided that higher loan losses in the oil-related sector should be expected, given the persistent low oil prices, but even more important, decreased investments by oil companies globally. We have also said that many of our clients have a quite robust cash flow, thanks to long contracts and strong backlogs. The continued subdued market is however, increasingly affecting clients as contracts and funding mature.
Consequently, loan losses are quite low in the first part of the year, but challenges will arise with time if market circumstances are not improving. We acknowledge that the Brent oil price stabilized somewhat during the quarter and closed around $40 per barrel. This is on the margin positive for the market, but what really matters for recovery is that oil majors are increasing their investments. Swedbank Research estimates that oil companies globally decreased investments last year with 23%, and that investments will decrease with another 25% in 2016. Only 2017, a certain increase of investments can be expected. We note that oil-related clients and market players in general are doing many things to cope with the situation, and Swedbank has, during the quarter, actively participated in a number of restructuring negotiations.
The increased risk has not yet materialized in individual impairments. However, we have, since last year, seen increases in number of exposures in our internal early warning indicators, such as watchlist, negative rating migrations, and increased forborne exposures. So summing up, we remain with the expectation that loan loss provisions will increase, particularly in the second part of 2016, and possibly into 2017, in line with the continued bleak outlook on the oil-related market. Thank you.
With that, I think we are finished and open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please dial zero one on your telephone keypad now, and you'll enter a queue. Please stand by for the first question. Our first question comes from Jan Wolter of Credit Suisse. Please go ahead, sir.
Yes, good morning, Jan Wolter, Credit Suisse. Thanks for taking the questions. A couple on the NII there, we can see that the treasury NII is actually coming up Q- on- Q, and I think, we thought it would come down, and, and Swedbank discussed, the treasury NII fall gradually during 2016. Do you still see that happening, or not? It also looks like the NII sensitivity is down significantly vis-a-vis the fourth quarter, in the fact book there from around 4.5 to 3 billion for a 100 basis points fall in short rates. If you could comment on that, if something has changed. So that's my first question.
Then the second one relates to the situation around costs, and I think you highlighted on the call that the focus is on execution on the IT agenda. Is it fair to say that the bank has underinvested in the last couple of years, and now to improve customer satisfaction, the bank needs to invest more, especially beyond 2016, so it could be difficult to maintain flat costs? So that's really my question here. Will that be difficult post this year? Thank you.
Thank you, Jan. If I take the NII question, and I leave to Birgitte to comment on the cost issue. I would say that in comparison between quarters, we have, yeah, it's difficult to steer fund transfer pricing between treasury and the business areas in a negative rate environment. So in this quarter, compared to previous quarter, we have a slight sort of tilt towards NII coming in the treasury area compared to being sort of diminishing slightly in each and individual business area. It's a minor effect, but you can see that in order to reconcile your numbers. We do not guide NII on the NII, or the treasury result on NII. We guide the treasury result on the totality of that result, and you could say that that guidance remains.
We talked about SEK 1 billion in total revenue for treasury in 2016, and that guidance remains. Even though we have a strong first quarter, you must remember there are valuation effects and buybacks affected, which are volatile in nature. So I think underlying that guidance remains.
Mm-hmm. And on the cost question, let me open up by saying that there's absolutely no contradiction between customer satisfaction and low cost.
... Just look at our Baltic franchise and you'll see very cost efficient operation combined with very high customer satisfaction. Although having said that, you're correct in the fact that we have gradually increased the IT spend, and that we'll continue to do. I think that will come if you look at the coming couple of years. We need to—we have some big projects, both on legacy, but we also on the digitalization side. We have a good plan, and we deliver according to our plan so far.
Thank you. Would you say then that given this increase in IT spend, it would be difficult to maintain the ambition with flattish costs as we see, for example, this year, 2016?
Yeah. I think we said, in the previous quarter, Jan, that we see the continuous, I think all banks are seeing continuously a transformation need in the IT side. You see more and more areas requiring sort of transformation. So from that point of view, I think it's a common feature among banks. But in the same breath, we are also having other initiatives that take out cost, procurement, nearshoring, and also the sort of change distribution forms actually enables you to do other initiatives. And we—I don't think there is any different view on the cost level, at this point of view here and now.
Okay. Many thanks for your help on that.
Thank you. Our next question comes from Adrian Cighi of RBC. Your line is open, sir. Please go ahead.
Thank you very much. Thank you for taking my question. Three questions, please. One follow-up question on costs. One of your peer announced that they're taking a charge to deal with potentially closing or merging some of the branches. Is that one of the avenues you're exploring to further rationalize costs? The second question on mortgages, you're mentioning you're targeting a mortgage market of 20% below your backbook of 25%. Why would you do that? And what's the rationale? Is this driven by potentially a view on the frothiness of the real estate market, or is it a view on the potential impact of the amortization rules coming up later in the year? And then maybe one last question on asset quality.
As you mentioned, you had a very low level of asset for losses of one basis point this quarter. But you also mentioned you were part of a few restructurings that happened despite no impact or visible impact on loan losses. Is there any more color on what you can sort of see for later on in this year? Any particular sort of target you might provide us in terms of or cap on loan losses for the year? Thank you very much.
Okay. If I start with the mortgage and the market share there, and Birgitte will comment on the development on, on branches and others on credit impairment. I think, Birgitte mentioned 20% market share. I think you need to remember that, our back book is 25, but that also entails, the volumes put on there that, by the independent savings banks, and they are putting... Historically, they have given us higher volumes than what they are currently doing. So, you need to distinguish between what is Swedbank's own market share and what we do through our cooperation agreement. And since the savings banks are very well capitalized and have a good, liquidity position, they put more than they've done historically on their own balance sheet. So therefore, you have the discrepancies, in, in there. Mm-hmm?
On the branches you related to Handelsbanken. My comment to this is I think that we are ahead of the curve, absolutely. We already closed branches. We already have made a good deep analysis of the need we have for physical meeting places in Sweden. What we are in the midst now is that going through the branches and sort of restructuring it to better meet customer needs. And this means that in some small, you know, smaller towns, you may need just a service center with a couple of people. And in other bigger towns, you need hubs and bigger branches with lots of more expertise. And this is what we're doing at the moment.
Sorry about that. On asset quality, what I said is that the investment cycles are very long in this industry, and now the investments are going down. That put pressure on this specific sector. We are doing things together with them. They are injecting equity, some of the debt investors are taking their lot, and the syndicates are discussing these issues. But if the market conditions prevails, we will definitely see clients running into problems. It's extremely difficult for me to give you a guidance on the exact numbers because it's few exposures, it's single event-driven. But yes, you will see increased loan losses from the oil-related sector in this year if the market condition prevails.
... Thank you very much, very clear.
Thank you. Our next question comes from Anil Dotoy of JP Morgan. Please go ahead, sir.
Hi, good morning. Just three questions, please. The first one was on the mortgage margins in Sweden. The comment that you made last quarter around the front book versus back book spread being roughly five-eight basis points. Just wondering how that has developed since then? That's the first one. Second, slightly related on amortization. You've given the stats again of the proportion of new customers amortizing, 94% for those above 70%, 82 for those between 50%-70% LTV. Just wondering, with the upcoming amortization requirements, will these both go to close to 100%, or how should we think about this? And then lastly, on the costs, I think you mentioned previously that you would expect to see IT costs increase something like SEK 200-300 million year-on-year.
Yet the IT expenses that you booked this quarter were actually flat year-on-year, if I'm comparing the first quarter to the first quarter of last year. Just wondering whether your previous guidance here remains valid, and whether we should, as a result, expect a bit of a ramp-up in IT expenses for the remaining nine quarters of the year. Thank you.
I'll just start on the question on the mortgages. As I said, we already introduced these new rules in August last year. No, I don't think they will come up to 100%, because they will always be, you know, for different circumstances for different customers. And I think the most important thing is that we make sure that we maintain low risk on our balance sheet, and also that we give advice that is the right ones for customers. When you look at the amortization setup and the rules, you know, it's not always so easy to put everybody in the same bracket. You may have income from different sources, et cetera.
I think we will not reach 100%, and I don't think we should either.
On the margin side, I think the front versus back book increase during the quarter was north of 10%. So, and we ended the quarter on a high note, so I do think the market is continuing to reprice, definitely. On IT spend, you can't really just look at the IT cost line for IT spend, because there is very much also staff cost that is incorporated and consultancy cost that incorporates in sort of overall picture for IT spend. So it's difficult to just look at the one line. I do think that we hope to do more on IT 2017 over 2016, but it will also be incorporated in the overall cost, cost target.
So it's a natural process where IT-related spend, whether it's pure IT or staff relating to IT, will absolutely, over time, substitute the number of people in the physical distribution form and also in the production area. So, IT will increase as a proportion of the overall cost base over time.
Okay. And can I just ask one thing on the amortization? So that number will not go to 100%, but you've also guided, or you've also stated that in the previous twelve months, you've seen about SEK 11 billion of amortization pre and sec, which is pretty much unchanged from if I look back, say, a year ago. Would it be fair to expect that number to trend up in the coming quarters post the introduction of the requirement?
Mathematically, that would go up, I think, slightly, of course, with more people amortizing.
Okay. Thank you.
Thank you. Our next question comes from Riccardo of Mediobanca. Go ahead, sir, you're on.
Good morning to everybody. Just a couple of questions from my side. First of all, on asset quality, if we, if we abandon one second oil and gas exposures, in any case, we've seen very, very low provisions, across the rest of the group. Now, do you, do you think this, do you see this as sustainable, going forward? And if not, what do you think it changed from in, from the current conditions? This is the first question. The second one I have is on the capital. Before you made extremely clear that you have no excess capital with, if I'm not mistaken, a couple of 250 basis points buffer on your updated capital requirement because of incoming initiatives from the Basel Committee, if I, if I heard that correctly.
Is there anything you expect, in the short term, and what really makes you more concerned on your capital from any intervention at, at European level? Thank you.
Okay. On the asset quality side, if I understood your question correctly, if I disregard the oil-related part of the exposure, you asked whether it would be sustainable to be at one basis point for Swedish Banking and multi-banking. Was that correct?
Yes, correct.
...And then I would argue that, I mean, if you look at Baltic Banking, it's, it's extremely strong from an asset quality point of view. So I would expect them to perform accordingly. On Swedish Banking, it is extremely difficult to be on a one basis point level sustainable. If you look at the last quarter, we had one single credit loss, which was bringing us up to nine basis points or something. So, no, it's not sustainable. You shouldn't expect that to continue forever.
Okay, thanks. Very clear.
On the capital, I think nothing has changed, really. What is new in this quarter is that we got the hike on the countercyclical buffer confirmed, and that we also got a measurement from the Swedish SFSA that we estimated to be 90 basis points. Other than that, we continue to say that the buffer after that is 250 basis points, but we know that there are new regulatory initiative, like everyone knows, discussed in terms of Basel Committee, and we don't have any visibility, and as long as we don't have that visibility, we don't see us having any excess capital. I think, in the end, it's very difficult to make any prediction for what the requirement will be, but I think Swedbank is well placed to meet that increased requirement.
If I may, continue on this just one second. Given that these consultation documents are out, have you run some internal calculation of what could be the impact, maybe on operational risk on or credit risk on the large corporate exposure, should those document remain as they are today?
Okay. I mean, we have received the consultation paper. We have modeled the input floors. You have input floors, output floors, and leverage ratio in that consultation document. And I can just say that, with regards to input floors, Swedbank has no problem to taking this new regulation.
Okay.
When it comes to operational risk, it is our best estimate that there will be basically no change from what you have seen so far in terms of RWA.
Okay.
On output floors or a new leverage ratio coming, there is no visibility on what that would be. We are currently around 4.5% on leverage ratio. We can easily go to 5%, and we think that we are well placed, really, to meet that. It's that regulatory. But still, we need to have more clarity before we can state anything on the capital.
Sure. Thank you very much. Very clear. Thanks.
Thank you. Our next question comes from Christoffer Rosquist of Barclays. Go ahead, your line is open, sir.
Thank you very much. It's Christoffer from Barclays. Just two questions. Just the first one on your asset management business, which I think we haven't covered off yet. You mentioned here, Birgitte, that you saw a problem or that the current trend was not good. What is the main challenge, in your opinion, right now? I mean, do you not have the right product offering, the right skill and staff in the organization? Is it the problem with distribution in the branch network to promote the products you have in this yield environment? Do you have a reputational problem since the conflict with the Shareholder Savings Association in Sweden?
Or, perhaps, maybe if you could speak about what, what your plans are going forward to, to continue to address this, because it looks as a, as a large opportunity for you with given your, your significant market share in Swedish mutual funds, for an example. And then I had a question just to follow up on what you said on amortization and competition. Just would be interesting to understand why you think the environment will change. If there are certain challengers who currently are using the, the more lax, sort of, formal regulatory environment around amortization, that they will have to change their, the supply that they can provide or, or the demand that they could meet when, when these, these ideas become actual regulations, or, or, or why you expect the trend change? Thank you.
On the asset management side, I think there are two reasons. One is, and you alluded to both of them. One, I think that actually all the media attention actually did hurt the product. There's nothing wrong with the product. So the funds, we've gone through it, and we have 80+ funds today, and we have, you know, a very good mix of actively managed index funds. And, you know, when we have some that are actually coming down to a zero fee paid. So I think that we have a good mix today.
I think that the, yeah, the media hurt, but I also think that there's another reason, and I think that we underestimated the customer's willingness, or, how should I say, you know, the fact that they go to digital channels to buy a fund. What we still see is that lots of Swedes, you know, don't actively go in and buy funds. Funds are sold in physical meetings. So I think that we had sort of a gap in the restructuring of our delivery model. Now we're moving into a, we're bridging this with more people and more actively and proactively selling our funds as we move into a better and smarter setup on the digital in the digital space.
So, these two things, I think, is the reason. And then you have-
You can also say that we haven't been successful in the transfer market-
Exactly.
On, on,
Yeah
this segment, either which we are putting an increased
On the pension side.
Yeah.
I think that that is—but that is part of the, the whole setup, too. So what we're doing is that in the whole transfer market and occupational pension area, we are now initiating a new start on this. And we have market shares that are too low, given the fact that we are the home bank for many small businesses. And we're setting up a transfer factory internally to make it so much easier for the front line to attract this kind of business. So we're looking and working on processes, but we're also looking to be more proactive in our sales efforts.
Your second question was with regards to the competitive environment on the mortgage side. I didn't really understand the question. If you could, repeat it.
Absolutely. So I understood your opening statement here on the call, that when amortization becomes mandatory, that you'd expect a change in the competitive environment in Sweden, either leading to less supply from challenger banks or that those will have to raise prices, which is then a helpful tailwind to Swedbank as well. So just asking you to clarify if I understood it correctly, that is both of those two, one of those, or what it is that you expect to change once amortization, amortization becomes mandatory?
Anders?
I think what we saw in the last two quarters in 2015 was that we lost market share, and we introduced not only stricter amortization rules, but also stricter origination standards from a risk perspective. What we've seen in this quarter is that it seems like some of the smaller players are getting into line, and they will be further into line when you have mandatory amortizations. And therefore, we expect our natural market share to come back, and we also saw that in the quarter.
Okay, I understand. Thank you. That's very clear. But can I just to be perfectly clear, did you say that you expected people to buy mutual funds online, but that was not the case, and now you're actually adjusting your operating model to meet, be able to meet those customers to sell those products face-to-face?
What I'm saying is that people didn't buy to the extent that we expected. So, we're sort of bridging the-- we think that this is absolutely where, you know, where we'll end up. And we're working very much on our digital offering on savings products and selling funds digitally. But, we need to bridge this. It didn't happen as quickly as we thought it would.
Okay, thank you very much.
Thank you. And our next question is from Chris Manners of Morgan Stanley. Your line is open, sir. Please ask your question.
Good morning, everyone. So I had a question for you on the deposits. I saw that there was a big increase in corporate deposits in the quarter. Looked like you've gone from about SEK 350 billion to around SEK 500 billion, so about a 46% increase. Maybe I could just ask you, what's driven the increase in the corporate deposit base? And also, how are you doing now on pricing? I mean, are you able to pass on negative rates to a bigger section of your corporate customer base? I know that some have been able to be price negative. Just thought I'd ask around that. Thank you.
The big increase in corporate deposit is very much related to short-term money in the U.S. So it has nothing to do with the Swedish client base or negative rates. It's the ability to maneuver your liquidity with sort of gathering short-term money and placing that with the Fed, Fed and ECB, really, because you can make some shorter money in there. So you have volatility in that number. So I think we have the underlying corporate deposit growth in the quarter has been around SEK 15 billion, which is a tenth of that number.
Thank you. And how are you doing about being able to pass on negative deposit rates to your corporate customers?
I think we have, we have, more or less the same strategy. On the margin, we have sort of with negative rates in the quarter coming down further, we have reviewed sort of on the financial institution and the really large clients, looked at a number of more clients that will be charged for deposit. But if you take an overall perspective on how we treat the strategy going forward for negative rates, it remains.
Thank you.
Thank you. And our next question comes from Omar Keenan of Deutsche Bank. Please go ahead, sir.
Good morning. Thanks very much for taking the questions. I just have one question on capital and then a second question on NII. Thanks, Göran. I think the call comments on the input flows and the outflows, op risk proposals having little impact on Swedbank, were helpful, but that the capital flows is a key unknown for now. I was just wondering if you could add some questions on the interest rate risk in the banking book. I know that the final standards were only, so not that long ago. Thankfully, there's no Pillar One standard, but the conditions for working out what the Pillar Two will be look tougher.
So just wondering if you've had a chance to think about what would happen to the Pillar Two add-on, what kind of magnitude we could potentially increase, expect to, to have from the new standardized measure? So that was my first question. My second question is, for Birgitte. It's just on the net interest income. Could you just remind us where the front book on mortgage margin is versus the back book? And if the current interest rate environment continues, how would you expect the quarterly NII progression for, for the group to go from here? Thank you.
Yeah, yeah, on the capital there, Omar, unfortunately, I'm not able to give you an answer. I need to come back on that one. I don't have it on top of my head there. We have to take it when we meet up later this week.
That's okay. It was only Thursday it came out, so.
Yeah.
... it's quick.
Well, it's 10 basis points between front and back.
Ten. That's great. And if the current rate environment continues, I guess, how would you expect Swedbank's group NII progression to go from here?
Yeah, I think we feel that it's becoming more tailwind than headwind on the NII. If you look at sort of how we are placed on capital and what we see in the marketplace for corporate margins, that should play tailwind. And then we also see that we are competitive on the volume side, that will give tailwind. And then also you, the fixed proportion of the mortgage book that is coming in for repricing, which is 40% of the overall book, that hasn't really been repriced. That, of course, with the now 18 months of expanding margin, will give a more significant tailwind on the NII. So I think if I add these three elements up, it looks increasingly positive. The negative is the central bank, if we would for any reason continue to lower deposit rates from here.
Perfect. That's very clear. Thank you.
Thank you. Our next question comes from Peter Kessiakoff of Carnegie. Please go ahead, sir.
Yes. Hi, thank you very much for taking the questions. First of all, congratulations to the new job, Birgitte. Then, just a question from my side in terms of corporate margins. You mentioned that we should expect corporate or that we could see corporate margins expanding. The question is, have we seen any impact yet? Is there any type of lending? I mean, for instance, housing corporations, where you see that where we potentially could see repricing start off. And then secondly, just in terms of interchange fees, where it looked like the impact on your card card income was largely unchanged. Well, the net was largely zero following that you were large in card acquiring.
Is this the effect that you expect for the full year as well, or do you expect any price adjustments on the card acquiring side that will change this dynamics? Thank you.
To start off, what you're asking about the corporate book, we're seeing, but, anecdotal, I think, evidence of a repricing in the corporate book. So I think it's, there is a trend, and, we also it's becoming slightly, slightly, easier in, negotiations. So I think that we'll- hopefully we'll see this reinforced. On the, on the card question, I think when, when you, as you know well, as big as we are, we have in, in both acquiring and issuing, we have 50% of, of the transactions are actually in-house, which means that we are not hit at all by changes in, in, in the, in the regulations. So, our expectations for the year is neutral.
Okay. And then just a follow-up on a previous question that was asked relating to the NII trend during the year. And you mentioned that you see a fairly good tailwind coming through during the year. Does this mean that despite a decline in NII of 2%, quarter-on-quarter in Q1, that we could expect to see NII for 2016 being flat or actually up on a year-on-year basis?
I would think that it will be flat to positive. It's more likely to be positive for the full year, actually, if I look what is on the table currently.
Okay. Thank you very much.
Thank you. Our next question comes from Pawel Duszynski of Danske Bank. Please go ahead, sir.
Yes. Hi, Pawel here. Just a couple of questions. First one, you, you're saying that, the costs are going to be higher for 2016, so 16.2 versus 16, previously expected. What is the net effect of that? Because you're saying that this is on the back of a higher top line.
We really don't comment on the agreement we have with the. If I were to comment on that, I would give you the margin split that we have with the independent savings banks in our commercial agreement, and I can't really do that.
Okay, okay, fair enough. Then second question, Birgitte, I think you said that you're looking at lowering fund fees in Robur. Was that correctly understood or did you refer that you had lower than previously?
No, we're not lowering. We already did. So, yeah.
Okay. Then just third question. REA going forward, we saw our REA increasing this quarter on the back of negative credit migration. How much or could we expect that to continue increasing on the back of continued increases kind of on the oil price, or negative effects from the oil price?
I don't think I can give you a specific number. As we run through the different counterparties systemically and review this. So, you can expect more to come, but I, I can't give you the magnitude.
Okay. And then the last questions regarding regulation that is out recently, we had new MREL requirements coming out from the Swedish National Debt Office today. Have you looked anything at that, or have you, kind of, have you been prepared on this topic? Could we expect kind of any negative factors from more expensive funding coming through?
We, I mean, we know that there are news coming today. We have no pre-sneak of that, so we have to review that in good order. We will struggle to comment on it in this roadshow. We need to work it through actually. So you need to give us a little bit of timeline.
Fair enough. Okay, thanks.
Thank you. Our next question comes from Peter Wallin of Handelsbanken. Please go ahead, sir.
Thank you, and good morning. I would just like to come back to mortgages a bit. At least in the Swedish media, there's been, like, anecdotal evidence that people are kind of rushing to the bank to take, especially add-on mortgages before the new amortization regulation are put in place. Is that something you have seen as well, which has boosted the volumes in Q1?
No, not really. I think that we have a good activity, and as I said before, we already introduced the amortization rules in August last year. So, yeah. I think our activity is in line with the housing market, the activity in the housing market. Mm-hmm.
Okay. So I guess that since you and at least some of the other banks have been implying or implementing these rules prematurely, you don't expect to see any slowdown in the volume in the overall market starting from Q3?
No.
Okay. Thank you. Then a last question of mine regarding asset quality. Now, obviously, loan losses in this quarter was much lower than expected. How should we look at loan losses for this year compared to what you were saying in conjunction with the Q4 results? Since you do expect loan losses to pick up second half of this year, will so, like, the levels we see in the second half of this year still land the total loan loss levels for the full year in line with what you were expecting then? Or will, so, like, the lower loan losses you're kind of indicating now for the first half of this year mean that 2016 as such will not see the kind of loan loss levels that you thought a couple of months ago?
It's extremely difficult to guide, as I said. First of all, I think you should remember that these large customers, they are on the stock exchange. They are doing restructurings, so it will take time. Again, it's a small number of clients, fairly large exposure, so it's single loss-driven. I think we said that you could expect somewhere roughly between 10 and 15, and I still think that stays relevant.
Okay, great. Thank you.
Thank you. Our next question comes from Riccardo Rovere of Mediobanca. Go ahead, sir, your line is open.
Thanks. So thanks again for taking my, my question. Just, I just want to have your opinion on negative rates are certainly hitting you on, on NII, but, but maybe, and this is just what I want to understand from you, your customers are also, the cost, the cost of that, of their borrowing is going down. So I just wonder whether... Let's assume rates remain where they are, do you think that lower cost of borrowing for your clients could somehow offset the margin pressure that you are seeing on NII? Or put in a straight way, do you think lower loan losses in a negative rate environment can somehow smooth or eventually balance the effect on NII, the impact on NII?
I think it's very, loan losses in Sweden cannot be lower. They are zero, basically. I don't think monetary policy can sort of help mitigate, NII pressure on the deposit side. I think though banks has been banks in general have been very successful in sort of mitigating the sort of the margin pressure on deposits with actually, actually capping lending rates on corporates and mortgages to some extent. So you can say that the banks are insulating the books from the effect of negative rates, and that is what you are witnessing to. It's only some part of the balance sheet that actually only gets affected by negative rates.
So, that has been a good way of maintaining profitability in the banks so far, and I think we should be happy with that.
Okay, thanks.
Thank you. As a reminder, if you would like to ask a question, please dial zero one on your telephone keypad now. And we already have one further question coming through. That's from Magnus Andersson of ABG. Go ahead, your line is open, sir.
Yeah, hi, good morning. Most questions have been answered, obviously, but just one on the treasury result. Do you still expect that it to be fairly flat year on year, if I take the NII and net gains and losses items into account, around SEK 800 million?
I think we're talking about. We have talked about SEK 1 billion, roughly, in revenue on treasury, and that remains.
SEK 1 billion in 2016?
Yes.
Yeah. And then 2017, 2018, should it be less, or?
2017, we haven't talked about at all, Magnus, so
Okay.
Mm-hmm.
Okay, thank you.
Thank you.
Thank you. And our next question comes from Masih Yazdi of SEB. Go ahead, your line is open, sir.
Hi, good morning. Just following up on NII. I think it was the first question that you got this morning that I don't think you answered. It's about the NII sensitivity that's come down from SEK 4.9 billion-SEK 3.2 billion for 100 basis points higher interest rates. Can you explain what that lower sensitivity is due to?
I wasn't aware of that sensitivity change, so it wasn't really. You shouldn't read anything too strongly into it. I need to go through why that has changed, within the... Those are my colleagues, and I will come back on that.
Okay, and, another question on NII then. I can see in your report that you haven't introduced negative rates to your corporate clients, which obviously is hitting your LC&I, NII. Do you expect to do that going forward in the coming quarters?
I think we have introduced it where we see it applicable to being introduced. It's not that we have no... We have introduced it on some specific clients. I don't think that's changing going forward, unless repo rates changes. I think the current strategy is where it is.
Okay. Finally, on NII again. Obviously, you're saying that the high yield bond market in Norway isn't functioning, and you're restructuring some oil exposure loans. Do you also see a repricing of those loans, that you can see higher margins on corporate lending in Norway, and especially on your oil exposure there?
Yes, there is definitely higher margins in that kind of environment.
Okay, thank you.
Thank you. Once again, if there are any final questions, please dial zero-one on your telephone keypad now. As there are no further questions on the line, I'll hand the call back to our speakers for the closing comments.
Thank you so much for attending this call, and look forward to talking to you in the next quarter. Have a good day.
This now concludes the conference. Thank you all very much for attending. You may now disconnect your line.