Ladies and gentlemen, welcome to the Swedbank Interim Report, January to March 2015. Today, I'm pleased to present Mr. Michael Wolf, President and CEO. 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. Mr. Wolf, please begin.
Good morning, and thanks for participating at this call. I was actually reflecting this morning that it was six years ago, Göran and I started this journey, and at that time, was quite turbulent, and the question was where the Baltics would end up. Six years later, all three countries have now converted into the Eurozone, so there is a dramatic change. If you look at the environment that we are operating in, it's still very much a transformation. It's the central banks printing money. We lack political reforms, especially in Sweden. I would like to highlight the need to increase housing starts and invest in infrastructure to create sustainable growth and productivity. In this environment, I would say that I'm very proud to report these type of results because it enables us to be long-term in our actions.
At the same time, we can support our clients, but we can also invest in new solutions for clients, like the digitalization that is really changing the game, but we can also adjust pricing according to the market situation. I'm very proud of my coworkers who have taken us to this position. Since the second half of 2014, our competitiveness has sort of manifested itself in increased business, both on the private and corporate side. We have enabled digitalization for the many customers, also there, both for corporate and private clients. This have significantly reduced the number of transactions and client activity on the branches, so there are cost benefits from this journey. Another positive effect with the digitalization is that we can spend more time in the branches towards customers in the upper segments.
Birgitte and her team is now gathering client executives for the upper segments in competence centers to enable our sort of competitiveness to develop even further. This is a proven concept for Swedbank. We have done this for mid-corporate clients, and you could say that LCI is a competence center. And in both these areas, we have seen improved client activity and market share as we ventured into competence centers. The big question around amortization that we have been speaking about in the report is all around the regulator having to withdraw their new regulation as one of the as the court decided that it was not legal to implement this.
Mind you, the Swedish Banking Association tried to come out with a recommendation prior to the SFSA, but the Competition Authority prevented that recommendation to go in place. We think that the discussion around amortization has been very strong in the last couple of years. You know our position since 2009, so we intend to work in line with the recommendation, going forward. Already today, I would like to articulate that 95% of all new customers with an LTV over 70% is amortizing, and 60% of new customers are amortizing between 50% and 70% LTV. So it's not the big issue. It's always work in progress already.
We do this to sort of protect our clients financial situation, and a good evidence of that this has paid off is 20 quarters of low credit losses in this bank, and in this quarter, we're reporting 0.02% credit loss ratio. Another area that I would like to highlight is Baltic banking. I think their performance is absolutely stellar. Loan to deposit at 92, 15% return on equity, and 48% of all new sales in this quarter come through digital channels. It shows that we can benefit from big data, and we have a very efficient sales structure in the digital channel.
That this is the right way to go, proven by customer service, the surveys that we do, which shows that 90% of our digital clients in Sweden are either satisfied or very satisfied with their services. As I said, initially, a lot of transformation in this industry, and this will continue to affect our business for a prolonged period of time. Therefore, we have sort of prioritized our staff to quite some extent. We want to give them tools to be able to operate in this environment, and we have been focusing quite a lot on internal mobility, which means that we have a minimum of external recruits.
This, I think, will show that we can build more competence throughout the bank and create even better cooperation between different units as our staff moves around in the bank. With that, I would like to hand over to Göran.
Thank you, Michael. I will, sorry, as usual, try to do a quick couple of quick financial remarks on each business area and summarize on the group, and then hand over to Anders Karlsson before we turn into a question session. Starting with Swedish banking, I think on the net interest income level here, we have been negatively affected, as you all are aware of, by the negative interest rate and low interest rate in the environment, which has affected the deposit margins. We have also been, this quarter is slightly fewer days compared to other quarters. That affects the numbers as well. On the positive side, we have seen a repricing on the capital that we hold against the mortgage market as a cushion required by the SFSA.
We have also taken advantage of the volume growth that we saw coming through, particularly in the latter half of next year, has materialized into net interest income for us. Net commission income is seasonally a little bit weaker than the Q4 . We have benefited from the growth is in assets under management due to the fact that the market has had a very strong performance. At the same time, we have lowered the fund fees, as you are all aware of, that has sort of netted that out, so we have transformed that into some client value, I think. Other incomes in this business area, we have a couple of one-off items. Among other things, we did sell Svensk Fastighetsförmedling.
That generated a small profit, as well as we sold, property that was head office in Sparbanken Öresund, and also Sparbanken Skåne, where we are part owner, did sell some branches that led to higher income, one of character. Summarizing on the key ratios, I think we can now see the full, effect on return on equity by the new capital in this business areas. And the somewhat weak cost-income ratio is a reflection of the integration work with Sparbanken, Öresund continuing, and the plan is, of course, to decrease that cost-income ratio now over time. Turning to the Baltics, very much the same, affected by the shrinking deposit margins. They have also seen a slight decrease in income, both on net gains and losses and commission line relating to the Lithuanian euro membership.
But I think they have been very good in mitigating costs. They are very good in sort of running their business and taking actions in cost efficiencies early on. So we're very pleased with the return numbers in there. Asset quality is very good. The impact of Russia is smaller than expected, so smaller from a low level, which leads to reversals, but others will continue to elaborate on that. Then Large Corporates and Institutions, same story, affected by lower deposit margins. Here, the lending margins have been stable. We have not seen any move really there. We have seen higher activity in the trading area, currency and fixed income related.
I think that came very much on the back of a lot higher client activity as the central bank moved into negative interest rates, which was quite surprisingly for the market. On the other hand, we have seen lower commission income in Norway as a result of a weaker pipeline or more uncertainty as a result of the weaker oil prices. The business activity in general has stalled there for the time being. Cost-wise, doing okay. We see the increased burden on regulatory costs for system developments that needs to be implemented, and we are working on extending our product offering in cash management in this area, as we've told you before. Summarizing on group level, I think the margin development is mixed, obviously affected by the low interest rate environment. We benefit somewhat from loan growth.
And on the provision income, we have slightly weaker seasonality, and we are, with the price decreases that we do on Robur, coupled with the lower, lower corporate finance in, in Norway, we have a slightly weaker number there. But underlying, I would say it looks very good to continue to grow with GDP in Sweden. Treasury result has been slightly, slightly stronger, than last quarter on the MAI side, and the, the bottom line on treasury, but we continue to have the same forecast of, where the treasury result will go from here onwards. And overall, asset quality for the group is extremely good. Lastly, just a few words on capital. The core, Tier 1 capital has decreased from 21.2 20.5.
Most of that is relating to an increased pension debt, IAS 19, that has eaten SEK 2 billion in capital. We have also introduced regulation around prudent valuation that has taken out almost half a billion in capital as well, and we have seen some RWA increase in various areas. I think the message here is still the same as it was previously, that we continue to see regulatory uncertainty and that there is no excess capital around. With that, I would like to hand over to Anders.
Thank you, Göran. Yet another quarter, the twentieth, with very low loan losses amounting to SEK 59 million or two basis points, and Baltic Banking showed reversals, although small. Impaired loans continued to decrease with roughly SEK 300 million, ending up at SEK 5.9 billion or thirty-nine basis points. Most of the decrease came from Baltic Banking. Thus, Baltic Banking continued to show resilience despite the sanctions and the weakened Russian economy. Lending increased by SEK 16 billion in the quarter, of which SEK 2.3 billion constituted lending to property management. This is corresponding to an annual growth rate of approximately 5%, which is in line with our expectations. Accordingly, I can conclude that our measures taken have the desired effect. Last but not least, Ektornet continues to sell off assets according to plan, and the remaining asset now amounts to SEK 600 million Swedish krona. Thank you.
Okay, then we open up for Q&A.
Ladies and gentlemen, I remind you that if you'd like to ask a question, please press zero one on your telephone keypad. Our first question comes from Mr. Pawel Wyszynski from Danske Bank. Please go ahead.
Yes, hello. So Pawel here from Danske. Three questions from my side. You talk a lot about digitalization and the possibilities from this going forward. How are your IT systems ready to handle, so say, the increased data flow? And will you plan anything to invest more in IT the coming three years? I start with that one.
If I take that, I mean, what we're doing in Sweden is to build a new data warehouse platform, and that is still one or two years out before fully there. That is one of the benefits of the Baltic operation. They were very early on gathering customer data and had a common data warehouse platform, which is sort of creating the sort of prerequisites for their success in digital campaigns today. And as I said in the call, 48% of all new sales in the quarter is generated through digital channels. So big data will be very important. What we see in Sweden is more of an effort to move transactions in the mass market, both on the private and corporate side, to digital transactions, and that is really taking off.
We have 1 million Swish clients only in this bank, and 40% market share in Swish overall. If you look at corporate, we are having 13 or 14 thousand corporates on Swish out of the sort of 16-17 thousand in total. So Swish really fits our customer base well. And this drives down transactions in branch offices, which is another task that we are aiming for, because we want the branch office mainly to service on higher segments, which requires more time to sort of build relationships and through that, create a better business volume. So all in all, I think we're well equipped. Like any bank with some legacy, one of our challenges is the legacy in the IT environment and the product complexity.
We have a big effort going on to reduce number of products and decrease number of IT applications, but it's a multi-year task.
Okay, so no huge IT investments, at least coming three years, rather, continuous investment?
Yeah, you can say, I mean, we upped our IT development sort of budget from SEK 800 million to SEK 1.1-1.2 billion the last couple of years. So we want to continue to operate on this level, but we have also told the organization if they can bring down IT maintenance costs, we can move that to IT development. So there is an incentive for the operation to sort of become even more efficient. Then there is a ramp-up time when you recruit new developers, but that's basically our thoughts around IT.
Okay, perfect. And the second question, if we see an increase in the countercyclical buffer in Sweden, would you increase your margins in order to compensate for the extra capital you need to hold?
That's our ambition. We think that history tells that once you see capital regulation changes, the market is repricing those. So, it's quite likely that that would happen.
Okay. And the last one on Robur. Are you happy with the current level that you have, or can you go lower? And also, could you give us a little more flavor on your last decision, the third time you cut the fees, why you did it and the reasoning behind it?
I think what we have done on Robur is to ensure that we allow Robur to be long-term competitive with the fee changes that we have implemented. Is this the end of fee changes? I doubt it. I think if we continue to see low interest rates for a long period of time, fees might come down further. And mind you, that's one of the benefits of having return on equity of 15%. We can afford being competitive on Robur fees for a prolonged period of time. And in this environment, of course, fees has a dramatic impact on the performance of the funds as well. So I think this will help cater for our long-term competitiveness in the funds themselves.
... But would this go for, for equity funds as well, or you're more talking now about fixed income funds?
We lowered equity funds from SEK 142 to SEK 125 in February. So yes, it also includes equity, equity funds.
Going forward as well?
Yeah, I mean, we want to be competitive, and we want to be relevant in whatever environment we operate in.
Okay, perfect. Thanks for the questions, answers.
Our next question comes from Mr. Peter Wallin from Handelsbanken. Please, go ahead.
Thank you, and good morning. I've seen that you're quite pleased with seeing the corporate lending volume growth decelerating a bit in this quarter. Could you give some flavor as to, like, how you're achieving this? Or is it clearly because you're increasing your front book margins?
Anders?
Morning. No, it's a combination of two things, basically. One was, as you might recall, what I said in conjunction to Q4, that we see that prices are increasing in the property markets, in a way that we believe, or not, a bit too fast. I also said at that point that we're looking into the credit origination standards. We have done two things. We have changed our internal steering to a certain amount, and we have implemented new origination standards, taking the current interest rate environment into account. So I would argue that that's the reason.
I think if I would comment just to say that so far, the measures taken has mostly been reflecting price and not risk, and but risk will sort of be implemented going forward as well. Yes.
Okay, so you have stricter origination standards, but that's not really what's been driving it in this quarter. This is mainly then improving margins. Is that correct?
Correct.
Correct. Mm-hmm.
Okay. And then also coming back to what might or everybody expects to happen tomorrow in terms of further rate cuts on the Swedish Riksbank. Could you give an update on how so, like, the compensation in terms of especially, I guess, corporate deposits is going in terms of implementing fees for that? And do you have a plan for maybe broadening that kind of compensation actions in terms if we would see a further rate cut tomorrow?
I think in general that we would try to hold our clients unhurt by the rate cut that it potentially could come tomorrow, especially the household lending. Selectively on the corporate side, we might introduce a price for specific corporates, of course, that has capital market access. But if you go down to the lower corporate segments, we don't intend to introduce fees for them at this point in time, really.
Okay. And then a final question of mine. So far it seems as if, well, Swedbank in general has been fairly successful in compensating for higher capital charges on mortgages. Where do you think we're standing today in terms of, like, the relative profitability of our mortgages in relation to higher capital charges? Are we fairly pricing them now, or is it still more to go?
I think over time, it's probably a little bit more to go because the profitability return on the capital is still not adequately. Then you could say that also that there are signs of even more capital being applied. So we need to watch that a little bit. But I think it's been a... We must remember that we are leaving a quarter that's been seen a fairly huge repricing taking place. So for the time being, I think also there will be difficult to drive the margins higher in the short term.
Okay, great. Thank you very much.
There, it's also fair to recall the increase in capital on this business. As it has moved from SEK 4 billion 2 years ago to SEK 26 billion today, there has been a fundamental need to achieve this repricing.
Great, thank you.
Our next question goes to Mr. Magnus Andersson from ABG. Please, go ahead.
Yes, good morning. Just to follow up, first on Peter's question on mortgages and repricing. Do you think that it will be as easy to reprice your mortgages in an environment where interest rates stop falling or actually stabilizes, that it has been in an environment with the continued falling rates, i.e., an environment where clients have experienced lower costs while you have expanded your margins? That's the first question.
No, of course, I think it's been easier to reprice the capital in the environment where all banks have had an incentive to compensate for shrinking deposit margins. I think that will increasingly, though, become difficult to do. I think over time, the deposit base, the huge deposit base, supports more the corporate lending than it does the actual mortgage loans in the balance sheets. Over time, it will be much more important for us to reprice really corporate lending if we are to stick with the zero interest rates on the majority of deposits rather than the mortgages.
Okay. Thank you. And then just on cost, you're keeping your guidance of lowering cost for 2016 towards SEK 16 billion. How should we look at that development over the years? Will it be very back-end loaded in 2016? Or should we start seeing more coming through towards the second half of 2015? That's the first one. And secondly, since you launched this target in connection with the Q3 report, has anything happened or come up that makes you more or less convinced that you will reach this?
Overall, I think it's a rather linear development. So you should start to see some effects coming through in the especially in the fourth quarter. I think a key risk aspect for us on delivering to this is that we can successfully migrate our clients from Sparbanken Öresund into the platform of Swedbank. That is intended to happen late in the latter part of this year. If that materializes, the risk picture around the cost development goes down significantly. I think if anything, that has affected sort of the cost, it's always movements in a cost base, in such a big cost base. For example, we have seen a verdict on VAT, on postages in Sweden, that gives you some relief.
But on the other hand, I would say we continue to see regulatory costs in the systems development arena increase. So I think there are always a lot of traffic in the cost, but it's nothing that we, at this point in time, would sort of say that has significantly changed the picture.
Okay, great. And finally, then on, on capital, you now have a roughly 100 basis points buffer, in terms of common equity one ratio versus the regulatory minimum requirement. And you refrained from giving us a capital target because of the, the regulatory uncertainty. But is this a kind of buffer, a 100 basis points? Would you consider that as a minimum buffer you would like to have to, to any minimum, requirement? Or, or, is it, is it low or high, or how do you look at, at that gap?
I think it all depends on where the regulator go with countercyclical buffers. If they add buffers, we don't need to have the same level of buffers. So it's a moving target, but it's not far off, but with more buffers from the regulator, we'll need less buffer. I think that's the simple answer on that one.
Okay, thank you. Very clear.
Our next question goes to Mr. Peter Kessiakoff from Carnegie. Please go ahead.
Yes, hello, thank you. Just a question on amortizations. It seems you're, you're, strengthening your requirement on, on, on amortizations on Swedish mortgages down to an LTV of 50%. And you write that the annual amortizations are currently SEK 10.4 billion, which is equal to, around 1.6 of, of your book. Are you expecting that to increase from, from, strengthening the amortization requirements? First question.
Yeah. I mean, already today, on new lending, 60% of the loans are amortizing between 50%-70% LTV. So there will, that number will go up, as we act in line with the now not implemented re-regulation. And mind you, I think it's quite clear that the reason for the regulator to come with additional countercyclical buffers is all related to the mortgage market. So, I think, yeah, it's kind of counterproductive not to force amortization and then get hit with the countercyclical buffers. So there is a game between those two factors. And, secondly, the market, including the banks, have been driving amortization for a couple of years now, and I think it's well accepted by general public that this is a good thing.
Your ambition is at least to increase those Annual amortizations, but no figure on how much?
It's no figure on that one, but we are market leader, and we need to, we need to act responsibly over time, and amortization is part of that responsibility.
Okay, two more questions. Just a follow-up after Pawel's question on the higher countercyclical buffer, where you mentioned it could be a reason to raise margins. Is this margins towards both corporates and households, or is it mainly towards households?
I think in general, it affects all business segments, but it will affect, due to the contraction of the buffer, it will affect the sort of the mortgage side even more.
Okay. And then just one last question. So you mentioned that volumes are up in local currency within the Baltics, and you also highlight the significant improvements that that division has done. What are your expectations on lending growth for the coming year or years within the Baltic region?
Not significant. I mean, they are affected like everyone else, of low global demand. The difference in the Baltics compared to Sweden is, though, that the industrial companies are at their capacity, and you have seen quite significant salary inflation. So there is a trade-off between investing in more capacity, which could be positive in the Baltics. So, we will not see significant credit demand, but hopefully a slightly improving credit demand.
Okay, thank you.
Our next question goes to Mr. Omar Keenan from Deutsche Bank. Please go ahead.
Good morning. So thanks very much for taking the questions. I just had a question related to net interest income. The first one is, you gave, I think, the last rate sensitivity about SEK 3 billion. I was just wondering if you could give us an update, if that's changed much going into the Q2 , and what proportion of deposits in Sweden now pay no rates of interest? And how much you believe front book margins on the mortgage are ahead of the back book that can potentially compensate that for the Q2? And then, lastly, on net interest income, the sequential increase of about SEK 80 million in the treasury division, was that mainly due to the hedge?
How should we think about progression going forward the rest of the year for this line item? Thank you.
Shall I start with the last one, being treasury then? I think I just will repeat myself there, trying to give the same language as we have for a couple of quarters. It's really that we—you should review the result, the two lines together, and that we are guiding that the treasury results as soon as the interest rates will stop moving downwards. If you will continue to have such a flat curve that we currently experience, that we will have a headwind on the NII, on the result interest level, between SEK 500 million-SEK 1 billion in that result line. And I think nothing has really changed in this quarter.
There is always a bit of traffic, traffic that varies in volatility between quarters and the lines, and I will not try to sort of guide you on every quarter in, in that aspect. If anything, rates has continued down, so we haven't really found the bottom yet. And in the movement of coming down, we are having a sort of a little bit too good result from where it will end up being. And that is the message I would like to convey on the treasury. So it's basically the same as in last quarter. What else was your question? I think it's 75% of the deposits are currently on zero interest rates, roughly.
And it is true that some of the repricing, of the mortgage book will carry on as tailwind going into, going into the Q2 But at the same time, I would like to say that since the quarter end, you have also seen the Stibor continuing to go down, and that will filter down as negative, NII as well. It's very difficult for us to give you guidance on this one. I think the longer we go on negative rates, it will become more difficult to reprice mortgages as an income substitute. It will much needed to become a corporate lending that will have to bear the cost if we continue to keep the deposit rates on zero interest rates.
Okay, very clear. Thank you.
Our next question comes from Mr. Andreas Håkansson from Exane. Please, go ahead.
Yes, hi. I mean, we covered a lot of the NII questions, but can I just ask something on your loan growth? SEB that reported the other day didn't really report any corporate loan growth, and the reason they said was that almost all lending in the market is related to commercial real estate, and they think that the standards have been brought down to a level where they don't really want to participate. And you reported a 5% growth in commercial real estate in the quarter in Sweden, and you said that you're outpacing the market and so on. Could you tell us how you view that market at the moment? Thanks.
I mean, the market has been, a market with a huge credit demand, as more and more investors seek yield, and you have seen price increases. The picture is quite clear to everyone. We feel that we are well positioned in that market. We are market leader. We know the customer base very well. You can see also that we have been very active on the sort of capital, capital market side of the equation, not only on, on debt issues, but also on, rights issues. So we see more equity coming into the sector. And as Anders alluded to, we raised prices the latter part of 2014, and we're now changing origination standards, and growth have come down significantly from the high levels of 2014. So that's basically the story here.
Okay, but are you sharing the concerns that SEB is having about the market, that people are doing quite aggressive transactions, not necessarily you, but that there are aggressive transactions being done in the market at the moment?
I don't want to comment whatever SEB perceives happening out there. I don't see the market with the same glasses as they do, so I can't really comment on their comments.
Okay, very well.
But I think we could say that, as yields are coming down, Anders was telling that he was sort of tightening up the lending origination standards just to cater for sort of that the yields can continue to go up, and that will, in effect, require borrowers to have slightly more own capital when they go into property management transactions.
Okay, good. Then one more just on NII. In your treasury division, where you had a very strong NII, you talk about an improved funding cost and so on. Can we just see, is it any of the funding costs that improved in the quarter that has not yet been allocated out to the division? So some of the expanded mortgage margins, of course, of course, coming from lower funding costs, and I, I would assume that's the same on the corporate side, or is that all out in the division and it's a separate thing in treasury?
... I would say that most of it is out in a division. And if you look at credit spread, they've been fairly stable in the quarter, actually. So it's not a big movement coming in there.
Okay. Thank you.
Our next question comes from Masih Yazdi from SEB. Please go ahead.
Hi, this is Masih Yazdi from SEB. One follow-up on, and I think it's very similar to a question you had previously. You have a table showing your sensitivity to lower rates in your fact book. There's one with a zero floor on all deposits, and one with zero floor on deposits from private individuals. I know you already said that you're cutting deposit rates to negative territory for some corporate exposure, but could you sort of explain or sort of how which table we should be looking at, or where you could end up closest to from a 25 basis point rate cut? There's one table showing a negative impact, SEK 1.1 billion, and the other one of SEK 600 million on an Annual Basis.
Which one do you think we're closest to, assuming 25 basis points and lower rates, given the measures you've taken so far? That's the first question.
I think that's very difficult for us to answer because we don't know. I think that's something that the competitive environment will also dictate, and the various client reactions and what the central bank actually does in the end of the day. And that's very much an event in happening and so forth. It's very difficult for you to guide on that more specific.
Okay, second one on your asset management business. As you're cutting fees there, I could see in the first two months of the year, you only took 4% of net inflows. Do you think sort of the fact that you've cut fees has had an impact on your, competitiveness in that market? Or do you think you need to take other measures to improve the net inflows you have? What's your sort of full analysis of why you're not taking the share of your back book when it comes to net inflows?
Recently, we had some withdrawals in PPM, and we are one of the largest there, and we also had some institutional money pulled out during the quarter. So I wouldn't say that you can draw any conclusions yet on the price decreases. What is more important is that we're placing our distribution channels towards more passive products, and you see that rotation in the numbers. And of course, over time, in this low interest rate environment, lower fund fees will have an impact on fund performance, and that should increase competitiveness going forward.
Okay, thank you very much.
Our next question comes from Mr. Jan Wolter from Credit Suisse. Please go ahead.
Yes, morning, Jan Wolter here, Credit Suisse. So around the treasury operation, currently it looks to be around SEK 12 billion or so capital allocated to that operation, and last quarter, it was around 20% group capital. Could you just tell us what capital allocation is reasonable to treasury over time? And second question, which is related to that, where can capital be best put to use? The current lending growth of around SEK 120 billion or so over the past year, SEK 100 billion of that is in Commercial Real Estate and residential mortgages. And can the bank see acquisition opportunities or growth prospects in other areas where the significant capital resources can be put to use? Thank you.
I think the treasury has been very much the residual for capital as, and it's especially so in the situation where you have an evolving regulatory framework. And I think that's continued to be that. I think we haven't really put down a number for ourselves even yet, where would what kind of capital we need in order to sort of sustain an ongoing operation there. So, I think you-- But the ambition is all the time to allocate as much capital out to the business area in order to get the product calculation and also the client calculation correct, so we have a correct steering out there. I can't really elaborate further on that one. The other question was really, do you see any major acquisition that can eat capital for us?
And we are always reviewing all potential things, but we are also, there are not, there are not big things and lumps around in well-established market like we are. We have selectively bought portfolios in the Baltics because we can put that on the existing infrastructure. It's highly lucrative. We did buy Sparbanken Öresund, which is also a way of expanding your physical size. But it's very, it's difficult to find really big ones or product investments.
Okay, thanks for that. And just a quick follow-up on the, on the cost side. Is the, the relocation, the saving of the relocation out to Sundbyberg, is that now in full in the PNL? And if you could comment on the plans of moving the market division back to, Stockholm City and any cost in, in relation to that would be helpful. Thank you.
The cost of the new head office is fully incorporated in the numbers now, so you should start to see the benefits of that coming through. The financial effects of moving markets is actually positive because in essence, we are leaving an expensive rental agreement in Estonia, where we have 850 people, approximately, working in IT. And that will give us, but it will come in 2018, you will see the benefits of that. It will be slightly shy of SEK 100 million, actually, in a cost improvement at that point in time. So from that perspective, it's a good sort of positive on the cost base. And then, of course, we are continuously looking to nearshore people to wherever there is cheap.
Stockholm is becoming very expensive, salary-wise, location-wise, and therefore we try to find, can we nearshore activities to the Baltics on increasing speed than what we currently are doing? And we can also think about the nearshoring in Sweden. It's cheaper to do some of the things out in the countryside where we have telephone banks, et cetera, and so forth. So this is an ongoing game of always trying, to be, to be as efficient as possible, and you could say that the Stockholm area is becoming expensive, so it will, of course, drive resources away from Stockholm in Swedbank.
Okay, very clear. Many thanks.
Our next question comes from Anton Kryachok from UBS. Please go ahead.
Thank you very much. Just a couple of follow-ups, please, on capital. Firstly, can you give us any indication if there is anything you can do to mitigate the SEK 4 billion increase in your risk-weighted assets, which came from the operational risk this quarter? And secondly, given that the Swedish FSA was unable to implement the mandatory amortization requirements, do you think there is a risk that they might come back to mortgage risk weight as a tool to cool down the housing market? Thank you.
I think on the latter question, it's more likely that they will come through countercyclical buffers, and hence the importance that banks are prudent in this area going forward. So that's where we perceive the next action to be. Anders, could you answer on the operational risk question?
Yeah, I mean, we're using the standardized model, so it's purely a function of gross income increasing over the last three years. The only way of managing that is to have an advanced measurement approach from allowance from the Swedish FSA. We are intending to send in such an application, but that's further out in the future. So that's basically nothing you can do there, as far as I know.
Thank you. That's very clear.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Yes, good morning. Good morning to everybody. I just have a couple of questions on loan losses, if what we have seen in this quarter can be seen as sustainable or replicable, especially on the Baltics and in the corporate division. And on the margin side, is there a point in which the tech further rate cut would make the repricing of the front book and the back book almost impossible? Because of maybe, maybe I'm wrong, but I think at a certain point, all the rate cuts that we have seen over the past few months should be transferred onto the customer base. Thanks.
First of all, if we talk about the loan loss levels, we are not guiding there, but I've said in the previous quarters, and I think that is relevant going forward, that this is extremely low levels. If the economies continue to weaken or if it gets worse, this is not a sustainable level. You should not use that as a guidance. It is a pure and simple reflection of us having a strong asset quality.
Could you reiterate the second question, please?
Yes. Just wondering, you say you keep repricing the loan book, but rates have gone down significantly over the past 3-4 months. So I was wondering whether at a certain point you should transfer on your customer the benefit of the rate cuts that we have seen over the past few months. So I'm just wondering whether these two... Let's say, when eventually these two different phenomena will come in an algebraic way, let's say, become, start becoming negative for you.
If I just try to answer your question, then I think, so far we are swallowing sort of the negative interest rates, and I think what Michael said earlier was we intend to do so even if we have a rate cut tomorrow, I believe. It's impossible really to say what we will do over a longer period of time. If rates go substantially lower negative and stays there for a longer period of time, I think we can't really judge today completely what we will do. The only thing you can say is, of course, that the whole transformation mechanism of a market economy in the bank, if you fix and rig the prices of money, you won't be able to steer adequately either.
So it is a problem for all banks and for Society in general, I think. So it will become increasingly difficult going forward.
Okay, thanks. And okay, thanks.
...The question comes from Mr. Kristofer Rosqvist from Barclays. Please go ahead.
Yeah, hi, this is Christopher. Thank you for taking the questions. Just first one on competition and a second one on the countercyclical buffer. So on the competition, I was just wondering if you could give us a little bit color on what you're seeing on who is more or less hungry. I'm thinking of that between the fourth quarter, we saw SBAB launching their campaign. And also we know that, for example, Danske Bank is targeting Sweden, and that they, in the business, well, essentially need more volume in Sweden. So if you've seen any more competition, and also, what is your main concern whether competition would increase?
Are you willing to give up some, some relationships that are not as attractive to you, or do you see that you have a competitive advantage by offering a broader range of, of products beyond just mortgages? That was the first question. I want to come back to capital.
Well, I think we feel competitive on back of being very cost efficient and having the highest profitability in the market. We don't need to react to behaviors, short-term behaviors in the market. And as you alluded to, the SBAB did a campaign, which we didn't respond to. So we try to be long-term, and we try to solidify our relationships based on digitalization in the mass market and relationships in the upper segment. And we can be patient with the position we have.
Okay, thank you. The question I had on, on the countercyclical buffer is, is really if I just get your perspective on, on sort of the justification for implementing it, from a, sort of credit growth perspective. And that is, if I understand the, the Swedish FSA model, it has for some time suggested that the, from a pure quantitative perspective, that the buffer should have been 1.5%, but it's been held lower in order to not starve off the corporate credit demand. But in the qualitative assessment, Swedish FSA is now saying that they see more corporate credit demand, and hence, is there room to g- to go up, above 1%.
But if I listen to some of your peers that reported last week, they said that there's absolutely no corporate demand for investments, but the growth that we see is for other purposes. So I was just wondering, you commented previously that you're very comfortable with the demand that you see from your corporate clients, if that means that you indeed see some quite solid demand, and that, you know, it might be justified, or there's less of a risk now previous to maybe 3, 6, 9 months ago of a higher countercyclical buffer.
I mean, corporate credit demand is not there. There is some demand in the property sector, as we have alluded to earlier, both on the private and the commercial side. And we are tightening lending standards. If we look at the implementation of risk-weighted asset floor, if we look at countercyclical buffers, it has so far not had any impact on lending demand in the mortgage area. And price increases continue to be there in the market, and it's all on back of huge demand and limited supply. If you want to really change this situation, you either start more housing projects, or you do something from the political side of the equation to dampen the price increases. But regulation through the regulator has had limited effect.
Mm-hmm. So even if the FSA would proceed with a higher buffer, it wouldn't have the intended effect, but because the absolute sort of interest cost to a corporate project is still so low, because of the low rates, even if you if you would price, reprice following higher capital requirements.
Correct. The structured dilemmas can't be solved by regulation. It needs to be solved by political reforms.
Very clear. Thank you so much.
Our next question comes from Mr. Heiner Luz from Goldman Sachs. Please go ahead.
Hello, I've got two questions. I'm going to start with the first one, Mike. If I look at your presentation, and I basically go to sort of your liquidity and funding slide, Mike, you issued more sort of in the first quarter than you have sort of in any quarter of the last three years. And even if I compare the next quarters, they're also substantially higher than what you sort of issued in the past. So my question generally would be is, firstly, are those sort of issuing targets sort of more like set in stone? And secondly, on this one, are you planning sort of to term out more funding?
Will we also see you sort of buying back more covered bonds, so basically keeping pressure on the trading line high, but supporting an eye and sort of in general, sort of even if you're not planning sort of to do that, if you generally have the sense of using the currently very flat rate curve, sort of to term out those funding things a bit more? I got one more question, but let's go with that one first.
I think, Göran here. I think, in general, we are updating our funding plan currently, and you could say that the growth of the balance sheet has been somewhat stronger than it was for a number of years prior. So that in itself will require us to be more active in the funding market. Then, I could say opportunistically, yes, of course, as the price of being, or prolonging your debt and going longer out, and the difference between senior and covered has diminished to the extent we are now at, you could say your incentive for being more conservative and actually taking advantage on cheaper money is, of course, good, I think.
...Okay. The other question is sort of on capital. I know there had been a lot of them asked. My question was a bit of a different angle. Basically, sort of in the last quarter, you said, "Okay, we feel like on capital, we need a bit more sort of buffer, given that certain things sort of that are moving, and there is still no certainty." Now, this quarter, you had basically two, or if you take the risk-weighted assets inflation, three of these moving parts that basically go against you. And if we still sort of look at that buffer, so in hindsight, it then looks clear why you took this buffer.
I just wanted to check if you sort of have any sort of elements you would be seeing sort of as moving around at the same magnitude as you've seen moving around this quarter, or do you currently think what happened this quarter already sort of taken a very large part of the sort of self-set buffer?
I think the effect of we saw on the pension side on sort of eating capital was in the low probability end of the simulations earlier on. So, our and we don't really see any big item eating capital. But having said that, we don't know what's what's in store for us from in terms of what the central bank does and so forth. So it is a very much uncharted territory, and the historic data doesn't really give you any guidance about negative rates. So I think you need to be a little bit humble in there, but it's on the low probability end of it.
Okay, thank you very much.
Our next question comes from you on the line from Bank of America. Please, go ahead.
Thank you. I think we’ve covered most things, but I just want to come back to a comment that Michael made in, I guess, in an interview this morning about your intention, despite the failure of the FSA to push through the mortgage amortization, to move ahead and implement at least something similar to that. Is that something that’s being coordinated in any way between the banks? I guess probably not, given the competition authority’s views. And if not, do you see that putting you at a competitive disadvantage now that you’re back to writing business more in line with your back book?
As you answered the question yourself. And it will put us at a disadvantage? I hope that all banks have done the same reading like we. Mind you, the S, the banking association tried to coordinate a recommendation, which was pushed back. So that gives us some comfort that most banks are in the same corner as we are. But more importantly, I want to safeguard my clients, and I will advise them in accordance to best practice at any given sort of mortgage loan that we meet.
Thank you.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please, go ahead.
Hi, thank you. Just one question. You, you're kind of cutting fees. You're implementing digitalization, which again, brings down certain margins. You're not, as far as I can tell, expanding outside of Sweden. So in terms of, in terms of your sort of long-term or medium-term strategy, what are you... You know, what is your- what is it you're hoping to achieve, and, and where are you, where are you heading in terms of driving growth? And, in the corporate space, just related to that, you took, I think, a 68% front book market share last year. Is that an area where you think you can also gain fee revenues and, and sort of deepen your relationship with those clients? Thank you.
If I start, and then I guess Göran has something on cost as well that he wants to relay. But if you look at the customer base in Sweden and the Baltics, we have two sets of customers, broadly speaking. We have the mass market clients, which is the vast majority in the Baltics. If you have a Swedish definition of mass market, you would basically encompass 95% of all Baltic customers. What has the Baltic operation done? Well, they have excelled in utilizing customer data to build relevant client offerings through digital channels. And in the quarter, they sold 48% of all products through that type of means. And this enables us to be very cost efficient, very relevant to customers, and we have great brand recognition in these countries and very high customer satisfaction.
So this sort of faceless interaction doesn't mean that we are not close to the customers. In Sweden, we expect to have 1 billion connections digitally with our customers in 2015. So here, the same sort of overall story is worked on. One is to be relevant in the mass market on digital platforms, to enable them to transact, but also get access to relevant data for decision making, and therefore, limit their presence in the branch offices. This should then give us more time to move our advisors to the SME and the affluent segment. And there, we want to create competence centers, like we have done with the mid-corporate client segment, throughout Sweden. And mind you, if you are in the 25-28 largest cities, cities in Sweden, you cover 85% of the Swedish population.
Hubbing competence will be the way we become more relevant. Why do we want to hub competence? Well, we want these, these people of ours to do these type of transactions often and be in the, in the sort of deal flow to build their own competence and knowledge. So that's the sort of strategy of ours.
If I just could complement that, we operate in four markets. We have a return on tangible equity of 16.7%, which is fantastically good. In Sweden, the population is growing at a very rapid speed. That will create growth opportunities for our domestically sort of orientated business in all fronts, really. The important thing for that is not to grow risks as property prices in general go up in Sweden, and we have well control over that. And if you look at our asset quality, you can see that we are almost best in class on that side. The strategy is really to do this at a low risk and at a low cost.
Mm.
If you look at the cost efficiency, we are in this quarter operating at 0.43, which I think is very nice to see that we continue to grow, to sort of become more efficient because there will be a changing banking environment where margins will be under pressure. And you could really ask yourself questions, will you not be able, will you be able to have 15% ROE without operating at 40 or below in cost income in years to come? I'm not talking about next year now, I'm talking about looking out a little bit, because that is the new operating model when the digitalization and the new regulation has really transformed the banking industry. I think Swedbank is extremely well placed in its geographies to capitalize on that.
Okay, thank you. Do you, just on this, do you have any... Does this mean that you have some sort of market share ambition for the corporate market when you, when you make the shift from the mass market to the mid-corporate and, and SMEs?
We don't have an explicit number, but what we want to do is to ensure that we prove that we are relevant. The segment where we are under participating generally is in the SME and affluent segment. That's where we are relatively the weakest. We have proven to ourselves in the mid-corporate and LCI sector that we have the capabilities to compete, not through price, but through competence. Hence, the effort to create competence centers to mirror the sort of operating models of mid-corp and LCI in the SME and affluent segment. This is, of course, segments where everyone wants to compete. It's very interesting segments to be successful in.
So time will tell how we do, but so far, if you look at market shares, the last couple of years in the corporate area, we have step-by-step improved our position. This is also back of a transformation of business society in Sweden. Sweden used to be very industrially dependent. Today, the service sector, the property sector, the retail sector is growing. Sectors where we are much stronger than many of our peers, thanks to our DNA and our client base. So I'm quite positive on our relative position. And then, as Göran says, we don't try to lure ourselves that this will be a top-line game only. It will mainly be a game of being so cost efficient that you become competitive, and also a game of being the best on digital services.
I think I feel that we are very well positioned to benefit from this. It will not be an easy journey, but we have one of the best starting points in the game, actually.
Okay, thank you very much.
Our next question comes from Mr. Ronak Ghosh from Citi. Please go ahead.
Great, thank you. It's Ronak from Citi. Just a couple of quick questions and follow up. First of all, on fee income, have you given any guidance on the impact to your cards fee income from the change in the cap and interchange fees that is coming in later this year? If I look at your fact book breakout, it looks like you had something like just over SEK 500 million of fee income this quarter from cards. Just wondering how much of that could be at risk. Secondly, when I look at your balance sheet, just a couple of quick questions on the balance sheet. Quarter-over-quarter, there's a doubling in cash balances at the central bank. I'm assuming all of this is the deposits of the Fed. If you could just confirm that.
And lastly, year-on-year, it's a small number, but your derivative assets have doubled year-on-year. Again, it is a small number. I'm just wondering what's going on there. Thank you.
On the first question, the answer is a neutral effect, and I think we have spent time when the regulation was announced to give more details that the data is out there. Yes, it's Fed, and on the derivatives?
I think, the increase in derivatives is a reflection of lower interest rate and, stronger dollar, that actually it's not higher business volumes. So,
An FX impact. Okay.
Yeah.
Great. Great. And just on the Fed, is it... If I had to do the math, is it about 1% of your NII is from that Fed deposit trade?
Give any guidance on that number, and I don't think we intend to do so, so you have to do your own math then.
Okay. But the 1% doesn't sound wrong?
That's your comment.
Okay, thank you.
Sorry for that, but we don't guide.
That's okay. I think the math works out something like that. Thank you.
We have a follow-up question from Mr. Andreas Håkansson from Exane. Please go ahead.
... Yes, hi. Coming back a little bit to new regulations in the property market. I mean, if we look at, as you said, the record high population growth, and, as you also said, the record low available for sale properties, do you see any type of regulations that will actually have a slowdown on house prices? Or is it only new construction that would, that would do it? Thanks.
My view is that people are very close to their purse. So of course, if there was some change in the tax deductibility, there will be an impact on pricing. So the market is very sensitive to people's cash flow. So anything that changes the perception of cash flow or actually change cash flow will have a price effect on the housing market.
But do you think that would have an impact already now when rates are as low as your, because the saving or actually, the actual increase in the cost would be so small? Would that have an impact a couple of years out when rates are going up, which would then double the risk that we see house price correction?
I mean, I don't think there is ever a market that is linearly perfect and don't get corrections. So sooner or later, there will be some sort of correction on the house prices. That's, you can't time a perfect market with the regulation and then come with the infrastructure and housing starts that meets perfectly whatever sort of situation you have. So I think we will have some sort of correction sooner or later. Mind you, the price increases; it has been enormously strong over the last couple of years.
Okay, fair enough. Thanks.
We have no further questions on the telephone.
Thank you for your active participation. We really enjoy that you are so active on these calls. Look forward to meeting you out on the road or at the next Q2 result presentation. Thanks!